NFPs: Trust is earned by financial management

In April 2023, the research and consultancy business Yonder, in partnership with the Charity Commission for England and Wales, delivered long-awaited good news for the not-for-profit sector in the UK.

Trust in charities had marginally increased at a time when trust in other institutions had flatlined or fallen, the Charities and their relationship with the public study revealed.

In fact, charities stand in second place on the trust scale compared to other social institutions, with doctors in first place and banks in third.

“There is stability in the public perception of charities who are more trusted than they were half a decade ago and more trusted than most other institutions and sectors in public life,” the report stated. “This is progress compared with loss of confidence in charities in the years after 2015 but there are few, if any, signs of trust returning to those pre-2015 levels.”

The long-term damage caused in 2015/16 involved aggressive fundraising techniques, concerns around how some charities were using the funds they had raised, inappropriate data sharing, poor governance and financial mismanagement.

Trust evaporated as Kids Company collapsed amid financial woes and an investigation into alleged child abuse on its premises. No evidence of criminality was found in the investigation, but the damage was done and the charity shuttered. Six years later, BBC News reported that the judge in former Kids Company directors’ High Court appeal against disqualification believed “the charity may have survived had it not been for unfounded allegations of criminal activity”.

Charity brands were further damaged when it was revealed that Age UK had a relationship with energy supplier E.ON that resulted in elderly customers being overcharged.

And a series of stories about aggressive fundraising techniques emerged after 92-year-old Olive Cooke took her own life. Cooke had supported the Royal British Legion for 76 years and received 267 charity letters in one month, as well as intrusive phone calls.

"She had 27 direct debits to charities, she was an older lady who had a hard time saying 'no' to anybody and they took advantage of her,” Cooke’s son-in-law told BBC News.

The only way to continue to regain those pre-2015 levels of trust is to practise flawless financial management, experts say.

“The legacy of high-profile cases involving the governance of large, household-name charities continues to act as a drag on people’s instinctive willingness to believe that charities can be fully trusted to manage funds and create genuine impact,” the Yonder report said.

“In the current climate, demonstrating prudent stewardship of funds is therefore more critical than ever. For the public, this means avoiding unnecessary risks but also making sure that donors’ money is actively put to work to further the charity’s purpose.”

A report from the Charity Commission for England and Wales concurs: “Public trust in charities has risen, though the increase is minimal. This marks the third year in a row of steady public trust in charities, suggesting that the recovery from the 2015-2020 trust crisis may have reached a plateau that remains below historic highs.”

What does prudent stewardship look like?

Paul Latham, Director of Communications and Policy at the Charity Commission, has been vocal about the importance of best-practice financial management in charities.

“Both trustees and the public generally feel that charities should avoid excessive risk and focus on their core purposes when deciding how to spend funds,” he wrote in a Charity Commission blog. “Equally, though, the public feels charities should not be so cautious that they end up simply accumulating money.”

The Charity Commission, which on 1 August released updated guidance for trustees around investing charity money, says trustees must act only in the interests of the charity, making sure they’re sufficiently informed and that irrelevant factors are ignored.

“Acting in your charity’s best interests means always doing what you decide will best help your charity to carry out its purposes, both now and for the future. It is not about preserving your charity for its own sake,” the document says.

“As trustees, you must not allow your personal motives, opinions, or interests to affect the decisions you make.

“This will help you to make a proper decision and show that you have acted appropriately.”

Setting an investment policy

While the Charity Commission’s new guidance document covers a lot of ground – including investment types, reviewing and reporting responsibilities, investing permanent endowments, tax on investments, advice for charities that mainly invest cash, and more – it includes a core section on the writing of an investment policy document.

A written investment policy is compulsory for any charity that is structured as a trust or an unincorporated association, if the governing document requires the charity to have one, or if the charity gives an investment manager powers to make investment decisions on the charity’s behalf.

In fact, the Charity Commission expects all charities that invest to have a written policy, including charities registered as a company.

Advice can be taken around the content of the investment policy, but that advice must be considered objectively against what is best for the charity, the Charity Commission paper says. Real and potential conflicts of interest that affect an adviser must also be identified and managed.

The written investment policy should include:

• The charity’s purposes, and how investments will assist the purposes
• Information around what the charity’s governing document says about investments
• Financial and non-financial investment objectives
• Threats, including organisations or movements that could work against the purpose of the charity
• Investment timeframes
• Liquidity requirements, potentially driven by how often the charity’s money must be accessed
• Risk appetite of the charity
• Environmental, social and corporate governance factors, including the charity’s approach, as well as that of companies the charity invests in
• How investments will be monitored, measured and benchmarked
• Identities, responsibilities and method of working with investment advisers and managers

The investment policy should be regularly reviewed and agreed by all trustees. A well-considered policy enables a charity to communicate clearly around the organisation’s purpose, how its investments fund that purpose, and the relevant, balanced and reasonable processes behind all financial decision making.

Meeting future challenges

A survey in November 2022 by the Charities Aid Foundation discovered that only 49% of charities felt they had enough funds to service current demand, and approximately a quarter had already reduced services. More than a third of charities (36%) struggle to recruit staff.

There are enormous challenges ahead for those in the not-for-profit sector as the cost of living crisis increases demand for services while also dampening levels of funding. Cuts to public spending, and a possible long and deep recession will only compound the challenge.

The sustainability of individual charities over the coming years will have everything to do with cost management, financial resilience and communication of purpose, driving powerful engagement with donors. And that all starts with financial management.

Read more: 5 tips for working with charities and NFPs – IFA’s Scotland regional ambassador Duncan Walker share his advice for accountants working with charities and not-for-profits.