The Kids Company judgment reveals some big issues for charities

Last week there was a major judgement in a court case against the CEO and trustees of Kids Company. It highlighted some major problems for the sector.

Last week saw the conclusion of a long-running court case against the trustees and chief executive of Kids Company, brought by the Official Receiver, who sought to ban them from being company directors.

The judge, Mrs Justice Falk, sitting in the High Court, handed down a 221 page judgment, saying that trustees should not be banned, and that the charity’s colourful founder and CEO, Camila Batmanghelidjh, had not been acting as a shadow director.

The core of the case came down to two ideas that are in natural tension.

The Official Receiver’s case was that if you run an organisation very badly, you should be prevented from running any other similar organisations, for the wider public good.

The counter-argument was essentially that trusteeship is a voluntary endeavour, and if you honestly try your best to do good, then that is enough, and you shouldn’t be punished for it.

The judge came down heavily in the second camp.

On balance, the judgment is good news for the charity sector, and reassuring for those of us who act as trustees.

But the case also reveals a startling lack of awareness about the sector throughout the legal and regulatory system. And it reveals how badly charity law fits with company law. It suggests that we need reform of charity regulation and governance, and also that we are not likely to get it.

What actually happened?

The case dates back to the collapse of Kids Company in 2015.

The charity had a board of trustees was made up of the great and the good, including Alan Yentob, former BBC creative director, and Richard Handover, a former chief executive of WH Smith. It received £43m of government money over 17 years of operation, mostly unrestricted, on far more generous terms than pretty much any other charity, and also benefited from lavish donations from a string of celebrities. But it had been eccentrically run since the start, and had never built up any reserves. It was already tottering when the Metropolitan Police announced an investigation into allegations of sexual misconduct. That proved the final straw, and the charity fell apart like a house of cards.

In the wake of some pretty searching questions, the Official Receiver and the Insolvency Service decided in 2017 to seek fairly lengthy directorship bans for all the trustees, on the basis that they “operated an unsustainable business model”.

The trustees immediately sought to contest the ruling, and went to law.

The mills of justice grind exceedingly fine, but they grind exceedingly slow, and the case has been making its way through the courts ever since. Now, finally, we have some answers.

What did the judgment say?

Broadly, the judgment is critical of the Official Receiver’s case. It criticises a weak understanding of the nature of charity and of the responsibilities of a board of non-exec directors, and suggests that the case was prepared in a less impartial way than was really proper.

However it reinforces the fact the charity was run in a totally chaotic way, living hand to mouth for years. It does little to dispel previous allegations of bad management and poor governance.

Senior managers raised issues about cash flow repeatedly over the years, and the trustees knew it, and tried but failed to address it. It’s clear Batmanghelidjh didn’t have much interest in setting things on a sustainable footing, which is why she was on the brink of being ousted when the charity went under.

The judgment leaves you with the impression that no one involved in the case – not the judge, the trustees, or the Official Receiver’s team – really knows too much about what’s normal in the charity sector, and how far from normal the Kids Company model was. A collection of rather high-powered public servants seems to have encountered our sector for the first time, and drawn some fairly startling conclusions.

There was a rather surprising suggestion from the judge, for example, that the self-referral model used at Kids Company was fairly normal and reasonable. And an even more surprising one which seems to say that building reserves is not really necessary for a charity.

The judgment also reminds us how amazingly unusual was Kids Company’s experience of government fundraising. Somehow a local charity, operating only in Bristol and a few London boroughs, was getting national funding, with a direct line to ministers – an experience shared by no other charity in the UK, to my knowledge.

The judgment comes to what seems a pretty optimistic conclusion: that the charity would more likely than not have survived without the sexual assault allegations mentioned above. It rather downplays the brinksmanship that had clearly been in evidence for years.

The judgment takes issue with the Official Receiver’s assertion that Kids Company had an unsustainable business model, saying that the charity ran for 17 years, and implying this is too long to sustain an unsustainable model.

This seems like nonsense. The charity had been ducking and weaving to stay ahead of the bailiff for years. Just because some people manage to stay ahead of the bailiff for a long time, that doesn’t mean it’s sustainable indefinitely.

In any case, they weren’t operating the same business model the whole time. The charity grew and grew to the point of unsustainability.

Still, the core finding is essentially a reiteration of what seems to be a widely accepted legal principle with regard to trusteeship: so long as you’re making an honest attempt to do good, you have a lot of protection under the law.

Good news for charities – and trustees

The decision is probably good news for the wider sector. Trusteeship already comes with very considerable responsibilities, and charities probably don’t want trustees to face potentially career-limiting sanctions any time a charity goes under.

You could question how much of a worry that was anyway. Kids Company was certainly an exceptional case, so you could argue we shouldn’t have generalised from it and that in this unique situation, sanctions were justified.

One trouble with that argument is that Kids Company was far from the worst run charity to go under that year. It was just by far the most high profile.

Of course, this is no defence in the law – “But everyone else was doing it so I thought it was okay”. However it is a cause for sympathy. Other charities have received more government money and gone under. Other trustees have been involved in far more deliberate and calculated misuses of charitable money. Nothing like this effort has been dedicated to pursuing them.

The real question is whether doing your best is a good enough excuse.

Trustee power and responsibility

This is important, because the key test for whether you should be banned as a company director is not whether you did your best, but whether you failed so totally that you’re likely to be a danger to the public good if you’re allowed to have another go.

You could certainly make an argument that these trustees have shown they can’t be trusted with another charity.

Which makes me wonder, how come?

It is interesting that the trustees allowed things to have gone on as long as they did. The judgment makes the reasonable point that these are all highly successful individuals who are very good at running things. It seems likely to me that none of them would ever have let cash flow get so bad in their own business that they couldn’t make payroll. It’s odd that they let it happen at Kids Company.

One explanation is that when people enter a new environment they do not know what normal expectations are. None of the trustees, for all their massive experience in other fields, seems to have ever run a charity, so they tolerated far stranger behaviour than they ought to have done.

This is an underacknowledged problem with trusteeship. It’s a completely different skill to, say accountancy or fundraising, and actually, it may not be much like acting as a director of a company limited by shares, either. That’s not often understood.

Another explanation is about power. Some trustees, at least, knew they were operating a broken business model, and they made a number of attempts to rein in the CEO. They just couldn’t. She was the face of the organisation and its main breadwinner, and also made the day-to-day decisions. If she had simply been removed, the charity would have collapsed without doubt, so she needed to be managed gradually out. But the process started far too late.

The chair may bear more blame here than the others. He’d been there a long time – far longer than is good practice – and was a loyalist. He was not a business person and was slow to see what was needed.

In that situation, what do you do? Walk away, probably. Don’t participate in the train wreck. But we all know that once you’re invested in a problem, it’s hard to simply cut ties and leave. And is that really what we want to encourage trustees to do anyway?

Director vs trustee – time for unitary boards?

The case also revealed some pretty big tensions between the idea of being a company director and being a trustee. Clearly, the responsibilities are analogous but not identical, and the company director regimen has been grafted uneasily onto charity law. It’s an unsatisfactory fudge.

Charities have to incorporate because they want to protect trustee liabilities and have legal personalities, but the two duties of the two sets of law have always sat unhappily together.

Of late we’ve seen the development of a new legal form – the charitable incorporated organisation – which addresses some of these problems and which charities clearly prefer. But it doesn’t address the whole issue, which is that a huge amount of legal responsibility is placed on a board of very part time, voluntary trustees – far more than they can sensibly bear.

That’s not to say there’s anything wrong with the concept of having a trustee board made up of volunteers. Everyone seems to quite like it. The problem is all about loading them down with onerous legal duties that can’t practically be fulfilled.

Charities use boards to set strategy, provide scrutiny of executive decisions, and offer support to leaders. Boards check that the charity is focused on meeting beneficiary need and acting in line with its objects. None of this needs them to be ultimately responsible for the whole affair – certainly not to the exclusion of the executive. Why make them do it?

The Official Receiver seems to have simply rejected the law as commonly understood, and just insisted that all charity CEOs are de facto directors. Since the Kids Company scandal, another chief executive of a collapsed charity – Ian Wardle, of Lifeline Project – has been banned for seven years as a de facto director. I would guess he may now challenge that ban.

The Kids Company judgment the law clearly shows that charity CEOs are not to be considered directors, which is perhaps a surprising decision, given how control is actually exerted over a charity in practice, with management teams having far more power than trustees.

We should ideally take steps to address it ourselves, in the absence of the law. For a long time big charities have been moving towards the unitary board model, where CEOs and often FDs sit on the board alongside trustees.

But it would also be good to see the law changed, to rebalance legal duties to reflect where power actually lies in the modern charity.

The model of ultimate control by unpaid trustees probably did make sense at the time it first became popular in the 19th century, when charity was an instrument for the great and the good to administer largesse to the deserving poor. But things have moved on since then. I think it might be time for change.

Lack of knowledge of charities

That change won’t happen, of course. It would need legislation, which would mean parliamentary time, which is a pretty scarce resource. And to be fair, it’s probably nowhere close to the top of the list of things which ought to get sorted about the sector. In most cases no one cares. We just muddle along fine with a big gap between the theory under the law, and the everyday reality.

The bigger problem highlighted by the case is about the relationship between charity and the public sector.

The Insolvency Service, as I said above, seems to have encountered charities for the first time a few years ago, and decided to completely reapply the law. Now it’s been to court and discovered its understanding of the law to be totally different to that of the judge.

It put me in mind of the Information Commissioner’s Office, back in 2015, which also encountered charities for what seems to have been the first time, and spent the year muttering “But you can’t do that,” in a quiet aghast voice.

It’s not uncommon, basically, for entire arms of government to not really remember that charities exist. Which is remarkable, really. Because the charity sector is massive.

I’ve quoted the figures before, and I’ll quote them again here. The charity sector employs 3 per cent of the UK work force – almost a million people. It owns 2 per cent of the UK stock market. In terms of expenditure on the public good, the £60bn the sector spends is comparable in size to the education sector or local government. It’s bigger than the police, fire service and armed forces combined. If it was part of the public sector, it would have a minister of state.

In short, charity has for years been a blind spot in the government consciousness. It’s completely under regulated and under regarded, given what it does. Imagine just not remembering the existence of local government.

Now we are beginning to see government wake up to charity, and to focus more on our sector. Unfortunately it’s most often to try to get charities to stop criticising and doing things government doesn’t like.

A failure of government

All of which brings us back to the fact that the collapse of Kids Company was far more a failure of government than of governance in the first place.

The charity should not have been fed cash without restrictions for years. It should not have gone for years without any inspection by a statutory agency. It should not have benefited from two decades of unscrutinised ministerial patronage.

Government’s normal attitude to charitable funding is much more like the one applied to various recent emergency funds, which have involved a ridiculous number of preconditions and have often seen a lot of the money diverted to commercial auditors to check that the sector isn’t on the fiddle.

The whole relationship is characterised unfortunately by lack of knowledge, lack of engagement and lack of trust.

What the Kids Company court case really teaches us is that government’s approach to charity needs to change – ideally away from a mix of disregard, distrust and occasional patronage for pet projects.

The question, of course, is how we make that happen.

I’m a freelance writer who specialises in the charity sector. If you enjoyed this and you need someone to produce content, please get in touch: david@ainsworthcommunications.co.uk