Learning from the Kids Company Judgement

I was never a fan of Kids Company.

As Chief Executive of the Diana, Princess of Wales Memorial Fund in the early 2000s, I visited Camila Batmanghelidjh and considered the case for grant aid. I concluded that although the client group were exactly our concern, and the way in which Camila and her team interacted with bruised and broken young people was inspiring, the organisation seemed unsound, and she was ignoring the recommendations of reviews by two other major grant-giving bodies about how it could be strengthened. My strong instinct was to keep away, and we did.

Relying on media coverage and conversations in the charity sector, I would have assumed until last Friday that the demise of the charity was a case study in poor governance, with an overmighty Founder/CEO and an irresponsible, even hubristic, reliance on contacts with the powerful (especially the Government) and well-off rather than a proper reserves policy and the disciplines that most large charities take for granted. I notice that in the instant-reaction world of Twitter, some of my colleagues in the sector are unwilling to modify such assumptions, whatever some judge might say. Why let a fair trial and detailed judgement get in the way of a pre-determined opinion?

On Friday 12 February 2021 Mrs Justice Falk delivered her judgement on the application of the Official Receiver to have the (Directors)Trustees of Kids Company disqualified as unfit to be Directors. The application was roundly denied in a significant judgement, from which I have learned quite a bit. At one point in her judgement, the Judge says: “I appreciate that, to someone whose familiarity with Kids Company might have been gleaned from press reports, the conclusion that I have reached might appear to be a surprising one. However, I make my findings based on all the evidence I have read and heard over the course of a lengthy trial.” Exactly. Let me explain why I think the judgement is significant, and also how it has modified (not eliminated) my own preconceptions about Kids Company. (I am not qualified to assess the actual effectiveness of the charity’s work with children, nor its organisational culture. I am focusing on the governance issues identified above.)

In defence of Trusteeship and Fairness

The Judge upholds the tradition that the courts will take a sympathetic view of Trustees who are honest and conscientious but make mistakes, because volunteer Trusteeship is a public good. “The charity sector depends on there being capable individuals with a range of different skills who are prepared to take on trusteeship roles…It is vital that public bodies do not have the effect of dissuading able and experienced individuals from becoming or remaining charity trustees.” Amen.

Secondly, the judgement emphasises the requirement of fairness: “My perception is that more emphasis needs to be placed on the requirements of balance and fairness in assembling reports and other evidence”. This is aimed at the Official Receiver but applies also to the Charity Commission. Mrs Justice Falk is at pains at every stage to place the decisions of the Trustees carefully in the whole context of the time, considering what was reasonable without the benefit of hindsight.

Thirdly, the judgement shows a fundamental respect for the contribution of volunteer Trustees. “I am wholly satisfied that a disqualification order is not warranted against any of the Trustees….On the contrary, I have a great deal of respect for the care and commitment they showed in highly challenging circumstances”. At another point she says that she admires their decision not take the easier option of not getting involved at all in the first place, or walking away when the going got rough.

The judge also says sensible things several times about the limits of what Trustees can properly be expected to know about the detail of what was happening in areas of work delegated to the staff.

Reserves

The Judge concludes that Kids Company would not have been able to survive even if it had had three months’ worth of reserves, which would have been “well short of what was required”. The Trustees were well aware of the desirability of building up reserves and it was top of their risk register that they reviewed regularly. But they found that it was extremely difficult to persuade donors, Government agencies or Trusts to fund reserves, and unrestricted funds were absorbed in meeting ever increasing demands (particularly as local authority budgets were squeezed and as recession bit). The charity hit its fundraising targets year after year. The auditors signed off unqualified accounts year after year after careful consideration of the going concern issue. The Judge considers that it was reasonable – not necessarily the “right” judgement, but reasonable – for the Trustees to prioritise meeting the needs of as many vulnerable young people as possible over building reserves.

Obviously unsustainable business model?

So was the business model inevitably unsustainable, to the extent that it was irresponsible and incompetent for the Trustees to have persisted in it? No, says the Judge. The restructuring plan in place towards the end would, she concludes, more likely than not have succeeded had it not been for the calamitous effects of a Police investigation into allegations of sexual assault that was later dropped. If the model was inherently bound to fail, she asks, how come it lasted for 17 years with an accounting surplus and unqualified auditor reports? Fundraising projections had consistently been met and were deliberately conservative. Budgeting had been accurate. Right up to late 2014 (a few months before liquidation) the income seemed to be coming in well. Had the charity survived to see them, the Judge considers, the accounts for 2014 would probably have shown no material deficit for 2014, however difficult the cash flow position. The Trustees knew they would have to cut back if numerous assurances from senior Ministers did not produce the necessary extra grants (see below) but in the meantime until late 2014 they believed reasonably that they could raise the income to keep the show on the road.

Weak Governance?

Was govenance weak, with an untrammelled Camila calling all the shots? No, concludes the Judge. The Trustees exercised quite rigorous oversight. There were tussles between Trustees and Chief Executive, who was at times insubordinate, usually over-optimistic, and tried for a while to resist Trustee instructions to prepare drastic contingency plans, but overall she was managed and on several occasions the Trustees imposed their will on her. They imposed recruitment freezes, controls over loans, controls over expenditure, and the rejection of Camila’s desire to move the HQ to relatively expensive County Hall offices. In the end, she had to accept a restructuring plan where she stepped down as CEO. There were numerous smaller examples. Far from dominating, Camila did not attend the Board’s Finance and Governance sub-committees. An independent report commissioned by the Government by consultants PKLittlejohn reported in March 2014 that in general policies, procedures, governance and risk management were sound, and strategy and business planning appropriately managed. The crunch issue identified, as the Trustees were well aware, was cash flow. One of the consultants said “I am pleased to see that Kids Company processes are better than most organisations I see. I will be using Kids Company as a case study in a presentation I am giving…on governance”.

Dependence on Government funds?

Were the Trustees too dependent on Government funding, leaving the charity at the mercy of the shifting whims of politicians? No, the Judge concludes. From 2002 to 2013, total public sector funds comprised about 30 per cent of the charity’s income – a lot less than many other big charities. In 2013, Government and local authority funds provided 23 per cent, private and charitable donations 77 per cent. The large expansion of the charity in those years was achieved mainly by successful charity fundraising, with the proportion of Government funding remaining static.

What was true was that the Trustees knew very well that a much-increased underpinning of Government funding would be needed if the expanded operation was to be maintained in years to come. Private donors had funded most of the process of demonstrating the importance of the model (as they saw it) but the Trustees believed it was a responsibility of the Government to step up with more core support of services to such a vulnerable and challenging user group. Government Ministers entirely agreed: the Prime Minister David Cameron, Oliver Letwin, Nick Hurd and Michael Gove were all involved in accepting that responsibility and giving the charity to believe that they were determined to find and deliver the money. Oliver Letwin even called this no more than relatively trivial “rounding” amounts for the ample budgets that could be tapped. Ministers repeatedly said that they did not want Kids Company to close any of its centres. These assurances from the highest levels of Government did influence Trustees to delay drastic restructuring plans – reasonably so, the Judge concludes, in the circumstances. The Government did in the end come through with much smaller sums than they and the Trustees had envisaged as necessary, but it was not enough.

Risk Appetite

The Trustees knew that Kids Company was taking major risks. Summarising a self-evaluation of Trustees in March 2014, it was said: “[The nature of the activity is such that] it will always be a white knuckle ride, but history demonstrates that the challenge is always met and therefore the Board supports the view that it is sustainable”. History (and Ministers) are indeed fickle guides to the future. Many of us, I am sure, would not have been willing to countenance that level of risk. Right across the charity sector, however, Trustees are wrestling with genuinely dificult dilemmas about how much risk to accept in a Can-Do spirit, or how far cautiously to limit their ambition for beneficiaries in dire need. When they get it wrong, it doesn’t necessarily mean they are incompetent or in dereliction of duty.

Conclusion: The difference between failure and incompetence

The Kids Company Trustees must take full responsibility for the disastrous outcome. They failed. Their beneficiaries were left with no Kids Company at all. But I for one have learned from this judgement to qualify my previous view that it was all about hubris, poor governance, a business model that was bound to fail, over-reliance on Government, chaotic processes, irresponsible failure to build up reserves or dereliction of duty.

I applaud the Trustees for fighting back against the accusation that they were so incompetent as to be unfit to act as Directors. Had the verdict gone the other way, it would have been very serious for many other charity Trustees who are also company directors and are trying to assess what risks to live with on behalf of their users in an uncertain world. The judgement is good for volunteer trusteeship.