Kids Company collapse | What it could mean for Trustee responsibilities

The collapse of Kids Company in 2015 started a series of events that are still ongoing even today.

In 2016 the Public Administration and Constitutional Affairs Committee Report (PACAC) published a report that stated The Board failed to protect the interests of the charity and its beneficiaries (…)  Primary responsibility for Kid’s Company’s collapse rests with the charity’s Trustees.

High Court findings

Five years on and after costing the public some £9.5m, the High Court’s Judgement in 2021 concluded very differently. The Judge stated that most charities would be delighted to have individuals with the abilities and experience of these Trustees and the care and commitment the trustees had shown in highly challenging circumstances. An important and vital driver of the decision-making was to ensure that able and experienced individuals are not dissuaded from becoming or remaining trustees.

There was recognition that whilst aspects of Kids Company operating model were high risk, it was not unsustainable in principle and the charity had laid out a restructuring plan. If it had not been for the unfounded sexual assault allegations it is more likely than not that the restructuring would have succeeded, and the charity would have survived.

The charity’s CEO, Camila Batmanghelidjh, did have a central role that included developing strategy, but she was subject to supervision and control by the trustees, who were the ultimate decision makers. The High Court recognised that the trustees did exercise real scrutiny over expenditure but most importantly, it stated that they were entitled to expect staff to draw any major concerns to their attention and gain comfort from external reports. Thus referring to a proportional view of Trusteeship, recognising that it is not a full time operational role and therefore reliance does need to be placed on key management of the Charity to update and inform the Board. As a result, the Trustees’ conduct did not amount to incompetence of a high degree.

Charity Commission findings

In contrast, in February 2022 The Charity Commission report that was published did assign blame for the failings of Kids Company on the Board of Trustees. There is a clear divergence of opinion from the High Court ruling by the regulator that found there was ‘mismanagement in the administration of the charity’ at both the Board and senior management level. The Charity Commission report is highly critical of the Board and senior management and the role they played in the Charity’s collapse. The report is critical of the Board role saying that a greater breadth of experience in the trustees and a broader range of skills might have meant they were better placed to question the executive’s decisions including the service delivery model adopted.

The Charity Commission highlighted the high-risk business model was predicated on a heavy reliance on grants and donations and on the CEO as a key fundraiser, whilst having a lack of reserves. The Trustees were aware of these risks but continued to operate under the same model for many years, only developing a restructuring plan in the last months of the charity’s operation. In its report, The Charity Commission highlights the four key lessons learnt from Kids Company as follows:

  • The importance of checks and balances, and the right blend of skills and knowledge, in charity boards
  • The requirement for operating models to reflect the nature and scale of the charity
  • The role of financial planning and reserves policies
  • Considerations for when charities grow.

The report does emphasize some key messages for Boards to take away; it reminds Boards that part of their role, when evaluating whether their approach is effective, is measuring impact of the charity. They need to ensure that:

  • There are effective systems in place
  • They understand their income risks and dependence, particularly if from one source of funding
  • They understand their cash-flows and their reserves.
  • They understand at what level reserves are maintained and why has this level been set
  • Where reserves are low, there must be a clear explanation of the operational ability to continue in the Trustees’ report.
  • Finally, in respect of fundraising itself, the budgets needs to be realistic, monitored and regularly assessed on actual performances achieved and so the risks arising on income generation are actively managed.

All of this is sound advice, especially in our current climate of increasing inflation, utility costs and increased service demand – it creates the perfect storm.

This thought process has flowed through the 2023 Charity Commission annual return that has been updated with several new compulsory income questions.

  • Charities with incomes over £100,000 now need to disclose the value of the highest value donation received from both an individual donor and a corporate donor.
  • For overseas income received, there is a need to disclose income by country and then sub-analysed by source, such as from governments, private companies or overseas donors.

The report also recommends that all charities could consider setting an agreed term of office for trustees so as to bring fresh perspective to the Board and to avoid complacency. It concludes that diversity across trustee boards leads to better decision making and challenge of the executive, following on from the criticism of the skills and breadth of experience of the Kids Company Board.

Next steps

In December 2022, Camila Batmanghelidjh has been given permission to go to High Court over her claims that the Charity Commission report is irrational and tainted by bias in the form of predetermination to produce a report which was critical of Kids Company. The Judge concluded that the grounds were arguable but there would be high hurdles as the Courts would not readily interfere with a decision by an expert regulator. We wait to see how the next steps in the Kids Company saga develop.

At the moment, this leaves Trustees in a quandary. On the one hand you have a position whereby the High Court ruled that Trusteeship is proportional and it is right that Trustees should place reliance on information and reports provided by management in their decision making. On the other, you have the Charity Commission report which looks for the Boards to be responsible for all aspects of charity management and challenge information provided to them.  Both points of view are valid, but without proportionality, Trustees are unable to fulfil their duties without a significant time commitment and burden which goes above and beyond the current governance structures in place, which are limited by time available to Boards in a handful of meetings a year.

The hope is that the view of the Charity Commission is scoped further in order to give Trustees the comfort they need in order to fulfil their duties or be paid to spend the time required to deliver against the Charity Commission’s remit, which would involve substantially more involvement in the day to day operations and processes. Volunteer Trustees who are working full time may find the time requirements of such a role challenging. Diversity requirements of recruiting younger Trustees onto Boards will be limited if the responsibilities of a Trustee are as wide as the Charity Commission viewpoint. 

[Content reviewed and updated 9 January 2024.]

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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