Effective governance top priority for charities

Head of Lodders’ Charity and not-for-profit team Mark Lewis considers the issues raised by a number of court cases, Charity Commission reports and the workings of the Charities Act 2022.

In an article first published in Charities Management magazine, Mark explains that effective and compliant governance and operation remain key priorities for charities, and that these issues are once again under the spotlight in the wake of high-profile cases making the news.

A continuation of virtual and/or hybrid working as a result of Covid continues to dominate the agenda for many charities, as well as the need to maintain team cohesion and relationships with beneficiaries and other associates.

Purpose

There is also a shared desire to focus on the aims and purpose, and take account of the changing needs of beneficiaries, for example where individuals have been affected by Covid. So, it is timely and appropriate to review the objects of a charity, and the possibility of a change to these becoming easier now that parliament has passed The Charities Act.

Refresh

The Charities Act 2006 was intended to simplify and clarify the law, by reducing bureaucracy, especially for smaller charities; providing a definition of charity; and modernising the Charity Commission’s functions and powers.

This was followed by the Charities Act 2011 which consolidated the bulk of the Charities Act 2006, outstanding provisions of the Charities Act 1993, and various other enactments.

The Charities Act 2022 became law at the end of February, but this is only the beginning of the story. The new Act is to be welcomed and will be implemented on a phased basis. The Charity Commission is currently considering the order in which the various segments of the Act come into force, some of which require secondary legislation. There will also be changes to Charity Commission guidance.
Within the Act, there are a number of helpful key features that create greater flexibility for charities, among them are these highlights:

1. Greater flexibility for the disposal and mortgaging of land, subject to various safeguards.
2. The ability to change governing documents aligned as between unincorporated charities and corporate charities (whether companies or charitable incorporated organisations), which should make it more straightforward for unincorporated charities to change objects.
3. More flexibility to deal with permanent endowment funds, simplifying the power to spend permanent endowment capital, and creating a statutory power to borrow against permanent endowment.
4. Better ease for small ex gratia payments to be made.

In the news

Two very high-profile charities recently hit the headlines, highlighting the need for good governance and also certain key issues faced by charities going forward.

Kids Company

The first is Kids Company (Keeping Kids Company), (“the Charity”) and the extensive report published by the Charity Commission on 10 February, which raised a considerable number of issues in relation to the running of charities generally.

This demand-led charity failed to maintain sufficient reserves to enable it to withstand difficulties. In particular, it did not carry the reserves to enable it to either continue or conduct an orderly winddown.

The Charity Commission’s report placed emphasis on having the right blend of skills and knowledge. It pointed out that some trustees and the chair had been in post for a long period, and that a rotation of roles, which would have allowed for an injection of new ideas and challenges about the way in which the Charity operated, would have been sensible, and that this would have assisted with challenging the senior executive who had been in post for many years.

The report references:
• that the Public Administration and Constitutional Affairs Committee reports a failure to refresh the leadership of the Charity;
• the need for board decisions to be documented carefully, particularly in relation to evidence of financial planning, to assist both donors and funders, and to protect trustees;
• the need to build a sustainable business model which does not disproportionately rely on government funding, nor a key individual for fundraising, which were issues in this case, acknowledging governmental or other similar granting models are present in other charities;
• experience on the board of how reserves are dealt with in charities with similar business models would have been helpful.

The High Court judge’s findings in relation to the Official Receiver’s application for a disqualification order, included that the conduct of the trustees did not amount to incompetence of a high degree. The judge emphasised the need to ensure that individuals are not dissuaded from becoming trustees because of sanctions which might be imposed.

Notwithstanding this, the Charity Commission’s investigation was on the wider test of whether there had been misconduct or mismanagement.

The Charity Commission’s resulting report highlights issues for the sector as a whole, from which charities of all sizes should learn, most importantly:
• the importance of checks and balances, with the right mix of skills and experience on charity boards;
• operating models to reflect the nature and scale of charities;
• the need for a proper reserves policy and financial planning; and
• the need for a consideration of issues arising when charities get bigger.

The Captain Tom Foundation

The Captain Tom Foundation raised concerns from three regulators: the Fundraising Regulator, the Charity Commission, and the Information Commissioner’s Office.

It is understood that the charity has sought to work with the regulatory bodies.

What the charity’s situation highlights, is the need for transparency and care with legal compliance in relation to fundraising as, once again, we have a case which shows that damage may be caused to an individual charity, and the charity sector as a whole, because of issues raised – whether perceived or real.

Charities must ensure that statements concerning fundraising contain the necessary details, including compliance with statutory requirements in relation to amounts received by commercial organisations connected with it. They must also make sure that data protection issues are properly addressed.

The Captain Tom Foundation is a high-profile charity which has raised a lot of money, and so it is essential that concerns are seen to be dealt with seriously, as does seem the case, to maintain trust and confidence in this charity, and also fundraising in the charity sector.

Giving to Support Ukraine

This initiative raises various issues which have been highlighted by regulators including:
• the desirability of giving to registered, regulated charities;
• the need for charities to observe sanctions requirements;
• the need for safe giving to registered charities with both government and fundraising guidance available;
• the need for charities to follow guidance when operating in high risk areas – in particular the Charity Commission guidance: ‘Charities: how to manage risks when working internationally’;
• the need for care when accepting donations, which may lead to reputational damage and also because it may be difficult to return a donation once received.

Lehtamaki v Cooper: Members in Charities

A separate case has clarified and set out the duties of members of charities, and whilst the case of Lehtamaki v Cooper relates to members of charitable companies limited by guarantee, it also applies to other forms of charity.

Essentially, the case provides that members owe fiduciary obligations to exercise some of their functions for the sole purpose of advancing the charity’s objects. This means that members of charities would be expected to exercise their functions in such a way that they disregard any self-interest, and that the members have fiduciary duties in relation to those functions.

The extent to which members are required to comply with these duties will depend on the precise circumstances of each case, and it is difficult to generalise.

That said, this case provided that the court had the power to direct a member as to how to exercise the fiduciary duty – very much on the facts of the case.

The case is complicated, not least because, although the ultimate decision of all the judges of the Supreme Court was the same, the reasoning used differed.

Who is a fiduciary and what are fiduciary duties?

A fiduciary relationship is one of trust and confidence, with the fiduciary owing a single-minded duty of loyalty, which means that fiduciaries cannot exercise any power so as to benefit the members.

These are some of the facets of a fiduciary relationship:
• Fiduciaries must not put themselves in a position where their interests and the interests of their beneficiaries conflict;
• Fiduciaries must not make a profit out of their position;
• Fiduciaries must act in good faith to serve the best interests of their beneficiaries

Consequences of the case

The principles of the case apply to members of other types of charitable organisation and the differences between the duties of members in different types of charity will have to be worked out.

The differences between duties of members of other forms of charity and CIOs are yet to be worked out.

It is not considered that the obligations should depend on the size of the membership. However, there may be reasons why people become members which may affect the extent of their duty – for example, supporters of its aims, those who wish to obtain a benefit from it, and those who wish to play a role in its governance.

In conclusion, charity members are considered to have agreed to exercise at least some of their functions for the sole purpose of advancing the charity’s objects, and as a consequence those functions must be exercised in such a way that members satisfy fiduciary obligations in relation to those functions as set out above.

It is hoped that the Charity Commission will provide clear guidance in due course.

More information

If you require bespoke advice in relation to your charity, our expert solicitors can assist you. For more information, or for an initial chat, please get in touch with Mark Lewis using the form below.

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