“Consistent and comprehensive failings”, “misconduct and mismanagement”, “unacceptable risk of damage” – these were some of the choice phrases the Charity Commission used in its recent inquiry into the Alternative Animal Sanctuary. Following a three-year inquiry, the charity, formerly based in Lincolnshire, has been wound up with two of its four trustees disqualified.
This case serves as a stark case study in charity mismanagement. If there’s one thing to take away from the charity’s plight, it’s that charity trustees need to be very careful when entering into any form of commercial contract. As demonstrated by this inquiry, when trustees fail to exercise appropriate oversight, the consequences can be catastrophic for a charity and its beneficiaries.
During the inquiry, the Commission unearthed a litany of regulatory issues associated with the running of the charity. The trustees repeatedly failed to record their decisions, or the processes by which those decisions were made. Further, the lines between personal and charitable interests were blurred; despite three of the trustees being from the same family, little attempt was made to guard against conflicts of interests. Moreover, the charity consistently failed in its obligations to meet its statutory reporting requirements (such as filing annual accounts) and remain accountable to the public, its donors and supporters.
The Commission’s inquiry also raised significant concerns involving the charity’s finances. The trustees had failed to keep and maintain adequate financial records, or put in place any internal financial controls. Decisions regarding finances were often made unilaterally, with the Chair retaining sole control of the accounts and cash flow. Poor financial decisions were made on more than one occasion, including using the charity’s funds to buy and restore an antique horse box. The horse box, purchased for approximately £75,000, appeared ultimately to have little use for the charity, or monetary value.
The lack of internal checks and balances, or collective decision making, not only led to significant losses but placed the charity under undue financial and reputational risk.
Perhaps most notably, the charity entered into a fundraising agreement with a direct mail agency in 2008. The agreement was extended twice, and eventually came to an end in 2020 during the Commission’s inquiry. Under the terms of the agreement, the fundraiser solicited donations on the charity’s behalf, and these donations represented the charity’s primary source of income.
Over its 12-year term, the agreement generated donations of around £10.6m. However, only about one-tenth of the amount raised actually made its way to the charity; the remainder (some £8.8m) being taken by the fundraiser in costs and fees. In its assessment of this agreement, the Commission found that the trustees had neither analysed the merits of the agreement, nor considered whether the decision to enter into it (and subsequently extend it) was in the best interests of the charity. Indeed, the Commission noted that the initial seven-year term of the agreement and its inflexible termination provisions disadvantaged the charity from the outset. Ultimately, the inquiry concluded that the trustees did not exercise adequate oversight in respect of the arrangement, nor did they fulfil their duties concerning the transparency of the agreement.
Lessons for other charities
What this inquiry demonstrates clearly is that charity trustees must take an active role in considering and scrutinising the commercial agreements that their charities enter into. This applies to all types of commercial contracts (not just those relating to fundraising).
Trustees need to consider whether the agreement (irrespective of its subject-matter) represents a good deal for the charity and that it is clearly in the best interests of the charity to enter into it. Whether an agreement represents a good deal for the charity is based on more than just its outputs. For example (to mention just a few), trustees need to ask themselves the following questions:
- is the charity’s potential liability for breach under the contract appropriately limited?
- is the charity giving any unlimited indemnities?
- to the extent to which it is allowing the counterparty to use its brand and logo, is it appropriately protected?
- if supporter data is being used by the counterparty, are appropriate safeguards in place to prevent its unlawful disclosure?
- does the charity have sufficient remedies against the counterparty if the counterparty does something it shouldn’t?
- can the charity exit quickly if it needs to?
To the extent that trustees are uncertain about the potential effect of an agreement the charity is proposing to enter into, independent legal advice should be sought. In respect of fundraising agreements specifically, taking appropriate advice will also help to ensure that the trustees (and the counterparty) adhere to the Code of Fundraising Practice and the legislation that applies when charities engage professional fundraisers.
The code contains a number of rules that both a charity, and any fundraiser it engages, will need to follow. The code also summarises the requirements of law as to which provisions must be included in the contract between the charity and the fundraiser.
In its inquiry into the Alternative Animal Sanctuary, the Commission emphasised that charities should ensure that a professional fundraiser is contractually obliged to display a solicitation statement in their fundraising agreements. A fundraising statutory statement is key, both for reputational protection and for compliance with the legislative requirements: it informs donors as to what percentage of their donation will be retained by the professional fundraiser (thereby ensuring transparency). The trustees of the Alternative Animal Sanctuary failed to require the fundraiser to issue the required statutory statement. As a result, the public was unaware that only a fraction of their donations would benefit the charity.
For more information on the issues that trustees should consider when engaging third-party fundraising bodies, please check the Commission’s fundraising guide (CC20). Further considerations for trustees to take into account when fundraising in general can be found in chapter seven of the code.
To receive Birketts’ Guide to Fundraising with Commercial Partners, please request a free copy. If you would like advice on any of the matters mentioned in this article, please do not hesitate to get in touch with Edward Bouckley, Liz Brownsell or another member of the Charities Team.
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at November 2021.