Tania Mason: How to govern in a sector on the brink

15 May 2020 In-depth

Trustee boards everywhere are ripping up their risk registers and grappling with a stark new reality. Tania Mason rounds up some advice for governing through the crisis.

So here we are. At the time of writing, almost seven weeks into lockdown, the world has tilted on its axis and nothing is the same as it was. Tens of thousands of lives have been lost, the economy is in meltdown and the government is flailing about in a storm that it somehow failed to see coming. Millions of workers are sitting at home doing nothing and receiving full pay, while millions more are working extended hours in high-pressure, low-paid key-worker jobs that put them at high risk of being infected with Covid-19. Millions more have fallen through the gaps in the government’s hastily-assembled safety nets, and are turning in desperation to debt advice services, food banks, homelessness organisations and myriad other charities.

But the charity sector is itself on its knees. Predicted to lose £4.3bn in April, May and June alone due to cancelled fundraising events and suspended trading, charities everywhere are furloughing staff, cutting executive pay, launching emergency appeals and checking which of the government support measures they can apply for.. But too many of the statutory schemes are poorly suited to charities; even the Job Retention Scheme, where “furloughed” employees receive 80% of their wages from the government with the option for employers to top up the rest, doesn’t work for many charities. Furloughed staff are not permitted to work, so at a time when many charities are experiencing a huge spike in demand for their services, putting staff on temporary leave is a far from ideal option.

When the Charities Aid Foundation asked charities on 16 April if they would stand a better chance of surviving the crisis if furloughed employees were allowed to continue working for the charity as volunteers, nearly a quarter said they would. But charities minister Diana Barran told a House of Lords online session on 30 April that volunteering for your employer was not permitted under the scheme because of the potential for fraud and misuse.

Some commentators suggested that charities could arrange volunteering job-swaps with other charities, but lawyers warned that this could be risky if HMRC conducts retrospective audits. The frustrations were summed up in a tweet on 15 April by Jo Crease, chief executive of Brighton-based loneliness charity Together Co: “Furlough is the biggest kicker. We have 91% increase in demand & no £ support yet. The community building where we’re based has no increase in demand but get 80% of their wage bill! Australia can do flexible furlough on their social sector, can’t we use their model?”

Many charities were also initially excluded from the Coronavirus Business Interruption Loan Scheme, as it was available only to companies that generate half of their income from trading. But this criterion was scrapped after lobbying by NCVO and others.

Even the government’s £750m charity-specific support package failed to ignite much relief among the sector, with many deriding it as too little, too late, and others criticising it as wrongly structured for many of the biggest charities facing the largest losses. Caron Bradshaw, chief executive of Charity Finance Group, said it would disproportionately benefit smaller charities: “If it were about saving ‘the sector’ this was a brilliant move. But it’s not – it’s about saving lives. In the context of the biggest players – the Alzheimer’s, the Scouts and the NSPCCs of the world – these measures don’t touch the sides.” The government itself admitted it “can’t save every charity”.

So here we are. The financial risks that the sector is now facing are genuinely unprecedented, and hundreds of thousands of trustees up and down the land are staring down the barrel of a situation they never envisaged when they proudly took the decision to join a charity board. Most are having to radically revise their short- and longer-term projections and make heartwrenching decisions about services and staffing. So, are they handling the challenge?

Mixed picture of trustee support

The picture is mixed, according to evidence from the Institute for Voluntary Action Research, which in mid-April held online peer support sessions with the executive leaders of 37 charities with incomes up to £2.5m. The level of support they were receiving from their boards was varied, IVAR’s report noted.

“The technical and emotional support provided by trustees has been appreciated, especially when difficult decisions have to be made – for example about use of reserves, suspending activities and furloughing staff,” it said. “Good trustee support is not, however, universal. Some leaders expressed disappointment at how detached their trustees have remained during this time of crisis.”

But others have pointed out that trustees are people too, and may be dealing with their own personal upheavals. Julia Roberts, practice lead at recruitment agency GatenbySanderson, says: “Remember that your fellow trustees themselves may be managing a busy day job alongside their board commitments, as well as their own health and family concerns. It will be important to balance the need for swift and effective crisis management and communication with the understanding that trustees may be supporting more than one organisation to respond to Covid-19.”

Delegating authority

However, in a fast-changing environment trustees must accept that their charities will need to take crucial decisions in a timely fashion, and should ensure that processes are in place to make this happen. While the virus remains a real threat to the population, it is vital to put in place back-up plans so that your charity can continue operating in the event that key individuals fall ill and can’t work. Boards should assign authority to staff or individual trustees to make tactical decisions quickly and clarify how decisionmaking will be delegated should the chair or a number of trustees fall ill.

This issue has been front of mind for James Fitzpatrick, chief executive of grantmaker the Joseph Levy Foundation, where authority to award funds is currently held only by the board. “One of our challenges is that our trustees are all volunteers who are trying to deal with their own personal uncertainties and adapt their own situations,” he said. “Trustees as a group are prioritising the personal over the professional, and that’s entirely understandable because they are people too. But it means that I, as chief executive, can only move at the pace of the average board member.

“Of course, we should all be falling back now on the principles that we should already have been thinking about, around delegated authority frameworks and clarity of roles between governance and management. But – and I’m sure this is true for most charities – my delegated authority framework doesn’t say: in the event of a pandemic, this is what to do. We are in exceptional times.

“Our delegated authority framework doesn’t, for example, say that I can award grants. That is a power reserved for the trustees. But on the basis that some of them may get ill, or that I get ill, we need to know how we will operate. So I am proposing a revised delegated authority framework where myself and the chair and the vice chair, or any number of trustees, have delegated authority to make decisions without needing the whole board to sanction these.”

Guidance from the regulator

Wise trustees will also familiarise themselves with the new coronavirus-related guidance issued by the Charity Commission. Its first effort at guidance, which gave no advice except to remind charities that they must immediately report all virus-related serious incidents to the regulator, was quickly withdrawn after widespread criticism of its tone and content. Since then, the regulator’s guidance has sought to be more helpful, covering issues including virtual board meetings, safeguarding, using reserves and changing charitable objects to respond to the crisis. It is being constantly updated as the situation evolves.

Meetings

The guidance states that trustee boards can hold virtual meetings, but should document their decision to do so if there is no current provision in their governing document. It’s a good idea for at least one of your trustees to also read through CC48, the guidance on meetings, to check your charity is compliant.

ICSA: the Chartered Governance Institute, also rushed out a new guide entitled Good Practice for Virtual Board and Committee Meetings, which includes advice on meeting management, decision-making and recording, and technical considerations. 

The Commission has acknowledged that some charities may need to postpone their annual general meeting (AGM) and other key events. If your charity is required to hold an AGM at a specific time, or to reach what might be an unachievable quorum, you should notify the Commission in advance and document whatever decisions are taken. ICSA and Slaughter & May have also produced a guidance note titled AGMs and Impact of Covid-19, which outlines the considerations and implications of making changes to AGMs during the lockdown. 

Changing charitable objects

In its guidance, the Commission says that charities with certain objects may be able to adapt these in order to respond to the coronavirus either directly or indirectly. For example, a charity with an object to advance religion may be able to offer support as part of its pastoral work. Or, an arts charity might help relieve isolation through online services.

It states: “In considering what you can do under your existing objects you will need to check whether your objects have restrictions, for example, to benefit a particular local area or class of beneficiaries. If your existing objects do not allow you to help, you may be able to amend your governing document to change them.”

But trustees must consider whether there are other charities that may be better placed to respond to the crisis, and whether existing beneficiaries could lose out as a result of making any changes, the regulator adds.

Finances and accounts

On finances, the Commission’s guidance confirms that charities can use their reserves to help cope with the pandemic, but should only consider releasing restricted funds if other options such as using reserves are not possible. It also states that decisions on financial matters should normally be taken collectively, and significant decisions and action points noted in writing.

The Charities SORP-making body, of which the Charity Commission is a member, also issued guidance stating that when preparing their annual accounts, “trustees should consider whether information needs to be included to explain the impact of the Covid-19 situation on their charity”.

The SORP-making body recommended that charities should explain how the virus-control measures have affected their activities, whether there are any financial uncertainties that could affect their sustainability and the steps being taken to address these, and what the impact has been on the charity’s ability to fundraise and how the trustees have managed this situation.

The accounts should also outline how the outbreak of the virus has affected staff, volunteers and beneficiaries, the implications for the charity’s activities for the coming year, what the impacts could be on the key risks facing the organisation, and the potential effect of the crisis on reserves, investments, pension liabilities and on the charity’s wider networks.

The Commission said that charities which need an extension to their annual return and accounts deadline due to the pandemic should contact them. But experienced interim manager Elizabeth Balgobin advises filing on time if at all possible.

Communicating with staff

Keeping lines of communication open between the board, managers and staff is key. Mark Goldring, the former Oxfam CEO who now heads up Asylum Welcome, a local refugee charity in Oxford, says that finding ways to connect with staff is vital for leaders when everyone is working remotely.

“Video works well, both live and recorded,” he advises. “Film quality is less important than the tone of voice and the sensitivity of the message, which need to carefully balance gravity, clarity, positivity and realism. It’s worth testing messaging on a trusted adviser before recording or sending out, as I know how damaging an inadvertent slip can be.

“Where giving specific messages around jobs, expectations or the future, it’s important to back up the spoken word with something in writing that gives the detail. We can all interpret the same message in our own way.

“Creating opportunities for staff and volunteers to ask questions, offer suggestions and to share and support each other, are as important as the formal messaging.

“Where we can offer assurances around employment status we should, even if it is timebound or conditional on things not getting worse. We must be honest and often can’t give guarantees, but we can be transparent about our approach, efforts and intent.”

Roberts at GatenbySanderson also emphasises the importance of regular and effective communication from the board. “The board of trustees should be a calming influence during a crisis. More than ever employees, volunteers and beneficiaries will look to the board for reassurance. Most people feel overloaded with information right now and need short, clear and concise updates. Don’t forget to communicate your thanks to all stakeholders for their ongoing support and hard work.”

Longer-term sustainability

Once your charity has cleared the first few hurdles of initial crisis response, cutting costs where it can to match the immediate fall in income, it will need to look ahead to the medium term and determine how the new risks posed by ongoing social distancing might play out. The gathering of evidence and facts on which to base decisions is vital. Various scenario responses will need to be prepared based on what is known, while also attempting to take into account any number of unknowns.

Cashflow is a key consideration. If a charity is to avoid insolvency, it must be able to meet its liabilities, such as rent and salaries, as they fall due. Con Alexander, partner at law firm VWV, says: “Cash is king. In assessing the cashflow forecast, the funds available to the charity, particularly funds held in reserves, will be critically important. Many charities’ reserves will not have been designed to meet the extreme circumstances that currently apply, but may provide trustees with some breathing room for decision-making.

“In establishing the scope and extent of the funds a charity can use to meet its liabilities as they fall due, it is important to bear in mind that restricted funds are often not available to meet a charity’s general operating expenses. Trustees should ensure that any cashflow forecast does not assume that restricted funds will be available to meet their charity’s liabilities. To plan on the basis that they will be available would be to plan on the basis of a likely breach of trust by the charity’s trustees.” However, it is worth asking grant funders if they can loosen any grant restrictions.

Pesh Framjee, global head of non-profits at Crowe, recommends that charities should devise action plans for different scenarios and ensure proper monitoring of trigger points and trend analyses, to help trustees decide when and how to put plans into place.

He says the frequency of board meetings and briefings from management may need to increase as the crisis develops, and that it is vital to show that the board received proper and up-to-date information to really evaluate the financial position. “Knee-jerk reactions are risky and careful consideration of reserves and how they can be used, coupled with cost optimisation and a real focus on income, can help manage the situation.”

Making hard choices

Goldring urges trustees to bear in mind that “trimming and freezing can take you only so far”.

He says: “They are worth doing and may be sufficient when cuts are a few per cent. But when they are going to be bigger, an overly even-handed approach is damaging to everyone and everything you do.

“Leaders need to make hard choices on what to stop, whether temporarily or permanently. Wise teams will have been working on this since April, even if it isn’t right to make final decisions until the timelines and outcomes are clearer.

“I’ve personally got this wrong many times, and always by not being ruthless enough. Just cutting enough to get by might minimise the immediate pain but leaves you vulnerable, lacking in confidence with no margin for error or opportunity for investment where it might be most needed.

“It’s too easy to be overly optimistic. Staff affected will never thank you either way, but those who remain will lose all confidence if you have to go for a second round of cuts.”

Insolvency

The Companies Act requires that accounts are prepared on a “going concern” basis unless there is a reason to believe that this is not appropriate. Therefore, when signing off the accounts, boards must consider whether their charity is still a going concern.

If trustees are worried that insolvency may be looming, they should investigate the recent changes to the insolvency regime announced by the business secretary in light of the pandemic. The government has temporarily suspended wrongful trading provisions retrospectively from 1 March 2020 for three months for company directors so they can keep their businesses going without the threat of personal liability. It also said it will enable companies undergoing a rescue or restructure to continue trading, giving them breathing space that could help them avoid insolvency. This will enable companies to continue buying supplies, such as energy and broadband, while attempting a rescue. More detail on these measures is expected any day.

One option to explore, and ideally before survival is hanging in the balance, is merger. Prudent boards will be making a list of potential partners now and initiating conversations with the chairs or chief executives of those charities to see if there are opportunities for collaboration, sharing services or full merger.

But in the end, there will be some charities that exhaust all possible options and cannot continue to make ends meet. In this case, trustees should ask their legal advisers to explain the implications of filing for insolvency, not least because it can raise the risk of personal liability. Specific rules apply to charities set up as companies, with statutory obligations that apply where a charitable company is insolvent on a cashflow or balance sheet basis. Trustees should understand how these tests apply and how their duties will change if the company is insolvent, says Alexander.

Unincorporated charities are not caught by these statutory provisions, yet the personal risks of insolvency to their trustees can be higher than the risks run by the trustees of a charitable company. Framjee says that if insolvency becomes a genuine risk, the charity should avoid entering into preferential transactions which put another party in a better position to the detriment of other creditors.

He says: “The court will recognise mitigating circumstances. For example, if the directors took proper steps to minimise the potential loss to the company’s creditors.”

Invest to save

Of those charities that do expect to weather the storm, it’s very likely that they will emerge from the other side as quite different beasts, with new structures, new ways of operating and new activities. To those organisations, Mark Goldring offers a concluding thought: “Is there something extra you can do to respond at this terrible time to the needs of those at risk or who you exist to serve? Ideally this will be immediate, but given just how constrained we all are, it may have to be as we move into the rebuilding and recovery phase.

“This ambition might be valuable even if it means finding funds that already feel overstretched or even don’t seem to exist. It’s obvious how this stretch benefits clients, but it also makes a huge difference to staff – if they can do something extra or even if their organisation can, they will be positive and proud.

“It might not yet be obvious what the new activity is, but your staff may well have ideas. Get as many people involved as you can. None of us want to be spectators when something painful is happening around us. Finding ways to help will leave everyone involved feeling better and strengthen your organisation’s relevance in the long run. And who knows, you may unearth the next big idea that all that strategic planning hasn’t.”

What charities say: Girish Menon, Chief Executive, ActionAid UK

One of our biggest challenges is how we will continue to support our programmes in the global south. We are the largest fundraising country within the ActionAid Federation, a third of our global income comes from the UK, so any percentage point fall in our income will have a deep impact on our core mission. And we know it’s going to be more than just a percentage fall, it’s going to be massive.

The other risk is that coronavirus has been such a global headline that some of the other crises that we have been dealing with have been pushed way down the agenda. For example, the Southern Africa food crisis – nobody’s got much time to think about that now. Our East African programmes have already been affected by terrible locust attacks on their crops, which means that there’s another food crisis looming in East Africa. But there is no appetite for that. We know that in the Myanmar Rohingya crisis, they are still in great need but nobody has much thought on that. And of course, the risks to these communities are much higher from coronavirus too. You can’t achieve social distancing in refugee camps. And in places where there is already a food crisis, people’s constitutions are weakened because they’re not getting the right nutrition. It’s very worrying.

What charities say: John-Paul Egan, National Director, England, Action for Children

When the Grenfell disaster happened, we had a nursery in the base of the building, and in that crisis we ended up developing some really good new digital services for families who were dispersed and unable to access physical services. So actually, that unfortunate incident prepared us well for this. We are a learning organisation so anytime we go through a kind of blip or crisis, we try to fold that into our DNA. And therefore, I think we’re quite well ahead in terms of digital delivery of services. I feel quite confident that we’ll be able to keep the show on the road for the next 12 weeks. Beyond that, it starts to become more worrisome.

We inherited some nurseries from 4Children which we run as a trading arm, but roughly 80% of our work is either contracted or fee-based. Fostering and adoption is a big part of that, and then we’ve got our own services that we sell to local authorities, particularly children’s homes but also some other services around mental health and so on. So, I think that diversity is our strength at the minute – which is ironic because one of the strands of our strategy in the last couple of years has been to narrow our focus down to three core products. But we haven’t quite got around to doing that yet, and as it’s turned out that’s not been a bad thing.

What charities say: Clare Montagu, Chief Operating Officer, Royal Trinity Hospice

We’ve sent everyone home who can work from home but I feel very strongly that as a leader of the organisation, I need to be at work so that I am visible to those working on the front line. We’re facing two major challenges – the first, like many charities, is financial, because virtually overnight almost 70% of our income dried up. We’ve been able to furlough some staff, and we’re taking full advantage of the deferral mechanisms for rent payments and taxes, which allows us to manage our costs in the short term. But, of course, all that does is pipe the problem to the other end of the sausage machine, and we’ll have to deal with it later.

Our other challenge is that we are a healthcare provider. The nature of our charitable purpose is directly linked to the coronavirus crisis, so we can’t pull back on delivery of our core services, and we can’t cut costs too much because the bulk of those costs are our clinical staff. We’re trying to support the NHS with flexible use of our bed capacity, but we’re caring for people who are at the end of their lives. And we’re caring for some patients who have Covid and we have some staff who are sick, and we’re dealing with some issues regarding the distribution of personal protective equipment.

Of course, we are a fully stocked, fully equipped healthcare facility but we’re worried, like everyone else in the system, about ongoing supplies of PPE. We’ve gone out to our community and they’ve been amazing – we’ve had local schools donate their science goggles and a dentist has given us their surgical masks because they’re only doing emergency work at present.

We estimate we need to raise £3m to plug the gap. We have good reserves but they won’t last forever, and we really need to come out the other side with some reserves still intact. We’re not staring down the barrel of insolvency just yet, but this is a fight for survival, without question.

Meredith Niles, Executive Director of Fundraising and Engagement, Marie Curie

We had very diversified income streams, but they were all vulnerable to this single constant, which is needing people to be able to gather. So having everything shut off at once was not in anyone’s modelling. March was a particularly big month for us because we have our Great Daffodil Appeal with tens of thousands of volunteer collectors holding buckets – that all had to be cancelled in the middle of the month and we estimate that the amount that we had left to raise was at least £1m, just from bucket collections.

We can still send out a direct mail appeal and we can still collect legacy income, but everything else is up in the air and this at a time when the need for our services is greater than ever. You can mothball a pub for a few months and then open it up again yet, but you can’t put end-of-life care services on hold in the middle of this.

People assume that because we’re big, we’re ok. But actually, because we’re big, we have to do a whole lot of fundraising every day just to keep the lights on.

We’ve extended the opening hours of our information and support service, we’ve embraced remote working and everybody’s working in a more agile way. Everyone’s mucking in and on calls all hours of the night and day and weekends to try and get ahead of this, but it just feels kind of bonkers that an organisation that has a lot to contribute right now is under threat. 

Governance & Leadership is a bi-monthly publication which helps charity leaders and trustees on their journey from good practice to best practice. Written by leading sector experts each issue is packed with news, in-depth analysis and real-life case studies of best practice in charitable endeavour and charity governance plus advice and guidance straight from the regulator. Find more information here and subscribe today!

 

 

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