Examination of Witnesses (Questions 1-19)|
TUESDAY 18 DECEMBER 2001
1. Welcome before the Committee this afternoon.
I am sure you are aware of why we are holding this inquiry. I
am not so sure that the Society are aware of the depth of anger
that the decision that was made by the Children's Society to withdraw
from Wales has engendered in the people of Wales. It is because
of this level of anger that we have decided to have a look at
the matter and we hope that we can come to some arrangement which
will benefit those children who we see within Wales who are losing
the benefits of the projects that were being done for them by
the Children's Society. Could you first begin by introducing yourselves,
perhaps Mr Sparks will start, and can you also say how long you
have been involved with the Children's Society and in what capacity.
(Mr Sparks) My name is Ian Sparks, I
am Chief Executive of the Children's Society. I have worked in
the Society since 1981, originally as social work director and
then from 1986 as Chief Executive.
(Mr Nall) I am Charles Nall. I am the Director of
Finance and Administration of the Children's Society. I joined
the Society on October 12th 1998.
(Lady Toulson) I am Elizabeth Toulson, I am the Chairman
of the Children's Society. I joined the Society on 20th October
2. Can we just clarify that with you, did you
become Chairman at that time?
(Lady Toulson) I had no connection with the Society
before 20th October.
3. Of this year? You went straight in as the
Chairman, that is an amazing rise to riches.
(Revd Mr Glover) I am the Reverend John Glover. I
am the vicar of Rhyl. I was nominated by the Archbishop of Wales
15 months ago to become his nominee on the Board of Trustees.
4. You have provided us with a list of the Society's
12 projects in Wales, grouped into four types, (CS2, Annex 1)
for the benefit of my colleagues. Could you give a very brief
description of the work undertaken by each type of project, please?
(Mr Sparks) Yes. The advocacy work is broadly aimed
at giving a voice to children and young people in the care system,
particularly round the decisions that are made affecting their
lives. There are two pilot projects, the Cardiff Family Group
Conferencing, who is running a pilot about family group conferences,
which is a way of working with families of children in care and
those at risk of being in care to try and bring together family
resources to resolve the problem. Forward Steps is another advocacy
project that was piloting a new model of advocacy, which is why
it was listed as a pilot project. The Merthyr Tydfil project is
aimed at giving a voice to children and young people in their
own neighbourhood, it is about children's participation in the
planning and issues that affect them in their own neighbourhood.
The three anti-poverty projects were, again, involved with community
development and capacity building in local communities. The St
David Diocesan Team also includes some Sure Start work, and St
Paul's Llanelli does some family support work.
5. The root cause of your decision to close
the Society's operations in Wales was lack of funds. You say in
your memorandum that in March 1998 you had liquid reserves of
£35.8 million and annual expenditure of £29.6 million,
you therefore decided to go on a spending spree and spend over
£12 million of your reserves, and yet three years later you
are in a position that you have to shut down your operations in
Wales because of the financial position you are in. To go from
such a strong position three years ago to such a weak position
three years later does this show signs of mismanagement?
(Mr Sparks) The only answer I can give to the question
itself is the trustees take the view that there has not been mismanagement.
6. Would the Charity Commission?
(Mr Sparks) I cannot tell you what they would think,
they have not said to us it is mismanagement.
7. Charity trustees have a general legal duty
to apply charity funds within a reasonable time of receiving them,
(see Charities' Reserves, Charity Commission publication CC19,
June 1999, in particular paragraphs 24-30). You say that much
of the excess reserves in 1998 came from investments which performed
exceptionally, rather than from donations, does the duty to apply
funds within a reasonable time apply to investment income in the
same way that it applies to donations?
(Mr Nall) I am not sure whether you are focussing
on the issue. Let me attempt to answer your question. Investment
income has always been applied in a timely manner. Capital gains,
to which you are referring, which led to the reserves, are a separate
matter. Reserves are held by charities for a variety of reasons,
the unexpected, development opportunities, and, of course, long
term risks. Long term risks would include the resurgence in inflation
or a need to meet a changed need in pension provisions, those
are two good examples.
8. Okay. What proportion of £35.8 million
available in March 1998 had come from investment income and what
proportion was from fund-raising?
(Mr Nall) My understanding is that given the general
break even situation in the decade leading up to this time period
there were small surpluses and small deficits. The bulk of that
fund would have come from aggregate capital gains rather than
from retained surfaces.
9. Many charities have a reserves policy under
which they hold a reasonable amount of money in reserve against
future losses in income (Charities' Reserve, paragraph 34-43).
Can you give us a brief outline of the main points of the Children's
Society's reserve policy in 1998?
(Mr Nall) Not before October, no. I have to pass that
to my predecessor. I can give you a written answer, I will have
to delve into our written records. Since 1998, as I referred to
it, a major concern of charity trustees is the risk of inflation.
If you look back to the 1970s and 1980s you had peaking inflationI
know there are some financially qualified individuals here26.9
per cent rings a bell. If you think of that, that is three months
expenditure, 25 per cent of annual expenditure, three months expenditure.
You would expect to see a high level of reserves if you wanted
to allow a year or two for the charity to adjust. Quite how high
a level is a matter for debate and the trustees have reduced their
reserves in policy from 9 to 12 months to 6 to 9 months, and that
was in the last annual report and accounts. It was, I think, because
of the very high level of reserves we reached the trustees took
the decision to spend some of those reserves.
10. Would there not be a current spending implication
in spending £12 million of your reserves, would you not then
be generating a current spending problem? Was that not foreseen?
(Mr Nall) I can see the point you are alluding to,
if you give me a moment I will come to it. The direct point you
are alluding to is if you spend your reserves you are reducing
the income from those reserves. However, if you are investing
for the long term, for long term events like resurgence in inflation,
they are very unpredictable, so you would typically invest in
the equity market for that proportion of reserves which relates
to the long term. Your yield, your income is very low, typically
three to four per cent, and in recent years we saw yields as low
as 2.5 per cent. You are compensated there by investment growth
in terms of the total return, that is why you see those gains
arising. Coming to the point you are referring to, if you set
in train expenditure funded from reserves that expenditure is
finite because the reserves themselves are finite and you are
unlikely to get the kind of everlasting capital growth that surprisingly
one saw for 20 years from the earlier 1980s, in fact one can go
back to the 1970s. You also need to invest in generating fund-raising
income growth so that the two match. When you embark on that kind
of decision you are taking a risk because you do not know when
you are making a fund-raising investment at what time your investment
will mature. You can plan and you can hope but if you were to
survey the charities sector over the last 20 years or so you would
see money going into investment and fund-raising and you would
see then returns anywhere between one and four years later, depending
on the mix of fund-raising activities invested in the objectives
you wanted from those fund-raising streams and similar criteria.
11. You were taking a risk by making that decision,
(Mr Nall) The trustees were taking a risk.
12. With the benefit of hindsight was that decision
to spend 12 million in 1998 a good decision or a bad decision?
(Mr Nall) It depends on which criteria you base your
evaluation of that judgment.
13. As a Welsh MP who faces the closure of the
Children's Society in Wales?
(Mr Nall) Then I would say that what you are seeking
for is some degree of misjudgment. The difficulty you have is
that the growth has now occurred in the first eight months of
this financial year. Income growth has been 13 per cent from fund-raising
activities, that is above the long term trend of all of the top
major charities as an average, which is about 10.5 per cent. The
trustees, in a sense, seeking to grow income have succeeded.
14. If there is income on the growth why are
you closing down the Children's Society?
(Mr Nall) Because that growth has come very late in
the day. The years 1997-1998, 1998-1999 and 1999-2000 saw flat
fund-raising income in real terms of round £20 million.
15. Is that because you did not have any fund-raiser?
(Mr Nall) It is because we did not make early enough
investments in fund-raising, probably. As I indicated to you,
it is not always possible to know with great reliability when
your fund-raising investment will pay off, it depends on the state
of awareness in your potential donors minds, whether they think
of you. It depends on the kind of products you invest in. Legacies
can take four years, or so, before you tend to see an uplift,
it is a relatively low cost means of fund-raising.
Mr Wiggin: To a great extent you asked my question
a moment ago.
Chairman: Are you happy with the answer?
Mr Wiggin: It has been completely answered.
16. You tell us in your memorandum how you developed
a new strategy to raise additional funds, including face-to-face
approaches to people in the street and international adventure
treks and this raised net fund-raising income by 7.5 per cent,
but you say this was far short of the target which was set. What
was the fund-raising target you failed to meet?
(Mr Nall) The trustees objectives, as I understand
them to have been originally set up, were to lift the Society's
income growth rate up beyond 10 per cent, the 10.5 per cent average
of the last 15 years, or so. The precise comparable period is
1986 to 1998. Your difficulty is that that is an average figure
7.5 per cent and that takes you through to the end of the financial
year 2001, it is the average of three relatively flat years and
one growth year. As far as the Society is concerned whilst that
growth has come late it has arrived and that is important.
17. Why did you not meet the target?
(Mr Nall) Because, as I already indicated, the investment
in fund-raising was, perhaps, later than intended. We grew investment
in fund-raising sharply in 1999-2000 and in 2001 and we are reaping
the benefits of that.
18. You set an ambitious target before you invested
in the fund-raising to achieve that?
(Mr Sparks) What happened that was the team who were
there at the time set ambitious targets and believed that they
had made the investment. Over time it became clear there was not
sufficient investment to bring in the income that they were expecting.
What has happened later in the period is there has been more investment
in fund-raising, particularly in new forms of fund-raising, like
door-to-door and face-to-face in order to generate new donors
and more income.
19. How did that 10.5 per cent fund-raising
target compare with the targets of previous years?
(Mr Nall) I am afraid I cannot answer that question,
I was not there at the time. If you would like me to answer that
question I can seek out the information for you.