Safeguarding subsidiaries

Daniel Taylor and Simon Hall offer some practical tips about charity governance and finance

Charities today face rising demand and shrinking resources. To keep delivering for their beneficiaries, many are rethinking how they use their money, assets, and structures. One increasingly popular route is the establishment of commercial subsidiaries: separate entities that can engage in trading activities, generate profit, and reinvest surplus back into the parent charity.

This shift brings opportunity. Commercial subsidiaries can enhance financial resilience, extend reach, and provide boards with greater flexibility to deliver impact. But these developments also introduce significant risks - financial, reputational, and strategic - that demand careful governance attention. The creation and oversight of trading arms is not just a financial decision; it is first and foremost a governance challenge.

This article explores how trustees can make sound choices about investments and trading subsidiaries. It offers practical ideas on governance, highlights common risks, and sets out questions that can help boards link financial decisions to charitable purpose.

How charities are rethinking money and assets

In recent years, charities have started to treat their assets not just as sources of income, but as tools to advance their mission. Trustees are asking whether assets should actively support charitable aims, rather than simply chasing the highest financial return.

Alongside this shift, more organisations are setting up trading subsidiaries to run commercial activities. Subsidiaries can provide tax benefits, contain risk, and give charities more room to innovate. But they also carry their own legal, tax, and governance requirements. Together, these trends are changing the questions boards must ask: what do we want our assets to do, how do we oversee them responsibly, and how will we know if they are working?

It is important to remember that not all trading requires a subsidiary. Primary purpose trading can be carried on within the charity, and there are small-scale exemptions for ancillary or low-level non-charitable trading. The step into a separate entity usually comes when non-primary purpose trading is significant and could otherwise expose the charity to tax or liability.

The rules every trustee should know

Two recent landmarks define the responsibilities of trustees when it comes to investment:

First is the Charity Commission’s guidance (CC14). It makes clear that a trustee’s main duty is to further the charity’s purpose. That means thinking carefully about suitability, risk, diversification, and taking advice. Trustees should also have a written investment policy and review it regularly. Importantly, CC14 confirms that responsible or ethical investment is legitimate, so long as trustees can show how it supports the charity’s purpose.

Second is the 2022 High Court case Butler-Sloss v Charity Commission. The judgment confirmed that trustees have wide discretion to exclude investments that conflict with their charity’s aims—even if this may reduce returns. The decision must be honest, reasonable, and well documented. Many advisers now treat this case as a key reference point.

The takeaway: trustees are not forced to choose between financial returns and values. They must show how their decisions about assets promote charitable purpose and keep clear evidence of how those decisions are made.

Where things go wrong: governance risks to watch

The success of commercial subsidiaries depends on robust governance design: independent and competent boards, clear oversight mechanisms, aligned reporting, and a strategic connection between the subsidiary’s business plan and the charity’s core mission.

When investments or trading subsidiaries fail, the root cause is usually governance, not numbers. The main risks include:

• Mission drift: activities that don’t align with the charity’s purpose or reputation can erode trust.
• Financial strain: heavy reliance on investment drawdowns can leave charities exposed when markets turn.
• Reputation damage: controversial investments or a subsidiary’s poor conduct can quickly undermine support.
• Legal breaches: misuse of permanent endowment, or failing to follow duties under charity law.
• Conflicts of interest: trustees doubling as subsidiary directors, or family and donors with commercial ties.
• Tax and insolvency risk: poorly structured subsidiaries can create liabilities for the parent charity.

Designing good governance for investments and subsidiaries

When navigating these challenges, strong governance is the foundation of success. There are some key principles to follow:

• Start with purpose: link investment objectives to the charity’s strategy.
• Document trade-offs: record the reasoning for ethical choices and any financial consequences.
• Be clear on risk appetite and liquidity: plan for shocks and set buffers.
• Divide responsibilities wisely: trustees take strategy, committees and executives handle execution.
• Separate trustee and director roles: avoid conflicts by not having the same people in both.
• Take independent advice: on investments, legal structures, and governance reviews.
• Measure impact as well as return: track social or environmental results alongside financial ones.
• Plan for failure: know how to wind down a subsidiary without harming the parent charity.

Good governance also means recognising the specific legal responsibilities that attach to these arrangements. Trustees remain ultimately responsible for the subsidiary, even though it is a separate legal entity. They cannot distance themselves from its activities, and must ensure that reporting lines are adequate, risks are surfaced, and the subsidiary’s plans remain consistent with the charity’s objectives.

Where trustees also serve as subsidiary directors, they must comply with Companies Act 2006 s.172 duties: to promote the success of the subsidiary company. This can, at times, pull against their charity trustee duties, which are to act in the best interests of the charity. Boards should manage this tension explicitly, for example by appointing a mix of independent directors and trustees to the subsidiary board, and by ensuring conflicts are clearly identified and minuted.

What should be on the board’s agenda

Trustees should expect to see, at least annually:

• A clear investment policy statement.
• Reports showing how investments align with mission.
• Stress tests for financial shocks.
• Subsidiary governance packs: business plans, director lists, intercompany limits.
• Updated conflicts of interest register.
• Independent assurance from advisers, auditors, or legal reviews.

These are not optional extras. They are the evidence trustees need to show they are acting prudently.

Quick checklist for trustees

Trustees can test their own arrangements by asking:

• Do we have a written, strategy-led investment policy?
• Have we recorded reasons for ethical exclusions?
• When did we last review liquidity and stress tests?
• Are subsidiary directors different from trustees?
• Have we capped intercompany lending?
• Are we observing permanent endowment rules?
• Does our conflicts policy work in practice?
• Have we taken independent advice on new decisions?
• Do our KPIs track mission as well as money?
• Who has authority to change investment or subsidiary strategy?

Case study: when governance gaps cause problems

A medium-sized environmental charity excluded energy companies from its portfolio and launched a new fundraising venture through a subsidiary. The trustees documented exclusions and took advice but failed to stress-test liquidity. When income fell, they had to sell assets at a loss. Meanwhile, the subsidiary’s pricing strategy led to negative press.

The issue was not the ideas themselves but weak governance: no liquidity planning, poor oversight of the subsidiary, and limited stakeholder engagement. The fix is better design: tie investment policy to funding plans, require subsidiary business KPIs, and ensure the board sees financial and reputational dashboards together.

Three questions every board should ask

To close a strategy session, trustees could ask:

1. What do we expect our assets to deliver for beneficiaries in the next five years?
2. If we accept lower financial returns for greater mission alignment, what is the plan to manage the gap?
3. If a subsidiary failed tomorrow, what would be the financial, reputational, and operational impact, and how fast could we protect the parent?

Charity boards that can answer these questions clearly, with a short plan, are already ahead of the curve.