FINANCE NEWS: Commission review raps trustees over bad management

LUCY MAGGS

Polling group Mori received 219 responses from charities to an online consultation commissioned by the Young Committee, which is considering the possible effect of the Myners report on charity investments.

The committee, chaired by Lord Young, is looking at how charities should be treated in any legislation that the Government introduces in response to the Myners report on institutional investment.

John Hildebrand, of investment managers Investec and a member of the committee, said he expected the committee to report at the beginning of next year.

One key issue being considered, he said, was the proposal in the Myners report that pension funds be compelled to vote at meetings of companies in which they held shares, if they felt that to do so was in the pension fund's interests.

"The survey showed that most charity pension funds did not vote at company AGMs,

he said.

Hildebrand added that there were doubts about whether the fund managers or the charity itself should be responsible for voting.

Loans to voluntary organisations could help them secure some parity with the private sector in competing for government contracts, according to a research project from South Bank University.

Author of the research Professor Paul Palmer said: "There is a tendency among voluntary organisations to see loans as a sign of failure. But in the private sector, taking out a loan is a sign of a successful and expanding business."

Charities need to adopt a more business-like stance in order to be more effective in delivering public services,

said Palmer. Loans could form a useful part of a finance portfolio. Having a number of funding sources could help prevent over dependence on government funding.

Loans could also be used to access funds when needed. Government funding is often spread over a number of years and organisations can take out loans against future funding. They can also be used to bridge a gap when funding is slow to arrive; organisations have recently had difficulty with European funding for example.

Mark Davies, charities manager at Unity Trust Banks, said: "We have a loan product that will allow charities to bridge the gap, but if it is avoidable then all the better as they don't have to pay bank charges.

I have phoned up funders and pointed out that a charity has applied for a loan and it would be better if they just got the funding out."

The research, launched at the Charity Accountants Conference last week, examined why voluntary organisations do not use loan finance. It found that trustees were often apprehensive because they believed donors would not be comfortable with the idea of charities borrowing money. They often thought they would be personally liable for failure to pay back loans.

However, this is not necessarily the case if trustees have not given a personal guarantee, if the loan is defaulted and the charity is a company limited by guarantee, said Palmer.

He added that it was important for charities to recruit trustees who perceive organisations as social businesses and understand the need for financial planning and taking out loans, and not simply as philanthropic organisations.

The report found that financial planning was not connected to charitable objectives in many organisations, making it difficult to get loans. "Trustees may be from a business background but they seem to find it hard to apply the same ideas in the context of a charity,

said Palmer.

The report established that commercial banks were reluctant and often refused to make loans to charities. When charity specialists at large banks heard this, they were "horrified", said Palmer. But loans were usually made by local branches with little experience of the not-for-profit sector.

There is also a lack of appropriate products as most are packaged to cater for the commercial sector.

There are some social economy banks such as Unity Trust Bank that will lend to the voluntary sector and have specialist advisers. But the research found that there was a lack of awareness among charities of these banks.

Palmer pointed out, however, that "social economy banks are themselves selective as to the projects they will finance - there is no carte blanche pre-supposition that they will lend.

Trustees at two charities have been criticised by the Charity Commission over lax internal procedures on financial management and administration, which resulted in money going missing from their funds.

Hastings-based Robsack Community Group received £4,870, which was apparently not paid into the charity's account. The commission found that the trustees' control over finances and administration was weak or non-existent and that trustees had failed to keep full and proper accounting records.

Meanwhile at Torquay-based Residential Care Homes Trust, the trustees had reported that an office manager had taken advantage of his supervisor's absence to forge documents and bank orders to steal £40,000.

The bank has since compensated the charity but the commission insisted on new controls to manage procedures during absence.

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