Financial failure is a by-product of taking risks, so avoiding the prospect of it could "retard progress", according to Andrew O’Brien, head of policy and engagement at the Charity Finance Group.
Speaking at a conference called Charity Reform: Implementing Guidance on Gundraising and Governance in Manchester today, O’Brien said the charity sector needed to "get away from the idea that somehow financial failure is an evil that we must be rid of" and accept it as a consequence of being innovative.
"I think that this issue starts from the premise that is shared by many people, that somehow financial failure is always avoidable and if a charity or business or anything gets into financial difficulty it is always the fault of those that were responsible for governing the organisation," he said.
"I think anyone who reflects on this would agree that this is simply not the case. Charities will fail. They have done so in the past, and they will do so in the future. Sometimes this will have nothing to do with their actions and be due to bigger issues outside their control. Sometimes there might be things they could have done, but it is only with the benefit of hindsight that we know what they were."
O’Brien also warned that there was "always a trade-off between a proportionate regulatory regime that enables organisations to innovate and thrive, and eliminating bad practice". He said that financial governance and management in the sector might become increasingly risk-averse.
He said: "At the extreme end, we could avoid financial failure simply by doing nothing. But charities were not set up to stand idly by. They are set up to act. Often in cases of market failure, no other economic or social actors have been able to sustain a business model that can generate sufficient returns to justify investment. Can we be surprised, therefore, that there is failure?
"And more importantly, what message do we send out to trustees and to those groups of individuals that are considering setting up charities, if we pillory examples where charities have tried and failed? Lessons must always be learned, but not lost in cycles of blame."
O’Brien said this meant that guidance and, in particular, messages from the Charity Commission about trustees’ financial governance duties should be careful not to put trustees off the role and should help them remain positive about their ability to govern a charity effectively.
A suggestion made in Dame Mary Marsh’s Review of Skills and Leadership in the VCSE Sector that trustees should be put on a par with school governors, allowing them to take reasonable time away from their jobs to carry out their responsibilities, had a lot of merit, said O’Brien.