Lee Coppack outlines the risk challenges faced by charities

There are nearly 170,000 registered charities in England and Wales, supporting every charitable object imaginable from the Essex Cavy & Rat Rescue to the Friends of Lime Trees. Two-thirds of them have very modest incomes of less than £10,000 a year, but a small group (440 in 2002) have an average annual income of £30.6m.

No matter how large, voluntary bodies do not come under the Turnbull and combined codes on corporate governance. However, the Charity Commission, the UK statutory body that oversees the conduct and operation of charities, expects them to comply with the spirit of corporate governance guidance in relation to risk management. A statement of recommended practice (SORP), issued in October 2000, sets out the principles.

Trustees of all charities with a gross income above £250,000 per year are required to make a statement in their annual report confirming that they have reviewed the major risks to which their charity is exposed and have put in systems to mitigate those risks. The Charity Commission also encourages risk management as good practice for smaller charities.

To help charities respond to the SORP requirements, the Charities Commission published Charities and Risk Management, a clearly-worded guidance document available on the Commission's website. It outlines each stage of the risk management process and discusses systems for identifying major risks and helping trustees to deal with them.

A spokesman for the Commission explains that the areas of risk depend more on the type of activity charities undertake than on their size. For example, charities that provide direct services to beneficiaries face different risks to those that simply make grants. The particular risks depend on each individual charity and its risk assessment.

The Charities Commission believes that larger charities often have a greater degree of complexity in their operation, and more at stake, in terms of both finances and reputation, should things go wrong. This increased scale of risk puts a particular onus on larger charities to ensure that they are robust in identifying risk and in ensuring that processes and procedures are in place to effectively manage the risk.

Monitoring and reviewing
To this end, the Charities Commission monitors the risk management statements provided by charity trustees. According to their spokesman, "The Charities Commission reviews the reports and accounts of a large number of charities (including the largest 400) in detail each year, and as part of this review it looks at the risk statements. Further, as part of its review visits programme, which involves one-to-one health checks with 600 charities a year, the commissioners discuss risk management issues with the trustees. If our review of any report and accounts indicates that risk management has not been properly undertaken we would contact the trustees and seek clarification."

Large, complex and emotive
With an income in 2002 of just under £80m, the UK's pre-eminent animal charity, the Royal Society for the Prevention of Cruelty to Animals (RSPCA), fulfils the description of large and complex. Furthermore, as the Charities Commission comments elsewhere, charities 'which rely on a strong emotive appeal involving vulnerable groups or animals' attract the most public attention.

This is something the RSPCA knows well for better and for worse. As the world's oldest national animal welfare charity in a nation of animal lovers, it is a media magnet. The RSPCA exploits this attraction, reporting that in 2002 opportunities to see the society in the media had risen to 3.6 billion from 3.3 billion the previous year.

However, it also means there are strongly held views as to how such an institution - patron HM the Queen - should behave. For example, the RSPCA's decision to oppose hunting with dogs and the appointment of an anti-hunting director general, Jackie Ballard, have made it a quarry for those media that believe it should 'be saving animals, not hounding MPs,' such as the Daily Telegraph in October 2002.

In its annual report for 2002, the RSPCA council of trustees reports on risks and opportunities for the society, stating that they 'take seriously' the risks to which it is exposed. The council has reviewed these risks in light of SORP 2000 and is developing further mitigation systems. Accountants BDO Stoy Hayward have completed a study for the society on risk assessment and mitigation with special attention to:

  • Protection of the society's reputation
  • Continuing availability of finance
  • Health, safety and welfare of volunteers and staff.

    Dependent as it is on public donations and legacies, the society has devoted effort to developing accurate cash flow forecasts. Despite this systematic approach to risk management, the RSPCA has been forced to make a number of cutbacks as a result of previous expenditure decisions and depressed equity values.

    Charity trustees are under a general legal duty to apply charity funds within a reasonable time of receiving them and only to hold reserves that can be justified to secure long term operations. When in 1999, its free reserves reached a high of nearly £60m, the RSPCA council decided on a policy of spending more than its receipts. However, the deficit in its revenue budget, combined with a loss in investments of £25.6m over the three years from 1999, have forced the trustees to reduce or postpone all capital projects, cut a number of jobs and freeze pay increases. The charity also had a shortfall in its pension fund of £21.3m in 2002 under FRS 17.

    In its 2002 report, the council of trustees does not comment on what role its risk management systems and controls may have played in this series of decisions. They say only that no forecasting system could have foreseen the prolonged fall in the world's equity markets, and it is, therefore, even more important to set out and establish the appropriate level of reserves for the society. In addition, the society has continued to maintain relatively high cash levels to avoid the need to sell investments at low points in the market.

    For the RSPCA, one of the most important issues will be the extent to which publicity about the financial issues and the measures it has taken to balance its budget could adversely affect its income. In 2002, there was no evidence this had happened. Total incoming resources increased by £9.7m or 14%, including an increase in contributions and donations of £4.1m.

    The hard insurance market has caused many charities difficulty. Says Clive Moulson of Zurich Municipal, "Many insurers are restricting their activity to those business or consumer sectors that they see as their core markets, and all too often it is the voluntary and charity sector that loses out."

    The effect on some charities has been material. Britain's largest conservation charity, BTCV, says that on 1 May its insurers effectively withdrew cover by changing the conditions so that the majority of its conservation groups were excluded. "The withdrawal of insurance cover caused a great deal of inconvenience and operational difficulty," explains Tom Flood, chief executive of BTCV. "Most groups had to stop their work entirely."

    BTCV switched to Zurich Municipal, which has provided cover for other charities in similar circumstances. It has, for example, saved Youlgrave Waterworks in Derbyshire from closure after insurance cover was withdrawn on the 173 year old community water supply co-operative.

    The Charities Commission acknowledges that many charities are facing increased insurance premiums, and it expects trustees to examine whether there are other ways of mitigating the insurable risks, such as better security measures, changed procedures, or calling a halt to particular tasks.

    Larger charities, some of whom have designated risk managers, are in a position to take new initiatives. A group of them has commissioned a feasibility study into a charity mutual, and has begun discussions with the Association of British Insurers to consider and resolve the issues that the insurers have with charities and the voluntary sector.

    John Barton, chairman of the voluntary sector special interest group of the UK risk management association AIRMIC, says groups such as the Charity Consortium, the Charity Finance Directors group and the Home Office are working to address not just increased premiums or reduction in cover, but also risk management processes, looking at ways to develop them where they are weak.

    What they hope to achieve, says Barton, is acceptance by insurers of the sector as an acceptable risk through better communication of the identification and control of major risks that have been put in place, and, with that, stability of insurance pricing and cover. "I would also emphasise that a significant number of charities and voluntary sector organisations have good risk management practices. The sector has moved a long way forward in this area."

    Lee Coppack is editor of Strategic Risk's sister publication Catastrophe Risk Management., E-mail: lee@catrisk.net .

    RSPCA History
    In 1822, Richard Martin MP piloted the first anti-cruelty bill through Parliament, giving cattle, horses and sheep a degree of protection. 'Humanity Dick' as he was known, was one of the 22 founders of the Society for the Prevention of Cruelty to Animals (SPCA) which was launched in London in 1824. The SPCA became the first national animal protection society in the world.

    By 1840, the society's work was held in such high regard that Queen Victoria gave her permission for the SPCA to be called the Royal Society for the Prevention of Cruelty to Animals. Its practical welfare work developed quickly. The single inspector appointed in London to check on markets and slaughterhouses, was joined by others. Together they formed a law enforcement body that pre-dated the police force.