Chairs, chief executives and the bottom line
Janet Hamblin examines some common governance mistakes and suggests ways to avoid them
The recent Westminster parliamentary post-mortem into the failure of Kids Company has focused attention more than ever on the vital role of good governance, and the shock waves resulting from the debacle should not be ignored in Scotland.
David Robb, chief executive of the Office of the Scottish Charity Regulator (OSCR), recently added his voice to calls for raising the governance standards of the charity sector overall focusing on targeted regulation of the 24,052 Scottish registered charities.
As the audit firm with the largest number of UK charity clients, we have a unique perspective which has helped inform our recent Charity Governance 2020 report – an in-depth study of how charities can ensure their governance model is fit for purpose – now and in the future. This sets out some common principles which can be applied by all boards and highlights best practice using case studies from across the charitable sector.
A charity's mission must be achieved, but trustees should ensure all their activities are financially sustainable
In essence, those with ultimate responsibility for charities often give up their time voluntarily but this does not absolve them if things go wrong. The systems and structures within which charities operate must therefore be clear and robust. Every charity in Scotland must conform to all of OSCR's requirements but good governance goes deeper than simply ticking boxes and best practice does not stand still.
One particular area we examine in our report is the critical importance of the roles of, and the interaction between, the chairperson and chief executive – brought into sharp focus once again by Kids Company.
There are essential differences in the two roles: one is voluntary and carries the ultimate responsibility whereas the other is remunerated and a more visible leader.
While it is worth noting that there are some high-profile chairs who can play an important role in promoting and furthering a charity's work, this should be balanced with maintaining a clear distinction about who does what. These sometimes conflicting standpoints mean that it is imperative that the right individuals fill these two critical roles and that they have the ability to work well together to achieve the organisation's goals.
The relationship between chairperson and chief executive should be one that is sufficiently close but not too cosy. Both should feel comfortable challenging the other, and other trustees should not feel alienated by the relationship.
While these two positions are pivotal to the organisation, regulators have identified the need for effective, collective decision-making by trustee boards. When individuals are too over-bearing, other trustees often fail to fulfil their duties to fully consider issues because they are intimidated or obstructed by the dominant individuals.
Another lesson from the recent failure of Kids Company is this: only a lack of cash will cause a charity to fail financially.
If establishing the charitable purpose of any charity is the first priority of any board of trustees, then implementing an effective financial strategy comes a close second. An effective trustee should be aware of the financial risks involved for each source of significant income stream but also consider the potential for new ventures and new streams of funding, with diversification and sustainability in mind. Allied to this is ensuring there are robust controls in place to mitigate the risk of fraud.
A charity's mission must be achieved, but trustees should ensure all their activities are financially sustainable. All too often, charity boards fail to continuously monitor cash flows and review financial performance. Where lack of oversight leads to failure, the resulting damage inflicted on beneficiaries, staff and the sector as a whole can be deep and long lasting.
Janet Hamblin is a partner at RSM in Edinburgh. She heads up the firm’s dedicated not for profit team in Scotland and has over 25 years of experience advising and auditing charities, social housing and education sector clients.