Charitable organisations: What’s your policy?

Charitable organisations are expected to show their monies are being used in a transparent and sustainable manner and having an ethical investments policy is a good way to clearly demonstrate this to stakeholders. How robust is your school’s investment policy? And what should you do to avoid risk? Marie Cahalane investigates

The very nature of schools means that they are entrusted with substantial funds and these must be spent wisely – to the benefit of students and school, both present and future. While part of this might involve investing in, for example, school premises, schools with charitable status are entitled to invest any monies that are not required to cover expenditure – a practice that can provide an alternative funding stream. Managing such funds must be done efficiently and transparently – with appropriate consideration paid to the risk associated with all financial investments.

Running a tight ship

As a charity a school is subject to an additional set of regulations and, if September’s green paper is anything to go by, governmental whims. Financial investment must be transparent and objectives must be clear. As a result, a robust investment policy is required, operating as a guide for good financial guardianship.

The Charity Commission outlines several legal responsibilities that must be adhered to when making financial investments: know and act within the school’s powers to invest; make considered and careful investment decisions; make investments that are right for the school – acknowledging suitability and diversity; seek expert advice in investment matters – unless you have a good reason not to; abide by legal requirements where you use someone to manage investments on your behalf; have a review policy for investments; explain your investment policy in your annual report.

In black and white

Ethical investment means investing in a way that reflects your school’s values, ethos and vision and which does not jar with the school’s aims. So, although one investment might be less lucrative than another – with a lower return on investment, for example – a charity can opt to take a lower return in order to invest ethically. However, Gov.uk stipulates that this must be justifiable based on the fact that, ‘a particular investment conflicts with the aims of the charity; the charity might lose supporters or beneficiaries if it does not invest ethically; there is no significant financial detriment’.

An investment policy should define a school’s investment objectives and how it intends to achieve them, what the timescale will be and make clear the long-term financial commitments balanced with the expected return on investment – providing a basic framework for investment.

The Charity’s Commission advises that your policy should include a detailed overview of the school’s investment powers; investment objectives; the type of investments the school is keen to make – for example ethical investments; the charity’s attitude to risk; how much capital will be made available for investment; timing on returns and liquidity needs; who it is that can take investment decisions – whether that is trustees or an investment adviser; how they will be managed, benchmarking and performance targets and, lastly, reporting requirements.

The right policy

Developing the right investment policy for your school’s purposes is no mean feat and the team tasked with the responsibility will need to ensure that it fits with other policies. The Charity Finance Group (CFG) has compiled a paper detailing best practice, supported by a number of comprehensive examples. According to the paper it is essential that the investment policy reflects your school’s ‘values, accountability, attitude to risk, decision-making and ethical considerations – all of which can help to attract potential supporters’.

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The CFG suggests that, where ‘significant funds’ are involved, although specialist knowledge isn’t a necessity you should consider appointing a trustee with investment knowledge to your board of governors or engaging an external investment advisor. ‘Getting your internal governance arrangements right, both for developing your policy and managing your investments, is crucial,’ they say, and advise delegating a small sub-group to put the policy together for review by the wider board.

Where there’s a lack of experience internally it is certainly best to seek external advice. Regulation determines that an appropriate candidate must be someone who is, ‘reasonably believed by the trustees to be qualified to give it by his or her ability in and practical experience of financial and other matters relating to the proposed investment’. You must be careful that you receive impartial advice – ensuring that there is no conflict of interest where a ‘connection’ might benefit – directly or indirectly – from the financial advice. Advisers – whether internal or external – are liable to the charity if a loss is made due to poor or negligent advice.

Bad advice

What happens if you do receive poor professional advice? Sarah Perry, head of dispute resolution at law firm Wright Hassall, says that you can seek redress, adding that there has recently been a sharp rise in claims against financial advisers. “Where an individual has lost money – which is easily traceable – a potential negligence claim can be identified very quickly,” she advises.

If you are undergoing the process of making a claim it’s vital that you collate all communication to establish what was advised and the risks that the school stated it was prepared to take. This, Sarah says, will go towards establishing the, ‘causation proposition’ – what would have happened if appropriate advice had been given – it’s essential to establish what ‘know your client’ work was carried out prior to investment. This will test the robustness of your investment policy as it investigates whether your advisor abided by the framework stipulated there. This is not a simple or swift process and Sarah notes that, “Typically, the starting point is six years from the breach of contract. In tax avoidance cases – due to the delay in HMRC bringing their claim – it is usually three years from the date an investor is reasonably aware of a potential claim.”

Investing your school’s surplus monies can be an effective way of reinforcing your financial standing now and in the future. However, financial investment does come with risk and this needs to be managed. Ensuring that you have a robust investment policy in place can help mitigate this risk – and this requires all stake holders to understand your objectives, vision, and boundaries.

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