A reminder of core trustee duties when facing financial difficulties

The last few years have been trying times for both charities and for those working in the charity sector. The difficulties faced by charities have been caused by a range of factors including the Covid 19 pandemic and the drastic increase in costs.

The Charity Commission have issued guidance on cost-of-living related financial difficulties facing charities such as: managing the cash flow of a charity, dealing with the increase in demand for a charity’s services and the possibility of a reduced income.

This guidance is a helpful reminder and highlights the importance of trustee duties and decision making when facing financial pressures and how charities may need to balance hard decisions. You can read a copy of the guidance here.

Complying with core trustee duties

When in financial difficulties, it is important for charity trustees to remember to carry out their governing duties effectively. In doing so, trustees must ensure they are complying with their core duties as trustees, such as:

1. Compliance with the powers outlined in the charity’s governing document

Trustees must remember that the governing document of the charity may restrict or not cater for certain powers. For example, restrictions may be placed on a charity’s power to collaborate with another/specific organisation. If this is the case and the charity’s trustees believe that the restriction is preventing them from accruing further income for the charity, the trustees must act in compliance with the governing document and seek legal advice as to whether this restriction could be removed to allow the charity to increase its income.

2. Acting in the best interests of the charity

When dealing with financial difficulties and the attendant pressures surrounding a charity, trustees may struggle when deciding what is in the best interests for the charity.

What is in the best interests for a charity will depend on the particular circumstances facing a charity – one size does not fit all. For example, it may be in the best interest of one charity to merge with another, however, this may not be in the best interests of another to do this.

Trustees may also consider whether it is prudent to sell investments and other assets to release funds for current expenditure. Sales may raise less money than might be secured in better economic circumstances. However, it may be in a charity’s best interests, for example, if it is the best option available for meeting urgent needs.

3. Managing the resources of the charity responsibly

One of the core duties as a trustee is to manage the charity in a responsible manner. In doing so, trustees should also act in the best interests of the charity.

In situations of financial distress, trustees may fall into the trap of allowing quick solutions, without taking account of the long-term impact on the charity. Trustees are duty bound to manage the resources of the charity responsibly. This means that the charity has to plan and monitor its income and outgoings so that it can meet its short, medium and long term aims and commitments. Having a strategic plan and a good understanding of the charity’s constitution can help achieve this.

4. Acting with reasonable care and skill and taking appropriate advice when needed

Trustees must always act with reasonable care and skill. This includes seeking appropriate advice before proceeding with actions which are not within their area of expertise. For example, if the trustees of a charity are under financial strain, they may decide that changing from one type of investment to another or entering into certain collaborative agreements, may bring tax advantages. However, appropriate advice should always be sought when deliberating on decisions of this kind.

5. Managing any conflicts of interest

Trustees of a charity should be aware of any potential conflict(s) of interest that can occur. There are two common types of conflict of interest: financial conflicts and loyalty conflicts.

When considering the strain of the increase in cost-of-living, it is likely to be financial conflicts that trustees encounter. An example of this would be where a trustee proposes to lease personal property or assets to the charity. Whilst well-intentioned, this could still lead to a conflict of interest situation and care must be taken to follow correct procedures and take full minutes of decision-making to ensure transparency.

For further advice on this please contact a member of our Charities Team.