governance

Yoke is a year old. 10 things we have learnt about charities.

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Yoke and Company is officially one year old. The company founders are a lot older and we are amazed that the year has gone in a flash.  So what have we learnt and what has changed?

1.      Regardless of all the Charity Commission’s advice on financial governance, it remains normal for trustees to say ‘I don’t do money’. If it’s baffling, it is usually just because the issue has been badly explained.

2.      Being regulated means Yoke never hesitates about the investment advice we give, which goes beyond simply comparing managers; The FCA’s review on investment consultants having conflicts of interest or not being regulated highlighted many issues that have yet to be addressed.

3.      Charity decision making lurches from one quarterly meeting to another. They always have, and probably always will. Difficult decisions often get deferred. No decision is a decision in itself and it is usually the wrong one.

4.      Too many charities regard success as a growing pile of money. Surely this is a measure of failure because the money is there to be spent on charitable purposes.

5.      Charities tend to be cautious; trustees should take more risk for their beneficiaries, just as a parent would for their children. The parents don’t enjoy the rewards, but that’s not why they do it.

6.      Penny wise and pound foolish – investment managers can be expensive but not that different from each other. Getting your risk budget right is free and makes you most of your returns. Obtaining help in this area difficult to find.

7.      The rewards in winning new investment business are huge, so the industry is incentivised to get trustees to change managers frequently. Less change will provide better long-term results. 

8.      The public trust in charities has declined after successive years of media attention and bad practice from a few poorly run organisations. Kid’s Company is becoming a distant memory after Oxfam, but charities need to be less defensive and bolder about the great work they do.

9.      We continue to meet so many amazing charity executives who have passion and bold ideas. The problems manifest when these ideas are passed to the trustee board who struggle to share the confidence to take controlled risks with their assets.

10.   We keep looking for someone else offering independent financial assistance to charities, concentrating on the ‘upstream’ problems that concern the overall financial decisions. Combining this with regulated and totally independent investment advice to charities of all sizes. This currently makes Yoke fairly unique in the UK. 

 

A false stop - having confidence and conviction on future returns

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We've just come across an old report dated 2013 from an investment management firm.

It sensibly suggested that portfolio returns had been so good that they must now be unsustainable and charities should begin to reduce the spending they funded from their endowment. There were many other similar reports making the same point and also suggesting charities should reduce their spending. So what did happen?

In fact the world’s stock markets went up by almost 16% a year for the next four years, an astonishing rise by any standards, especially when inflation barely moved above 1% a year. Longer-term analysis, based on Barclays data, shows the real return on UK and US equities, from 1900 to 2016, was 5% and 6.6% respectively.

If you were a charity trustee or executive in 2013 and received that advice from your professional adviser, what did you do? Did you do as advised and accept a lower distribution and lower spending? If you did, what choice did you have in the face of such confident advice?

Think of it another way: if a fundraiser had said that they wanted a lower their fund raising target for the year because they had done so well recently it couldn’t carry on, what would you do? Both markets reply on past performance and there is no guarantee that this will continue.

A trustee should listen, understand, push back and then decide. Trustees and CEOs are much better at pushing back when they are familiar with the subject, such as fund raising, but in a world such as investment management it often appears too complex or high risk to ask some of these very basic questions.

This shouldn’t be the case, and trustees have a duty to push back to make sure that the advice they are being given is reasonable and reliable - whether its comes from a fund raiser or a fund manager. That’s the law and this responsibility lies ‘upstream’ of the normal business of the investment management community and amongst trustees and the executive themselves. One common barrier to this taking place is the absence of any ‘neutral’ support that charities can call upon when trying to push back – everyone has an angle - so the key is to find the one that is most trustworthy for the task in hand. 

For most charities, they have a degree of discretion on both income and expenditure. Even the best budgets allow or forecast for some volatility of these measures as there is no certainty. 

There can be no doubt that where trustees did push back against such advice in 2013 and stayed with their spending plans (or even increased them), their charities would have made a distinct additional contribution for many people who were experiencing times of considerable hardship. If they had been wrong, they still had the chance to pull up the drawbridge, but not before they had made sure everyone was inside.

How charities can avoid the Ryanair fiasco

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The recent debacle of Ryanair, having to cancel hundreds of thousands of bookings on their flights due to a cock-up over pilot holidays has some resonance with the charity sector.

 

Both offer a service to the public. They are both regulated, offering their services on a cost-effective basis. People with lower incomes rely on their service and both suffer from negative media attention when things go wrong. When things go wrong, people are adversely affected.

 

Of course, it would be impossible to suggest that Ryanair was a charity or shared many of the behaviours of a not-for-profit organisation. It is an airline that is driven by profit, with aggressive tactics creating one of the fastest growing airlines in the world.

 

But when things go wrong, for whatever reason, it can get out of hand quickly. This causes personal pain and long-lasting reputational damage. It is easy to compare the charismatic nature of Michael O’Leary, Ryanair’s Chief Executive, with the founder of a successful charity that goes array. It is called founder syndrome. A few senior people in the organisation who are driven by their own vision and in certain instances, have weak boards or controls to maintain a stable organisation.

 

Something as simple as a badly planned staff holiday rota has caused personal pain for many passengers, reputational damage to the airline and the media a field day. It is a salutary lesson for any organisation, listed, private or charitable that it is vital to have good governance, controls and processes in place to prevent simple errors escalating into a serious breach of trust.

 

Charites are not immune from the Ryanair affair and errors happen. The secret is to manage your risks accordingly and when things go wrong, have a concrete plan to mediate the issue as openly and honestly as possible.