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Posted 7 September 2017
From Boom to Ban: What did the Kids Company Trustees do wrong?
It has been two years since Kids Company started the dissolution process, but for those once responsible for the charity, the repercussions of its failure continue to reverberate. This week, the former directors of the charity have issued a statement saying that they “wholly reject” the allegations that they were running an unsustainable business model from September 2013 to August 2015.
The statement comes further to the Business Secretary’s announcement that his office would issue proceedings against several former directors of the dissolved charity, as well its emblematic former chief executive. If found in the state’s favour, the court could disqualify those individuals from acting as a director for up to 6 years. A number of those named in action hold directorships for other companies, and so the decision could have detrimental effects on their future careers.
What is most shocking is that the directors were successful in business long before Kids Company, with their aggregate back catalogue of employment including the BBC, WH Smith, a multinational pharmaceutical and an international Public Relations expert. How could they have reached this point?
As directors of a charitable company, they were also trustees. This gave them ultimate legal responsibility for the charity under their Trustee Act duties, as well as director’s duties by the Companies Act. The 2015 report into the collapse highlighted several areas of concern:
One criticism was that the chief executive, who was also the founder, would not communicate effectively – at times acting as a barrier rather than a conduit – and there were also incidences of disengagement with the trustees. Charities need a ‘check and balance’ mechanism to operate efficiently. If one person or a small group of individuals are exercising excessive control over key decisions, it may mean that your charity is not adequately balanced. Communication between the two arms needs to be maintained.
Trustee and staff suitability
Kids Company harboured an environment of false confidence. People relied on the most vocal, irrespective of that person’s skill or knowledge of the subject in question. Key specialisms were missed, although the trustees believed them to be in hand. The most vocal people also happened to be the people who had held office for the longest period. This created a long-standing lack of challenge.
Like all businesses, money is essential to the sustainability of a charity, and again this rests upon the shoulders of trustees. Professional firms instructed by the charity identified matters of concern, but the seriousness of their warnings varied from firm to firm. None of them appear to have reported the scale of risk carried by the charity to the trustees, the Cabinet Office or Charity Commission for example. It is the trustees’ responsibility to look at the whole picture, not blindly rely on the professionals. Several factors influenced the loss of money, but the main problem was a lack of either an emergency fund or transparency about the charity’s financial position.
The statutory standard states that ‘a director must exercise reasonable care, skill and diligence’. Case law will see that any decision will also be based on a three stage process:
- Do the matters relied on amount to misconduct?
- If they do, do they justify a finding of unfitness?
- If they do, what period of disqualification should result?
I would say however that this is going to be harder than it might first appear.
Without doubt that the Business Secretary is making an example of the Kids Company trustees. The buck does, after all, end with them. But, whether you agree or disagree with the forthcoming legal action, it might be worth asking how you would react in the same circumstances. Would you speak up if the culture of the charity dictates that you should merely listen? Does your charity promote a limit to tenure? Would you question your third party professionals?
The reality is that such failings are not beyond the realms of possibility for many charities. It is best to perform an annual audit of your charity’s decision-making process to keep on top of those cumulative factors that may in future be detrimental.
For further information and advice on charity law, please contact our specialist team on: 01392 207020 or email: firstname.lastname@example.org