Blog

Governance, regulation and compliance

4 September 2012, 10:59

Being charitable by what you spend, not by what you save

Being charitable by what you spend, not by what you save Becoming a trustee of an endowed charitable foundation could appear intimidating to anyone that doesn’t have investment and ...

Post byJane Tully

Where next?

Events »

Monday, 6 July 2020
Foundation Charity Investment Training Course More »

News »

Wednesday, 24 June 2020
Our commitment to diversity, equality and inclusion More »

Being charitable by what you spend, not by what you save Becoming a trustee of an endowed charitable foundation could appear intimidating to anyone that doesn’t have investment and finance expertise. In addition to general trustee duties, the ‘endowment’ aspect often cloaks the role in an air of mystery, complexity and technicality, where the focus is more on the performance of assets than charitable mission. However, a recent report by ACF ‘The governance and financial management of endowed foundations’, is a helpful reminder of the benefits of going ‘back to basics’ and keeping a clear focus on what the foundation was set up to achieve. Taking this approach can allow foundations to take a more comprehensive view of how they use their assets to achieve their aims. Endowed charitable foundations are usually set up when property or cash is gifted to trustees to use to fulfil certain charitable objectives. In England and Wales, there are around 900 endowed foundations with an annual income exceeding £500k (from an estimated total of 12,000 UK grant making foundations). They account for over half of the sector’s assets at £48.5bn and spend roughly 4.8% of this each year, meaning their contributions to civil society are not to be dismissed. With a challenging environment – cuts in public services, low investment returns and greater demand from beneficiaries, the pressure on foundations is greater than ever, leading many to question whether their assets could be used more boldly. With this in mind, earlier this summer we hosted a fascinating discussion together with ACF and Charity Investors Group to tackle the issues head on. The Report’s author, Richard Jenkins, drew on the findings of the report to dispel some of the common misconceptions about endowment management:

MYTH #1: Endowments are permanent. This is often the default position for many in the sector where, sometimes without reference to the original legal documents, trustees and staff assume that the founders would want their charity to exist in perpetuity. This means that, by law, boards must preserve the capital asset for future generations and only use income or investment return on the foundation’s aims. But this assumption is wrong. Unless it says otherwise in a charity’s governing documents, an endowment is expendable at the trustee’s discretion. That doesn’t mean expendable foundations must spend out, but it does give trustees more freedom to spend than they may at first assume.
MYTH #2: The investment of charitable endowments requires the same treatment as pension funds and private trusts. Again, this is not the case. Endowed charitable foundations have charitable aims instead of known beneficiaries. In that sense, the trustees are not driven by future specific liabilities, such as pension fund. They can be much more flexible in shaping the scope of their activity to meet the charities’ aims, carry greater risk and spend more, should they wish to do so.
MYTH #3: Trustees must invest to achieve the maximum risk-adjusted return, in keeping with the Trustee Act 2000. While this is often read to mean the best return, in reality, the ‘risk-adjusted’ element means trustees should have targets that are right for their situation and long term goals, conferring greater potential to shape the scope of activities.
MYTH #4: Trustees are obliged to follow any advice on investment matters. However, while there is a duty to take advice, where appropriate, in fact, it is only trustees that can decide what is in the best interests of the charity.

Endowed foundations often find themselves lumped together with pension funds and private trusts targeting market-beating return and seeking advice geared towards different players. In the midst of this, the focus on the charitable aims can get lost. Dispelling these myths can help refocus trustees on what is distinctive for them. The overarching message, according to Richard Jenkins is that trustees are not there to maximise the value of the assets but to embody the charitable objectives and represent the interests of eventual beneficiaries. If trustees then can look beyond the immediacy of perceived regulatory constraints and focus clearly on identifying the right activates to delivery their charitable aims, this then frees them up to think more holistically about how they use their resources to achieve those aims. At the meeting we also heard from the Tubney Trust, a foundation with broad charitable objectives whose founders had specified that it should not exist in perpetuity. Following a challenging strategic review where the trustee revisited their charitable aims and how they could best be achieved, they decided to take a narrower focus on some defined areas: biodiversity and farm animal welfare. They also moved from being a reactive grantmaker to being proactive in the areas they felt they could make a tangible difference, by working really closely with a more limited pool of applicants. Sarah Ridley, former Executive Director of the trust, said that the requirement to spend out and the discipline that instilled was helpful in creating an environment where trustees focussed in on what decisions would best enable them to meet their charitable aims. Nuffield Foundation are another example of a trust that has looked at ways it could better use its balance sheet to achieve its aims, such as negative screening, positive engagement, social investment, venture capital and borrowing. According to James Brooke-Turner, looking after the charity’s investment is a necessary evil and often seen as the least interesting part of the job for some trustees, but nonetheless one that is vital to achieving its aims. The message from the debate was clear - focussing on charitable purposes must come first for endowed foundations, as much as for operational charities. Remember this and you’ll be smarter and bolder in how you use your assets. « Back to all blog posts

Blog

Being charitable by what you spend, not by what you save

Related Content

Charity Commission guidance on Serious Incident Reporting during the coronavirus pandemic

How to guide: Covid 19 Charities SORP Committee Guidance

Charities and insolvency

Top ten tips for how to handle the year end in a pandemic

Caron Bradshaw appointed as a member of new SORP Committee

Has the Charity Commission has taken the wrong tone in its election guidance

Why does the narrative around public 'trust' makes me feel so uncomfortable?

Civil society asks of the Spending Review 2019

Five takeaways from August’s Inflation Report

The lessons for Oxfam and the wider sector

Finance Focus July 2019

BEIS Review of the Financial Reporting Council

CFG Annual Handbook 2019

How the best boards do it, from preparation to meeting execution

Seeing the wood for the trees

CFG responds to the Charity Commission’s consultation on the SORP-making process

What the recent SCOTUS judge controversy can teach us about the Charities’ SORP

Annual Report 2017-18: Empowering Your People

Changes to the CFG Board of Trustees

Finance Focus May 2018

The key to good governance - truly understanding the business

Essential Charity Finance for Trustees Guide

Does your charity follow serious incident reporting guidelines?

Charity finance professionals need to be aware of new automatic disqualification rules

How big a threat is property to your charity?

Money is not the issue when it comes to charging for Charity Commission

How can charity investors perform better in a volatile market?

A stairway to heaven on business rates for the charity sector?

Investing in financial governance is one of the most cost effective ways to help your charity

Sarah Atkinson - Have your say on the annual return for charities

New report raises concerns about complacency on financial governance

Trustee Survey Report

Time to review your risks? An update from the experts...

Where are the ‘automatic stabilisers’ for charities income?

6 simple steps your charity can take to help protect themselves from fundraising fraud

Do I need a fraud response plan?

Fraud and the 3 C's

Three new Charity Finance Group trustees elected

How can charities ensure they work towards gender equality in their organisation?

What can charities learn from the recent fraud cases?

CFG launches Counter Fraud Campaign

Record Management Toolkit Launch Roundup

What can charities learn from the international cyber attack?

NCVO Almanac points to fundamental shifts in the charity operating environment

Better partnerships needed between finance and fundraising teams

Annual Report 2016-17

We must not see a rush to charging charities for regulation – House of Lords report

IFS 2017 Green Budget – the good, the bad, and the worrying?

Responsible Record Keeping: what do voluntary organisations need to know?

Trustee Week: Working to inspire good leadership

Charging charities for regulation isn’t inevitable but it is risky and inefficient

Let's talk about the F-word

Tony Armstrong looks at Devolution: working with local organisations to transform public services

Devolution is our chance to advocate for the most vulnerable

How will the 'devolution revolution' be financed?

Caron asks: 'Why does the voluntary sector need a devolution summit?'

Do charities need to become social enterprises to survive?

Ten things you should know about the new power to make social investments

New report should prompt major re-evaluation of social investment

EU Referendum: Keep watching this space…

CFG's SORP Survey

Guest blog: Stamp duty increase reinforces case for charity investors to invest in stamp-exempt funds

Guest blog: SAVE Financial Planning

Guest blog: Insights into charity investment practices

EU Referendum: What could this mean for charities?

You don’t need to be a charity to do good…but it helps!

Another day, another opportunity for charities to engage in a consultation

Friday Afternoon Fraud

Is the SORP FRS 102 working for you?

ACF, CFG and NCVO raise concerns on draft guidance for funding non-charities

Annual Report 2015-16

Employment Status 2016

Rethinking Risk: Beyond the tick box

Charities need to do the walk, not just the talk and invest in financial leadership

Hunting for the silver lining; the IFS, the economy and charities.

Charging charities for their regulation: A fait accompli?

Affinity Deals: What do you need to know?