Giving their all

Two into one

The Scottish charity sector is incredibly diverse, in reasonable health, and learning to live with the regime policed by its new master, OSCR.

A somewhat oversimplified summary, perhaps, but the Journal’s first sponsored round table discussion – hosted by Scott-Moncrieff, leading auditors to the charity sector – covered a huge range of topics, presenting quite a challenge to compress into a single report.

“Am I the only one who wonders if the average Scot would be puzzled that we are having this conversation in the context of charities?”, Bill Pagan of Pagan Osborne wondered at one point, as the panel considered the growing local authority practice of contracting services to the sector, with the attendant issues of competition from private sector business, whether it helps or hinders the charity achieve its objects, and more.

But given that the 24,000 or so charities in Scotland cover everything from the Church of Scotland, generating over £100,000,000 income each year, through grant-giving endowments, not-for-profit service providers, community bodies and others, as well as the traditional fundraising “good cause”, and it can readily be seen that there is plenty of scope for debate over issues concerning the sector.

One topic that caused relatively little comment was the well-aired question of the divergent Scottish and English definitions of charitable purposes, with HMRC insisting on compliance with their rules for tax relief purposes. While there was broad agreement with Pagan’s comment that “It seems to defeat the object of having devolved legislation”, it also emerged that the Revenue authority, at least, doubts that in practice any body will be found to be charitable by either itself or OSCR but not by the other. Our panel were not so convinced, as the English Act doesn’t mirror the Scottish requirement to be independent of ministerial control, an important principle in the eyes of the Macfadyen Commission which preceded the Act.

As Scott-Moncrieff’s Gillian Donald, herself a member of the Commission, pointed out, the Charities and Trustee Investment (Scotland) Act 2005 debars a body subject to ministerial appointment from being a charity, which put at risk the charitable status of all of Scotland’s further education colleges. Rather than addressing this by making them independent, the Scottish Government has simply exempted these colleges from the relevant part of the Act.

Surely, however, as Anderson Strathern’s Anne Swarbrick noted, this principle also raises the issue whether grant-giving trusts should be able to control what recipients do with the money – and they say, of course they should, because they too have to ensure it is being used for their charitable purposes.

“It’s worth having debates about the boundaries”, commented Duncan Munro, director of the grant-making Robertson Trust, “so that ministers or local government officials don’t just start extending their reach and telling you what you should do. I think these things are absolutely fundamental.”

Both Munro and Richard Hellewell, chief executive of Royal Blind, argued for a distinction between economic control through contractual terms, and management control – and there was wider agreement that local authority representatives who sit on management boards often have difficulty applying the principle of independence required of trustees. “They don’t understand it: you sit in on trustees’ meetings and you hear councillors say ‘Well my council thinks…’”, Bill Pagan observed.

Critical mass

Advice in relation to forming new charities, and merging existing ones, raised interesting observations. First of all, why are there still so many small charities often doing similar things, when it was thought that the Act would encourage mergers?

To Alan Eccles, of Maclay Murray & Spens, whereas larger charities are likely to consider strategic mergers, with smaller ones and their trustees “the idea of ending a charity is quite difficult”.

Dianne Wilde of Barclays Wealth, whose division supports charity investments, agreed. “There is so much emotional energy invested say in a family oriented charitable trust, to look at winding up or merger or whatever, it’s not just about ego.” She knew of an outdoor centre whose trustees wanted to change its operation and hand over after 30 years in office, and liked the idea of selling up and becoming a community fund, but had difficulty in actually letting go.

Duncan Munro thought, to general agreement, that at least with smaller charities, mergers only happened where there was some prior nexus: “The time people give to boundary scanning as you would do in a big company doesn’t really exist… it tends to be ad hoc, such as a particular trustee or circumstances that bring them together”.

Gillian Windever of HBOS had a good example of successful collaboration between charities: two community transport companies successfully joined forces to win the contract to transport people about the London Olympics. Conversely, national charities sometimes set up Scottish offshoots because they find it easier to fundraise in Scotland that way.

Nick Bennett of Scott-Moncrieff predicted a “huge influx” of charities with local authorities as sole trustees, taking advantage of the merger provisions in the Act. “There are literally hundreds if not thousands of charities that are frankly too small, they can’t afford their charitable purposes or these no longer exist or have been superseded. Finally OSCR have got their teeth into it and have begun demanding that they produce accounts – these small single-charity trusts are going to have to reorganise.”

More controversial was whether OSCR could or should play some sort of gatekeeping role when benefactors are proposing to set up a new foundation. “Collectively the adviser sector should be saying hang on a minute, couldn’t you put it into a fund with XYZ, there are many charities out there with the scale”, suggested Giles Ruck, chief executive of the Scottish Community Foundation, which matches donors to community causes. But on OSCR playing that role, “That would be engineering; it’s not part of their remit.”

But is it engineering, Gillian Donald asked, to say there are 15 charities in your sector doing your thing – why don’t you go and talk to them first?

Hellewell, who was with OSCR in its “formative period”, told us that it had been discussed, before the Act was passed, “whether they should create a regulator with that kind of broader power, and it didn’t go the full way”.

Bill Pagan: “I’d be absolutely livid if I were a potential benefactor of a charity in some way and an outside person said, actually what you should do is give it all to the Bill Gates Foundation. It would stifle philanthropy.”

Ruck pointed out that in England the Charity Commission puts charities’ annual reports and accounts on its website, and a market has grown up providing analyses of the data to potential donors – but there’s no Scottish equivalent because OSCR doesn’t provide that facility.

Dianne Wilde agreed. “If charities want to get serious about their act, they want to get serious about how they report – where’s the transparency; how does anyone find out about what they do?” Although there is a legal right to the information, it can be hard to get hold of “and it really has to be a double click… I do think there is more of a role for OSCR to play in this without them becoming too all-powerful”.

Feelgood factor

Are charities as a sector more upbeat about their prospects in the current economic climate than business generally? If so, why? A survey published in March by the National Council for Voluntary Organisations suggested this was indeed the case, though our panel had various suggestions as to the reasons – and queried whether some downturn might yet take place.

“This whole confidence thing is difficult”, commented Richard Hellewell. “I think it’s true of charities and business that senior management is all about thinking positively. Maybe the balance is different for a charity manager.”

Gillian Windever suggested that being salaried rather than having a personal stake in a business might make a difference to charity managers at present – “there isn’t the same fear factor” – and Dianne Wilde added that the business preoccupation with the bottom line and balance sheet debt contrasts with the charity focus which looks more to the common good.

Gillian Donald: “They’re not looking to make a profit but to make a difference.”

Giles Ruck added: “You might identify the amount of volunteerism going on around community organisations in particular, call it social capital if you will, that probably isn’t going away, so if you’re a leader of that type of organisation you’re likely to be optimistic even if markets are turbulent.” However he thought a squeeze might come if local authorities reduce the size of their contracts and that goes on for a number of years. What would be the picture say in two years’ time? He pointed out that although there is growth in the sector, there is a very low surplus of income over expenditure, at least in Scotland.

Duncan Sloan, head of community banking for the Royal Bank of Scotland, reckoned that economic turbulence would mean different things to different people. “The question for smaller organisations is, will people go on putting their hands in their pockets?”

For Duncan Munro, the question was probably too generalised because of the enormous range of types of charities. You could, he said, have a situation where local authorities are forced to restrict funding, or endowments from charitable foundations go down with share prices, or there are lower donations from individuals. “Put all those three together and you could have an impact over the next three years, but it will be a variable impact according to the type of organisation.”

Innovation and risk

Ruck raised the question of whether trustees are becoming more risk conscious, or risk averse, and the influence if any of local authorities in this area. Although he thought charities were some years behind commercial companies in this respect, others considered the subject less of a novelty.

Donald noted that in divesting themselves of, for example leisure and cultural activities to the charity sector, local councils are trying to divest themselves of certain employment and pension-related risks, “whereas the charity sector has welcomed them with open arms”. Ruck thought this illustrated his point – “risk management is front of line but I’m not convinced it’s at the board table of medium sized community charities”.

Munro suggested it wasn’t about devolving risk but devolving financial responsibility, on a parallel with PFIs. “And it’s not surprising if you’re trying to devolve financial responsibility that certain chickens come home to roost in the future.” As a more general comment he wondered whether the risks to trustees in a more regulated world would “inhibit charities being good at what traditionally they are good at, which is innovating and taking risk, not simply doing the things that are there already, but forging new ground. It would be very sad if there is a sort of ‘risk-averse creep’ that spreads out from the public sector that inhibits that sort of vitality.”

Sloan was more optimistic. “I think there is a greater spirit of innovation and entrepreneurship among charity leaders now than there probably has ever been”, he remarked, referring to how they are doing different things to sustain their future and broaden their income streams. He added that this applied to communities as well as individuals, “and that collective community spirit I see burning bright in lots of different places now”.

Ruck still wondered whether service provider charities were being led so much by their service level agreements that it was “squashing out the capacity for leadership”. He quoted SCVO data suggesting that in the last financial year the third sector subsidised local authorities to the tune of about £180 million. “Clearly that’s not sustainable, but it echoes the point that charities have willingly taken on this work.”

Nick Bennett thought there was a real financial risk for trustees especially where charities inherit local authority functions. “In effect the authorities are only doing it to cut costs, leaving the difficult decisions to trustees who are gong to have to shut pension schemes, make real cuts in services, and I’m not sure that some of the trustees for example on local authority leisure trusts, acknowledge that that’s what they’re getting themselves into”.

It was soon after this that Bill Pagan made the intervention quoted in the introduction – would people be puzzled that this kind of activity was regarded as charitable?

Ruck recalled that “A think tank in London proposed that if your income was 85% or more public sector, you should lose your charitable status.”

Donald: “That kind of loses the point of beneficiary good.”

Sloan suggested that the average member of the public “will have no conception of the organisations that exist like Aberdeen Foyer [which combats youth homelessness and unemployment], or Dundee Cyrenians [resettlement accommodation for homeless adults], or Kibble School in Paisley [education and care for youths with behavioural and other difficulties] who have got so many different dimensions to them that, yes they are a charity, but the range of things they do, in the great majority of cases people will not twig.”

Best provider?

Discussion led on to public attitudes to donating towards bodies that are largely council funded, and what they expect local authorities to provide – something Giles Ruck had experienced as affecting support for an innovative adult learning project, one not in fact within the council’s legal responsibilities. He suggested that even over the 85% funding level, a charity could still use its other revenues to support something innovative.

Hellewell added: “And it’s that local authority work that gives that body the critical mass, the size and weight in order to use that money to best advantage.”

But as Bennett pointed out, it leaves the charity vulnerable to spending cuts.

Dianne Wilde asked if there was an assumption that charities were more efficient than local authorities in providing services. Munro mentioned a study of the care home sector, with its balance of public, private and charity sector providers, which concluded that there were good and bad examples of each type and no general conclusions could be drawn. Others commented on the different accounting practices that made comparisons difficult, the effects of relative size, and the respective decision making processes.

Do charities become more inefficient with size, particularly in terms of decision making? Hellewell suggested that “a large charity needs large charity type trustees, and a small charity needs small charity type trustees, who are more hands on and at the coalface. The large charity needs people who are used to the idea of what strategic thinking is about, and need to know what reading the danger signals is about and the right kind of alertness to reading the accounts etc… The big risk area for charities is when a small charity becomes a big charity, and it has to adapt, because it needs a different skill set on its board.” The threshold point, he added, couldn’t be exactly defined – it depended on its activities and its management challenges.

Sloan observed: “It’s one of the most difficult things in a whole host of businesses I’ve been involved with, the management of growth and the ability to understand that you’ve reached a point where you need to stand back and be a proper managing director, and delegate to others and trust them to do the things that you want to.”

Pagan: “It’s not the management of growth, it’s the growth of the management.”

OSCR: finding its feet

How did OSCR, the new regulator, fare? On balance, quite well. While some speakers suggested it could play more of a role as facilitator as well as regulator, others commented that that was beyond its remit, which was exclusively contained in the 2005 Act – and perhaps beyond its resources also.

Richard Hellewell, who was instrumental in setting up the monitoring regime, assured us that OSCR “tries to be very light touch with small charities: the main thing is they’re actually producing the accounts and fulfilling their obligations to their members and trustees, who are the people who should be exercising control in that situation”.

Duncan Munro thought there was a real opportunity for OSCR quite legitimately to be facilitative in terms of charities changing their constitutions and objects: “When I was in England if you go back 20-odd years the Charity Commission was very tough about people changing their objects, and gradually they realised that that might not be the most helpful attitude to take, and they’ve modified that approach... I think a proactive approach that says life goes on, that facilitated these sort of changes, is something that OSCR can do very positively.”

Anne Swarbrick thought OSCR was taking a wide view of its powers under ss 39-42 of the Act, which deal with reorganisations: “We’ve had a few where they were in a grey area and generally speaking OSCR has been very helpful on those” – though the provisions don’t cover everything and some cases still have to go to court.

In some areas such as housing associations, OSCR has arrived on a scene already occupied by bodies such as Communities Scotland, and has been regarded as an extra burden because of that, though Hellewell maintained it was actually much the lighter regulator in comparison.

Gillian Donald remarked that representations to the Macfadyen Commission had been that the sector didn’t want a Charity Commission mark 2: “The Charity Commission is a very detailed regulator and what we have in OSCR is balance.” She thought however that the accounting regime could still be simplified for the smallest charities, say with assets below £10,000.

Giles Ruck reported that his organisation dealt with some community groups who were put off becoming charities because of the perceived administrative burden.

Hellewell responded: “But perhaps the fact of OSCR and the new regulations is making trustees realise what they’re taking on, whereas maybe earlier they were going into it quite naively, not knowing what the statutory duties, the accounting requirements already were.”

And Alan Eccles found it interesting to compare incapacity law, with its reporting to the Office of the Public Guardian, often in relation to similar sizes of funds. “OSCR is a much simpler beast to deal with – and OSCR’s free! The OPG charge you for the privilege of producing a set of accounts for them.”

Anne Swarbrick had one other complaint about the Act – the narrowness of access to the Scottish Charity Appeals Panel, which is only hearing its second case and excludes interested parties not directly bringing an appeal. “I think it could and should have been much improved.”

Donald: “The fact that there have been so few appeals, does that mean that OSCR gets it right?”

Swarbrick: “No, it means you can’t get through the door.”

Eccles: “I think OSCR would love to have appeals because then there would be some basis for their decisions.”