How trustees of charities can reduce risk
Three key principles for good governance and how to implement it are risk management, avoiding conflicts of interest in decision making, and due diligence.
Risk management
There are five types of risk:
- External – damage to your charity’s reputation or changes in government policy.
- Financial – inadequate reserves or losing money through inappropriate investments.
- Governance – lack of relevant skills/commitment from trustees or a conflict of interest.
- Operational – lack of beneficiary welfare or safety.
- Compliance – poor knowledge of regulatory requirements regarding fundraising or operating vehicles.
I strongly recommend that trustees have a risk management process in place. As part of the process, trustees should consider:
- their objectives and activities
- outcomes to be achieved
- external factors (e.g legislation/regulation)
- their reputation with major donors and supporters
- past mistakes and problems faced
- their operating structure, and
- comparison with similar charities.
Trustees need to show they are prepared for key risks and can demonstrate what risk remains after action is taken. Strategies include:
- transference – through use of a trading subsidiary or outsourcing
- avoidance – by not taking up a contract or stopping an activity/service
- limitation – establish reserves against loss of income
- reduction or elimination – by establishing/improving control procedures
- sharing the risk – through a joint venture
- insuring against risk – such as employers liability, third-party liability, and
accepting risk as low probability/low impact and reviewing annually.
A recent case study
Our Charities team acted for a town festival where risk was mitigated by transferring it to a third party. The town decided to put on a rock concert. To do it themselves was within the auspices of their charitable objects; however, they did not have the experience and so because of the potential financial loss they may have faced, so we advised them to ring-fence the activity within a trading subsidiary.
Contracts were sent out, incorrectly, on the charity’s headed paper. The concert operated at a loss paid for by the charity which, due to the contract error, was deemed inappropriate use of charitable funds.
Consequently, even where a risk is identified and a strategy for dealing with it put in place, it can still fail. Here, not everyone understood the reason for using the trading subsidiary and the practical consequences which followed.
Risk management is not a one-off process and should be very much embedded within the running of the charity.
Conflicts of interest and good decision making
It is not possible to make a good decision if a conflict is present. The guiding principle can be summarised as: anyone with a fiduciary duty has a duty to avoid a conflict of interest.
Identifying conflict early on and taking steps to avoid or manage it is key. Often a risk can be created by a lack of paperwork, but if there is a record of advice being given and a decision being taken as a result the trustees will be better protected.
Trustees should:
- declare a conflict immediately - having this as a standard agenda item at trustee meetings is good practice.
- have a written policy setting out how to identify and disclose conflicts to help prospective trustees identify possible conflicts.
- follow any instructions regarding conflict in your governing documents.
In addition, good decision making (principle summarised below) gives trustees confidence their decisions are within the range a reasonable board would make.
The basic principles of good decision making are to:
- act within your powers
- act in good faith and in the interests of the charity
- be informed
- take account of all relevant factors.
Due diligence
The ‘know your’ principles are in line with international guidelines and cover three main areas:
Know your donors
The abuses of money laundering, proceeds of crime, and tax evasion are well known. Charities should be wary of requests for a return of part or all of a donation and be reasonably assured about the provenance of funds as well as any conditions attached to them. If you are concerned, check lists of financial sanctions targets and/or consider refusing the donation.
Know your beneficiaries
This is particularly relevant to grant-making charities. Trustees should ensure they know who individuals are and that it’s appropriate to provide assistance.
Know your partners
Charities must be sure any working partner is appropriate, otherwise they may be able to abuse the funds paid to them, including assessing their reputation and legal status. It is good practice to have a partnership agreement in place.
Due diligence includes accounting for charity funds, helping trustees meet their duty of prudence, and maintaining donor confidence. Where a charity undertakes robust monitoring this may act as a deterrent of abuse.
In summary, following these principles should protect the actions charities and their trustees take in running a non-profit.