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For many charities, day to day management of the organisation is delegated to senior employees. So how can trustees and senior executives ensure that they have full perspective of the organisation and confidence in its internal controls? One way is through the review of frequent, high quality management accounts.
Management accounts are a key tool for keeping a wide range of stakeholders, including funders, beneficiaries, auditors, regulators, senior executives and trustee boards, informed of the performance of a charity. It is from reviewing these accounts throughout the year that issues such as weaknesses in internal controls, performance against budget, shortfalls in funding or cashflow concerns can be identified at an early stage. The benefit of an early warning is that it gives time to take effective action.
Contrary to presenting meaningless data prepared by the number crunchers, management accounts have the potential to play a significant role in shaping important board decisions. The secret to successful management accounts is what goes into them.
Good starting point
Traditional management accounts usually consist of an income and expenditure account and a cashflow statement. This is a good starting point, but there is plenty of scope to add more value. Reporting management accounts in SORP (Statement of Recommended Practice) format is a powerful way to present monthly or quarterly results, as the year end position shouldn’t then come as too much of a surprise.
It also allows trustees to accurately see the reserves position throughout the year and enable them to make informed decisions about designation and transfers well ahead of the year end - a point which is likely to be reinforced with the publication of the new SORP in 2014.
This is something which some charity boards find difficult to do prior to seeing draft statutory accounts, which is often after the year end. Reporting in SORP format throughout the year allows charities to monitor their reserves against policies as the year progresses.
The inclusion of a balance sheet enables a charity to obtain an understanding of its assets and liabilities. It helps to manage liquidity and will highlight potential deficiencies in “working capital”. Reporting on fixed assets throughout the year also means that depreciation is likely to be calculated accurately on a monthly or quarterly basis, and will feed into the SOFA (Statement of Financial Activities).
Often, if a charity has substantial fixed assets and large depreciation charges, the impact of this cost on reducing surplus is not always captured without the inclusion of a balance sheet. As a result, the surplus for the year per the statutory accounts can look very different to that reported in the management accounts during the year.
Cashflow projections should be updated for known actuals throughout the year in order to properly identify any shortfalls in funding, well in advance of these occurring. It will also identify where cash reserves are accumulating and would be better invested elsewhere with a higher rate of return, or split between banking institutions in order to diversify risk.
Comparative information important
Comparative information has an important role to play too. Numbers in isolation can be virtually meaningless. Comparisons against budget, last year, closest “competitor”, key performance indicators, best ever performance and such like can help put results into context. An analytical review against these comparatives can help trustees take a step back and ask “do these numbers make sense?” It is at this point that some of those early warning signs can be unearthed.
Non-financial key performance indicators are also beneficial in understanding changes from prior year or period. Examples could be: average employee numbers, number of projects completed in the period, number of tenders won and lost. Any data that is key to the activities of the charity could be presented here and will help trustees understand how the year is progressing.
The key to getting the most out of your management accounts is based on the quality of the data which goes into them. It is essential that data are accurate. Try to avoid self-review by using separate individuals to deal with the day to day processing of the numbers, and those who put the management accounts together. Keeping these roles independent should eliminate obvious errors and provide a strong internal control mechanism.
Employees taking ownership
If trustees are delegating day to day management of the charity to employees then it is essential that these employees really take ownership for the activities and numbers they are responsible for. Involvement of the staff in the budget setting process, and sharing the management accounts with them are just two ways in which this could be achieved.
Without involving staff in this level of detail, they could become quite detached from the financial reporting process and therefore compromise the quality of the information they are producing.
Ensure the backing information behind the main SOFA, balance sheet and cashflow statement are relevant to your organisation. For example, if it is beneficial to report by project as well as statutory format, then do so. The understandability of the figures is crucial in making informed decisions. If the required level of detail behind the numbers is not included, the management accounts are unlikely to be a useful tool for trustees.
It is beneficial to invite your auditor to the finance/audit committee meetings throughout the year, and include them on your mailing list for management accounts. They can therefore be aware of any issues prior to the year end, and the charity is able to clarify any relevant queries as the year progresses.
This also gives trustees an opportunity to build a strong working relationship with the auditor, and the chance to learn from some best practice recommendations the auditor may make. The ability to review your financial information throughout the year should make the year-end process less painful and more efficient for all parties.
Good working relationship
Some charities view the annual external audit as a necessary statutory burden, but it needn’t be. The more a charity puts into the process, the more it is likely to get out of it. The backbone to this pearl of wisdom is developing a good working relationship with your auditor and keeping those lines of communication open all year round.
The following are a few do’s and don’ts to help the finance team in your charity establish a smooth audit process:
|Do:||Agree a schedule of deliverables at the planning stage.
Putting together a detailed year-end file with supporting documentation for the numbers in the statutory accounts will cut down on the amount of queries you get during the onsite visit, making the process more efficient for both parties.
|Do:||Insist on an onsite planning visit.
If an audit is planned well, in theory the onsite main audit fieldwork time can be reduced as work can be done in advance and the finance team will have more of an idea of what they need to have ready for the onsite visit
|Do:||Make sure the finance team are available.
Don’t underestimate how demanding the audit team can be. This is their day job and they need the finance team to help them to complete it. Elements of the finance team’s workload may need to be reallocated/postponed to avoid them becoming overwhelmed with demands on their time.
Often auditors think they need a certain report presented in a certain way. If you can ascertain why it is needed, there may be something more appropriate (and easier to produce) for them to look at.
|Do:||Have regular catch ups with the onsite team.
Catching up with the audit team on a regular basis keeps each part up to date on progress, potential issues and outstanding information. This strategy ought to minimise any surprises.
|Do:||Debrief and feedback.
At the end of an audit cycle, take the time to reflect on the process with the auditors. Voice your likes and dislikes and agree how to implement changes for the following year’s audit.
|Don't:||Leave it to the last minute.
Don’t underestimate the amount of time putting together statutory accounts and pulling together a year-end file will take. Start early and be prepared.
Agree up front with the auditors who is taking ownership of the financial statements. If it is the auditors, clarify if there are any additional fees for this – it may influence your decision!
|Don't:||Change the timetable at short notice... if it can at all be avoided.
It will be inefficient for you and the auditors, and you are unlikely to get the ideal staff mix and continuity at short notice.
Implementing some of these best practices should result in an informed trustee board being able to extract real value from its financial reporting and audit processes.
"Cashflow projections should be updated for known actuals throughout the year in order to properly identify any shortfalls in funding, well in advance of these occurring."
"The key to getting the most out of your management accounts is based on the quality of the data which goes into them."
"The ability to review your financial information throughout the year should make the year-end process less painful and more efficient for all parties."
"In order to convert people from one-off to long term donors careful nurturing needs to be put in place."
Care is needed though, because the management and direction of a charity rest with its trustees, not others, and clear lines need to be drawn to make this crystal clear. Trustees also from time to time need to have private discussions and there is an ever present danger that observers can distract trustees from the need to focus exclusively on the interests of their own charity and its beneficiaries.
How then can trustees make the most of observers whilst avoiding the pitfalls? Here are some suggestions:
Understand why observers are invited to attend meetings and plan ahead to ensure their needs will be met. Stakeholders might just want the comfort of knowing that all is well without inadvertently becoming “shadow trustees". Potential recruits might want to see what is involved and trustees might want to “try them out” before both sides commit.
Partner organisations might want to coordinate activities between both sides. Different motives warrant different measures and a one size fits all approach is rarely appropriate.
Ideally observers should be required to sign a confidentiality agreement. If this isn’t possible, then it may be appropriate for trustees to veto their attendance. As a minimum, observers should be made aware of a code of conduct they are expected to follow, emphasising the need to maintain confidentiality.
Thought should be given to sensitive agenda items being considered by trustees in private when, for example, commercially confidential matters are discussed or where there are potential conflicts of interest with observers or their organisations.
Sometimes it is appropriate for observers to be invited to specific meetings only, such as the Annual General Meeting.
Before papers are circulated to non-trustees consideration should be given to what ought not to be shared with outsiders.
It helps to indicate in minutes of meetings which items observers were present for. Observers can make valuable contributions but care should be taken to ensure that decisions are made by trustees alone.
Sometimes board observers can be more effectively used on sub-committees or on subsidiary boards, where their special contribution can be maximised without the baggage of being main board members.
Where a custom of admitting observers has been established over time, it may be worth initiating a governance review to re-examine the practice, redefine when and why they attend and consider on what basis they are admitted to otherwise confidential meetings.
Admitting observers to trustee meetings can play an important role in the operation and management of a charity with benefits on all sides. It is all too easy, though, for observers to attend meetings for reasons long forgotten and of little benefit to the charity. For charities in these circumstances it is timely to look again at whether or how observers can add value.
Fraud is a growing concern among UK charities. According to The Annual Fraud Indicator (AFI) released by the National Fraud Authority, one in 10 charities with an income of over £100,000 has detected some type of fraud in the past year.
The AFI found that the most common types of fraud against charities are banking payments, accounting and identity fraud with fraud costing registered charities in Great Britain £147.3 million a year.
And it's not just scams being undertaken by people or companies operating outside the organisation that charities need to worry about. Charities also have to be vigilant against fraud committed by their own staff, trustees or volunteers as 31% of the charities interviewed by the AFI found.
Whilst the majority of employees of a charity are no doubt honest, law abiding citizens with a genuine interest in the charity's aims and causes, fraud does take place within a charity and is usually committed by an employee, volunteer or even a trustee.
You only have to consider recent cases to see that fraud can take place from within a charity by people it trusts.
For instance, earlier this year businessman in Liverpool for over three years for taking £213,000 from charity buckets. Harris Polak was contracted by certain charities to raise money and was entitled to an approximate share of 15% of these funds. However, he took more than his entitlement and spent it on holidays and shopping excursions.
Even in the last couple of months there was the case of Elizabeth Lewis who was convicted by Cardiff Crown Court after her husband fraudulently set up a charity to claim Gift Aid to the sum of £855,611 And then there was a mother and daughter involved in running a charity who were arrested on allegations of fraud and a former chief executive of an equality charity in Wales who is facing charges of fraud and theft.
Common types of fraud committed by people directly involved in the charity include invoice fraud, which is a fake invoice raised by an alleged supplier for services. This can be done in conjunction with an employee or volunteer who is part of the scam, who then authorises payment of the invoice.
Cheque fraud can also be a serious issue for charities. Despite the fact that the use of cheques has declined in recent times, advances in technology means it is much easier for fraudsters to forge cheques.
The same is true for online dealings. As technology has improved and banks have become more vigilant in detecting fraud, so have fraudsters become more adept at forgery and online scams. Fraudsters are now able to hack into charities' online accounts and divert funds to their own accounts or send out phishing and scam emails to obtain bank details.
More recently the Charity Commission has warned charities to be on the lookout for fraudsters making donations using stolen credit cards. The scam involves a fraudster informing a charity that they want to make a large donation on the condition that the charity forwards a percentage of the donation to another specified charity. The specified charity turns out to be a person's bank account and is not a charity at all.
Once the card issuer recognises that a crime has taken place it will recall the full amount of the donation from the charity's account, leaving it out of pocket. The charity has inadvertently been part of a money laundering scam.
Legacies received in wills can be a vital source of income for many charities. The amount charities receive from legacies in the UK is approaching £2bn a year. It can, therefore, come as a serious blow when a legacy is delayed or even wiped out entirely because of the actions of a fraudulent executor.
There have been several high profile examples of this recently. Christopher McKnight, who was executor of a friend's will, was recently jailed for 27 months after spending the majority of the £133,000 which had been left to a UK charity for vulnerable and neglected children. The charity tried to recover the money, but McKnight had already spent it, leaving the charity with nothing.
Protecting against fraud
So what can charities do if they find themselves victims of fraud or suspect fraudulent activity, whether by an executor, a third party supplier or a volunteer?
The most effective way a charity can protect itself against fraud is to prevent the fraud from occurring in the first place. As Benjamin Franklin once said, an ounce of prevention is worth a pound of cure.
In terms of its own employees and volunteers, charities should limit the situation where any one individual has responsibility for large sums of money and promote an atmosphere where fellow employees can report suspicious behaviour. If a strong anti-fraud culture prevails, individuals will not feel offended if checks need to be made or questions asked.
Of course, most charities carry out stringent checks on their employees before employing them but can the same be said for volunteers? For example in the Harris Polak case, how could the charity have ensured that Polak was declaring the full extent of his fundraising efforts?
Practical fraud prevention
Whilst there will always be occasions when the charity is unable to fully guard against fraud, there are a few steps that can assist charities in preventing fraud occurring.
One way is to read the Charity Commission guidelines on fraud, which outline ways for charities to tighten up on security and protect their organisation.
In terms of fraudulent donations or money laundering fraud, charities should be extra vigilant, carry out due diligence, check donations and implement financial checks and systems which alert it to unusual or substantial one-off donations. Charities should undertake regular risk assessments relating to their structure, activities and area of operation to ensure procedures and processes remain as robust as possible.
Charities should put in place appropriate policies governing access, use and storage of electronic information and ensure that all computer systems are adequately protected by anti-virus and anti-spyware software.
ADVICE FOR DONORS. When a donor is dealing with a new or smaller charity for the first time, they should ensure thorough checks are done - even simple steps such as telephoning the charity or checking with the Charities Commission can be relatively cheap and straightforward ways of ensuring that the charity exists.
Ideally, donors should be comfortable that these charities also have the adequate financial controls in place to govern the access, use and storage of electronic information so any information exchanged remains safe.
BACK TO CHARITIES AGAIN. Charities should subscribe to a legacy notification service to prevent against fraudulent executors. This ensures that the charity is notified of a pending legacy at an early stage and can follow it up to ensure it is being managed correctly and legally.
When fraud is suspected
If a charity suspects fraud it should quickly report this to the Charity Commission and seek legal advice straight away.
There are various legal steps a charity can take in terms of fraudulent executors. There are civil actions for injunctions or recovery of money. Where necessary, it should also be reported to the police. This can be done via Action Fraud.
Once a charity has identified fraud it should then conduct a review and update its internal risk assessment and financial control policies to prevent this happening again. The Charity Commission has issued an alert, which outlines ways trustees can protect against fraudulent donations and money laundering.
The full alert can be viewed on the Commission's website along with the relevant guidance for trustees about how to protect their charities.
Role of the Charity Commission
The Commission reiterates the need for all suspicions to be reported to it. Whilst the Commission is a regulator of charities and not involved directly in investigating and prosecuting criminal activity, it works closely with other relevant authorities.
The Charity Commission's role, when notified that fraud has occurred, is limited to investigating whether there has been any wrongdoing or failure by the charity itself. It will then work with the charity to establish what systems and procedures the charity needs in place to ensure that such a fraud does not occur in the future.
Then there is the charity's reputation to consider and manage. If the public think there is risk of their donations going missing then it could put them off donating in the future. So it is important to have in place a damage limitation programme which includes a communications plan for all types of fraud situations.
The plan should outline who has responsibility for speaking with stakeholders, who should be handling the press where appropriate and address questions such as whether to report the fraud in the annual accounts. When done in a positive manner and to publically inform about the preventative measures taken to protect against possible future threats, a communications plan can be a great way to reassure and rebuild public confidence.
Fraud is an ugly business and one that can greatly damage the charity financially as well as its reputation. Prevention is better than cure so safeguarding all possible threats from fraud is vital, but if a charity is on the receiving end of a fraudster, it should not be afraid to get the law involved and to take appropriate legal action.
"Fraudsters are now able to hack into charities' online accounts and divert funds to their own accounts or send out phishing and scam emails to obtain bank details."
"If a strong anti-fraud culture prevails, individuals will not feel offended if checks need to be made or questions asked."
In the intensely competitive charity sector, particularly at a time of recession, partnership working, rigorous evaluation, the highest standards of professionalism and running a charity as a business have never been more important. This article seeks to show how adopting this approach has worked for my charity and that there may be lessons to be learned from our experience.
Create was born on 7 July 2003 from the vision I had of a charity that would make society fairer, more caring and more inclusive by using the power of the arts to transform lives. Since then, we have run 4,200 workshops, facilitated by almost 200 professional visual and performing artists, for more than 25,500 participants.
We devise and run projects that are individually tailored to the organisations and individuals with which we work, allowing people who are excluded through disability, disadvantage, ill-health, imprisonment, poverty or social isolation to participate in high quality creative arts experiences that enable them to develop creativity, learning, social skills and self-esteem. Relationship building, developing trust and exploring social issues are all central themes.
I started my career at KPMG, as a PA and then a marketing executive. This blue chip corporate launching pad played an important role in helping to shape my career, in particular emphasising the importance of partnership working, attention to detail and the highest levels of professionalism. After securing a BSc Management Sciences (Marketing) with Arts degree at Lancaster University and the Institute of Marketing Diploma, I spent the next phase of my career in orchestral management, most recently as chief executive of the Orchestra of St John’s.
Working in small organisations forced me to develop a broad skill set that included strategy, finance, HR, fundraising, marketing, PR, artistic planning, project management and evaluation. This has proved invaluable in setting up, leading and developing Create, which has presented many exciting challenges and rewards over the past ten years.
Charities regularly get a bad press for being “unprofessional” and many of us do operate on a very tight budget that requires difficult choices to be made but this has led us to be highly resourceful at Create from the start. Despite being based in my home for the first 15 months, I have always seen Create as a business – which is also a charity – and I am convinced that our success to date is as a result of combining a strong vision with creativity, flexibility, excellence and rigorous financial management.
Our participants drive everything we do and we recruit staff, artists and volunteers first and foremost on their commitment and passion for our mission of changing lives. All team members and trustees visit projects regularly, where they see at first hand the impact of our work on participants’ lives, which keeps them informed, inspired, motivated and participant-focused.
It also ensures that the decisions they make have participants’ needs and interests at their heart. I feel privileged and humbled to lead such an exceptional team: there is an incredible buzz around our work and everyone is prepared to go the extra mile.
We individually design every programme to meet the needs of the recipient organisation (e.g. school, prison, children’s hospice or day centre for homeless people), the individuals it exists to serve and, where applicable, the funding partner – corporate, trust or individual. By working creatively and flexibly, we ensure that all stakeholders’ objectives are addressed. One community partner told me: “You are the first organisation that has ever asked what WE want”.
This approach is reaping rewards: we increased our income by 29% last year, our projects were rated successful overall by 99% of our community partners and won a series of prestigious awards.
Each of our programmes is run by one or more of our professional, practising artists, who combine an outstanding artistic practice of their own (they might be a jazz musician performing on the international circuit, a theatre director or a visual artist exhibiting their own work, for example) with exceptional skills and experience of leading creative arts programmes in challenging community settings.
It takes a special sort of person to be able to bring these very different qualities together successfully, ensuring extremely vulnerable participants are at the centre of a highly creative process that is driven by them.
We have a very thorough recruitment process and ongoing assessment procedure to ensure the highest standards are maintained. Around 20% of our artists are emerging facilitators who are selected and nurtured alongside our experienced team, providing invaluable support in the workshop setting and allowing them to grow and develop.
I have a deep commitment to continuous professional development, for my team and myself, despite the significant financial challenge this can present, and accessing relevant training throughout my career has been indispensable. I have been indebted to the Foundation for Social Improvement in recent years, whose high quality, free courses for small charities (turnover below £1.5m) have helped to up-skill me and other members of the Create team – time very well spent though often hard to carve out of a hectic schedule.
We assess training requirements as part of each staff member’s six-monthly appraisal, helping our most valuable asset to identify development needs with their manager. A mentoring scheme forms part of our internship programme; volunteers are offered on-going support; and we piloted an “artist sharing” event earlier this year that enabled those who deliver our programmes to network and share best practice, an initiative which was so successful that we will be repeating it bi-annually going forward.
Rigorous, honest evaluation has been part of our approach from the beginning, certainly one of the most important processes I have ever established. Each programme is assessed against the aims and intended outputs/outcomes that are agreed with the different stakeholders at the outset. Planning and debrief meetings start and conclude each project and we have a 100% feedback policy, with verbal and/or written input collected from every participant, community partner (e.g. prison officer, youth worker, teacher), volunteer and artist.
Picture-based questionnaires or verbal feedback are made available to participants with low levels of literacy, English as an additional language or learning disabilities to ensure their voices are included. At the culmination of each project, we produce a detailed report that provides crucial feedback to our community partners, artists and project funders; and we use the learning and recommendations made to inform all future projects.
Alongside our project evaluation process, we launched Making it Matter in 2010 to assess the longer term impact of our programme on participants. We select two projects each year to re-evaluate 6-24 months after they took place via focus groups with participants and in-depth consultation meetings with staff.
In June 2013, a major new funder asked Peter Grant, senior fellow at Cass Business School, to review our evaluation. He concluded: “Create’s approach to evaluation is thorough and highly commendable. The charity is unusual in recognising that it can be a vital learning tool in improving its own work. Both evaluation techniques are probably ‘as good as you can get’ in examining the soft skills with which Create is dealing.”
As mentioned above, running Create as a business has been key from the start, enabling us to demonstrate high levels of professionalism to our funders and other stakeholders. Within a few months of establishing the charity, we had a set of policies and procedures in place (such as “Safeguarding Children” and “Equal Opportunities” policies and a detailed Staff Handbook) and have added to these over the years as we have expanded and as legislation has changed.
I wrote an “Anti-Bribery” policy last year, for example. For a small charity, it can be a challenge (and expense!) to keep up to date with such crucial but time consuming back office functions (we review and update all policies annually) so I have surrounded myself with professionals who give their time and expertise: an Advisory Council of highly skilled individuals; in-kind support from a corporate HR department; and invaluable pro bono legal expertise from Reed Smith.
Last year, I recruited Creative, Development (fundraising) and PR Councils to provide a further resource on which to draw, which have already proved invaluable in guiding the charity in these crucial areas.
Likewise, operating a rigorous and transparent financial management procedure has been a priority from day one to ensure financial stability and credibility. The trustees receive monthly management accounts that are prepared in-house before being independently checked by our honorary management accountant (the director of finance for another charity).
Our annual accounts are audited within three months of the year end so that we have the most up to date financials to include in funding applications. We file our annual returns at Companies House and the Charity Commission well within deadline.
I have always felt that such good governance sends out an important message when applying for funding, and recent experience of securing large grants from charitable trusts and foundations has demonstrated time and time again the high expectations in this area that many funders now have.
Fundraising is one of my passions and I believe that our success as a charity over the years is due in no small part to our approach to fundraising, which is creative, collaborative and tailored … like the rest of our programme. I have never approached fundraising with a begging bowl mentality. I believe supporting the work of charities like Create offers organisations and individuals a chance to do something profound and meaningful.
In line with best practice, we align our approaches to funders’ charitable priorities and use compelling participant stories and the demonstrable impact of our work to help make our case. We then take stewardship seriously, ensuring our funders are involved and informed in the way that is right for them.
We have aspiring plans for Create going forward and will be building on the successful approach that we have developed over the past ten years to achieve the ambitious targets defined in the business plan that I finalised last year, following detailed consultation with our trustees, staff team and stakeholders. This sets out a pathway via which we will double our income to more than £800,000 by 2016, delivering twice as many workshops each year that will help to transform the lives of many thousands more participants.
"I am convinced that our success to date is as a result of combining a strong vision with creativity, flexibility, excellence and rigorous financial management."
"I have a deep commitment to continuous professional development, for my team and myself, despite the significant financial challenge this can present
The recent uproar about the level of salaries for executives in charities was a reflection in the press of outrage about not just the high level of benefits enjoyed by certain senior charity executives but also about the mindset of those in the charity sector who defended those salaries.
Briefly, people who give money to charities do not want their donations to go to pay large salaries and other benefits for senior charity executives. The majority of people who give money to charities are on average or relatively low incomes and consequently there is no meeting of minds between them and those within the sector who would argue for high salaries.
This situation is replicated by the furore over bankers' bonuses - ordinary people think they are outrageous but the people who run the banks think they are necessary. The difference, though, is that charities are so much more dependent on a good image in the eyes of their supporters.
The so-called breed of professional senior managers in the charity sector are in danger of being perceived as a breed of charity "fat cats", as indeed so many of them are.
There is another aspect here too. The argument put forward that "if we don't offer the right salaries, we won't get the right people" is completely inappropriate for the charity sector. The majority of people who work in the charity sector know they can't expect salaries compatible with the private sector - they are motivated primarily by a desire "to help".
There will always be people out there, including retired but experienced executives, who are willing to take up positions in charities at a lower rate of pay than in the commercial sector.
Also, there is the unspoken fact that a lot of those senior executives in the charity sector greedily expecting more money are only in the charity sector not because of a great commitment to helping the disadvantaged but simply because they couldn't hack it in the private sector or were made redundant and couldn't find another private sector job.
So what is the way forward?
1. Proclaim the fact that any senior executive in the charity sector can't expect the kind of benefits they would receive in the private sector.
2. Outlaw bonuses of any kind for any employee, particularly senior executives. People are paid to do a job to the best of their ability. Does it mean that if they are not paid a bonus they won't work so hard or to achieve the best possible result?
3. Clamp down on pension benefits for senior executives. Pensions should be on a uniform basis throughout the charity and relate to new workplace pensions as a maximum.
4. Salaries should be limited according to certain benchmarks, namely using the Civil Service as a benchmark. Maximum salaries should be related to those of senior but not top civil servants, i.e. those earning about £80,000. No salary in a charity, even the biggest, should touch the £100,000 mark.
5. There should be a public listing, i.e. on the web, of the salaries of all chief executives and finance directors of charities. Positions rather than names can be listed. This is something which should be regarded as a right for prospective donors and existing supporters.
The pressure on charities to report the impact of their achievements has increased and the trustees’ annual report remains key in each charity’s arsenal of publicity material to help each clearly win the attention, support and funds it needs. As the requirement for charities to demonstrate the relevance and effectiveness of their activities grows ever greater, it is important that charities articulate their achievements comprehensively yet concisely.
Though eight years have passed since the SORP (2005) was introduced, evidence from Deloitte’s fourth annual survey of charity trustees’ reports suggests that there is still a divide between those charities which comply with the letter of reporting requirements and those which choose to comply with the spirit of them.
(The survey, "Time for Change", published in September 2013, took a random sample of 50 charities from the top 1,000 charities by income and looked at the extent to which they produced a high quality report. Where possible the same charities were selected as in previous surveys so that reporting trends could be identified. Where a charity was no longer in the top 1000 a replacement charity was selected at random.)
The trend for an increasing number of charities to produce visually appealing accounts or annual reviews continued this year, albeit marginally, whereby 44% of charities produced a visually stimulating set of accounts, up from 42% in 2012. (In Deloitte’s first survey, performed in 2010, the proportion was 20%.)
However, it was also observed that charities producing both a set of accounts and a separate annual review fell from 48% last year to 38% this year. Overall, 30% of charities produced neither a visually appealing set of accounts nor a visually appealing separate annual review. Do some charities consider that the increased expenditure should not be made or should not be seen to be made?
As corporate annual reports get longer it can be harder for the intended readers to draw out the most critical content. In acknowledgement of this, there has been a drive to reinvigorate narrative reporting and the forthcoming regulatory changes, including the introduction of a Strategic Report, will soon come into effect for charitable companies.
There are also changes in UK accounting standards encapsulated in FRS102 and a revised Charities SORP which will affect periods beginning on or after 1 January 2015. The draft of the revised SORP was published for consultation in July 2013.
Charities are about to enter a time of change and as they have to adapt to new standards and guidance, it will be increasingly important that charities consider the best way to present themselves, so that their story behind the numbers comes through to users of the financial statements or annual reviews.
The survey makes clear that some charities put in effort to keep the annual report trim and to make every page of it add something of value. Indeed, a highlights page or opening statement from the chairman or chief executive was included in 46% of the reports surveyed, up from 38% in 2012. Although this is not a requirement, it would seem these charities value the impact of a clear and succinct message early in the annual report.
However, there are still some missed opportunities. For example, although 42% of charities complied with the Financial Reporting Council’s guidance on going concern disclosures overall, the survey found that of the 26% of charities which explicitly stated that their reserves were below their target level, 69% of them did not provide any information on going concern.
Responding to challenges
Charities’ strategies to respond to the challenges of managing expenditure and reserves in the economic climate can be seen reflected in some of the movements from last year’s survey. For example, the number of charities reimbursing travel expenses to trustees fell from 74% in 2012 to 66% in 2013; and the number of charities with reserves below their target level has decreased from 38% to 26%.
Current constrained economic conditions will affect the risks charities face. Charitable companies are required to include principal risks and uncertainties, yet the SORP does not go beyond requiring confirmation by charities that risks have been considered. However, these risks can paint a broader picture about the challenges facing any charity, not just a charitable company.
The survey found a marked improvement in the narrative disclosures around risks, such that they gave a guide to the substance of charities’ activities or positions. Not only did the number of charities disclosing the major risks they face increase from 54% to 64%. But the risks disclosed were noted to be less generic and more tailored to the specific circumstances and operations of each charity. For example, specific mention of reputational loss as a risk declined slightly (7% – 2012: 10%), however other risks disclosed (e.g. quality of service provision or safeguarding) have obvious potential to impact on reputation.
This is a welcome improvement. However, it still leaves 36% of charities, whilst complying with the SORP, not applying the Charity Commission’s best practice recommendations in this area. This statistic has particular relevance in the context of the new Charities SORP, for which consultation has recently started. The proposed revised SORP, amongst other changes, requires all charities to disclose their principal risks.
There are some recurring themes from the findings in Deloitte’s previous surveys highlighting where charities can improve their reporting:
• 33% (2012: 44%) of charities either did not discuss how they provided public benefit, or assumed that this was obvious from the rest of the report.
• 18% (2012: 18%) of charities had no obvious correlation between their financial expenditure and the activities described in the annual report.
• 34% (2012: 30%) of charities either did not provide details of their objectives or discussed their objectives but were silent on how they planned their future activities to achieve their objectives.
Again, these points are captured in the new Charities SORP requirements.
With the pending regulatory changes in narrative reporting, charities cannot ignore the fact that there will be changes in the expectations of people reading their reports. The challenge will be for charities to adopt the spirit of the forthcoming changes to financial and narrative reporting, so that their annual reports tell their stories appropriately. Impact and clarity will be key, and may lead to the attraction of more donors. Are you ready for the changes ahead?
"The survey makes clear that some charities put in effort to keep the annual report trim and to make every page of it add something of value."
Collaboration in the voluntary sector so often results in wasted effort, financial loss, frustrated staff, and inadequate services that opportunities or pressures to collaborate must be evaluated against strict criteria. These can give management teams and boards comfort that collaborations will be of value for organisations and their beneficiaries.
It is undeniable that there are pressures on charities to collaborate, specifically those coming from commissioners of public services. Frequently, the size of contracts, or the complexity of the outcomes required, compels charities to team up with other voluntary (or private) sector organisations to fulfil the terms of the tender.
This isn’t a bad thing – as commissioners get better at specifying outcomes as opposed to outputs, more charities should join up to produce a value chain (or "impact network") and provide an integrated range of services for the most vulnerable in our society.
But there are reasons why these pressures to collaborate are problematic. Firstly, most tender opportunities have short time frames, requiring charities to scrabble around for partners without time and sufficient thought to the problems that could arise when putting in place service delivery agreement.
Charities should be far more proactive in assessing the full cost of their activities, and what additional cost a collaboration would add (bearing in mind that collaborative working almost always adds cost, at least in the initial phases). But it is undeniable that short time scales militate against the best collaborations, and often end up with hasty decisions on cost and price which do not serve charities’ interests, and can see them subsidising the public sector.
Secondly, for many tender opportunities, it is not possible for a charity to be a sufficiently large prime contractor to meet the commissioners’ needs. Frequently, this requires a private sector organisation to lead a bid, with charities acting as sub-contractors to provide the expertise and social value the bid requires to be successful.
This model can offer great opportunities for charities on their pathway to growth, but the experiences of many organisations in the Government's Work Programme shows that this depends on the design of the contract and the behaviour of the prime contractor. For many charities their experience of this model has been fruitless and a waste of resources.
More positively, collaborating to win public service contracts can make financial sense for charities, allowing them to provide services they cannot alone, and for a price that meets the full costs of collaboration, and a margin for further development. It is also clear that collaboration, in whatever context, can allow charities to deepen their impact and extend their reach. This can work in a number of ways:
Collaborations can allow a charity to provide much needed services to a client group who would not approach it themselves. For example, a charity providing therapeutic services to children from troubles families can work with another providing breakfast clubs, after-school clubs, or in-school mentoring. In this way, they introduce their services to children most likely to need them in a familiar, non-alienating environment.
Collaborations can put services around particularly vulnerable beneficiaries, rather than expecting them to access multiple services. For example, a charity working with pregnant teenagers may find them in need of housing advice. Rather than simply pointing their clients in the right direction, it would be wise to work closely with a housing advice charity to ensure the clients do receive the advice, and are provided with follow-up support.
This has the added benefit that the first charity is not trying to "bolt-on" a housing function, but is wisely leaving it to the experts of another organisation.
Collaborations can bring together two organisations to blend their interventions, recognising that they add more value together than separately. If this is successful it could lead to pressure to merge. Mergers are not to be feared if they are in the best interests of beneficiaries, and involve two charities admitting that their differences are not what define them.
Deepening your impact and growing your charity should go hand in hand – and a collaboration opportunity which offers both is a no-brainer. But opportunities are rarely that simple, and a more complex opportunity need not necessarily be dismissed providing you approach it in the right way.
Collaborating to pursue a contract may mean delivering work which you feel is not as impactful as other activities, or which feels off-mission. If you decide to go ahead you should have a rationale – and you should share it with trustees and staff – as to how the growth will allow you to increase your impact on your core beneficiaries in the future.
Conversely, if you subsidise a collaboration or put potentially unsustainable resource into making it work, how impactful does the work have to be to justify this? Will it also give you a boost in reputation or profile that you think will translate into more worthwhile opportunities? You need a strong argument to justify working at less than full cost recovery – particularly if what it means is that charitable funds are being used to subsidise the state.
Charities should do as much as possible to become "collaboration-ready" when they are free of the ticking clock of a tender opportunity. You can still be talking to your local commissioners of course. They may have a good overview of the sector and have "dream teams" they’d love to see happen. Alternatively, if you are having discussions about the outcomes they are going to be commissioning for in the near future, you can get ahead and think about who you would need to join up with to deliver those outcomes.
It also helps to reach out to potential partners when times are good for your organisation. Being an attractive proposition gives you options, and negotiating power. Many charities start exploring collaboration as a "save me" strategy, leaving them in a weak position.
When your charity is considering potential partners, do think beyond your regular contacts. There is a tendency for charities to try and put together partnerships with their "best friends" – organisations within your sub-sector. But you may also be competitors and collaborating won’t usually help you get around this.
So look outside your immediate sector to organisations which serve your beneficiaries in a different area of their lives, or which serve a group to which you want to extend your services. In this way, you can put together a new impact network. It is worth repeating that this process is easier and more purposeful if you have been gathering information on the outcomes likely to be commissioned for in your area.
It should go without saying that the most important piece of work you can undertake to become collaboration-ready is something every charity needs anyway – a strategy that is reviewed regularly, which informs your business plan and your annual goals and targets. Without a clearly defined strategy that relates to your mission, it is much harder to assess whether a collaboration opportunity really could advance your short or long term goals, or is something that will use up resource without moving you forward.
When you know whether collaboration will help you get where you are going, you’ll know how much ground to give when compromise is required – as it inevitably will be. You’ll also know when to hold the line, or walk away if necessary.
Walking away from a potential collaboration can be hard – it usually happens after considerable time has been put in, and goodwill and trust have been built up between organisations. But if the partnership stops making sense in terms of impact or growth, then it’s imperative that a chief executive does take the decision to walk away. One little tip is "have your most difficult conversation first". At that stage, there is still likely to be plenty of goodwill to help you sort the problem out, but if it’s intractable, it’s also easy to halt the process.
Collaboration requires determination, compromise, diplomacy, and a relentless focus on the end goal. It’s also increasingly a necessity in the voluntary sector, but charities should make sure they do it in their beneficiaries’ interests, as well as in their own.
"…for many tender opportunities, it is not possible for a charity to be a sufficiently large prime contractor to meet the commissioner's needs."
"If you decide to go ahead you should have a rationale...as to how the growth will allow you to increase your impact on your core beneficiaries in the future."
William Shawcross, chair of the Charity Commission, made the following statement: "...in these difficult times, when charities are experiencing shortfalls, trustees should consider whether very high salaries are really appropriate, and fair to both the donors and the taxpayers who fund charities. Disproportionate salaries risk bringing organisations and the wider charitable world into disrepute."
FROM THE EDITOR: Thank goodness Sir Stuart Etherington, chief executive of the National Council for Voluntary Organisations, has stepped into the row about charity remuneration with a proposal for the NCVO and Charity Commission to work together to produce guidelines for charity trustees when deciding on the pay for senior staff. It shows the charity sector sensibly responding to a revealing series of articles by the Daily Telegraph on high levels of pay for some charity executives, and the Daily Mail joining in the fray.
The Commission has responded positively to Sir Stuart's initiative and there will now be a report in the spring from by the NCVO and Charity Commission. From the comments made so far by the two it looks like they will be starting from the right perspective.
With a number of very critical MPs making their comments, and the chair of the Charity Commission himself having expressed his concern, it was only right that the charity sector, via Sir Stuart, was to be seen undertaking a conciliatory initiative to address the situation.
A far cry from the unfortunate reaction of ACEVO chief executive Sir Stephen Bubb to the moderately worded concern of Charity Commission chair William Shawcross, when Bubb said: "This is a disgraceful distraction by Shawcross. Of all the issues facing charities, why does he pick on something that is simply not a problem?"
Well it is a problem now, and Bubb has helped to make it one. The newspaper reports and articles, the comments of the Charity Commission chair and various MPs were about the increasing number of charity executives hitting the £100,000 earnings mark, a number of charity chief executives earning more than the Prime Minister's salary of £142,000, big pay rises for senior executives and a number of chief executives on bonuses. Bubb's comments further stoked the problem, leading to more media criticism.
The Daily Telegraph is a great campaigning paper when it comes to what it regards as remuneration excesses, as evidenced by its coverage of MPs' expenses. It won't go away simply because Bubb brushes off criticism. Without doubt the charity sector will face continuing critical investigation of the issue, with the paper leaving no stone unturned in its determination to have a wrong recognised and the situation rectified. That's how the paper operates.
The attitude that the charity sector's chief executives in the form of ACEVO would appear to have displayed, through the sentiments expressed by Bubb a number of times since the first Daily Telegraph report appeared, mirrors the responses by bosses in the banking sectors when criticisms about pay and bonuses first arose.
Basically, the argument goes like this: "If you want the right people, you have to give them the right remuneration." And it is an argument that similarly infuriates the public when used in justification of packages for executives in, for instance, the utility and local authority sectors. Also infuriating is the defence "we are remunerating executives in line with their responsibilities".
These sectors were already unpopular for various reasons, so the perception of unjustified remuneration levels only served to make matters worse. Charities differ here because, until the current remuneration row, public perception of charities as a sector has been very good. Thankfully, people like charities, which is why they support them – with money and with voluntary effort. It's a great relationship, so it needs to be preserved – not undermined by ignoring the importance of public perception.
Until this row public perception has been that charities are really good organisations, run by really well meaning and caring people worth supporting in their efforts. Once this perception starts to change, and there is no way it can survive unchanged if excesses and greed are perceived to be part of the culture of charity management, then support for charities will be damaged. At a time when charities are subject to severe financial pressures, including falling donations, this would be a disaster.
What ACEVO has to understand is that people don't regard charities as the same as corporations and local authorities – they regard them as having different values from these two sectors. So ACEVO shouldn't be seen as using the same arguments and having the same attitudes which people see non-charitable organisations using and which they don't like.
Take bonuses for charity executives, for instance. The public won't ever understand the rationale for them. They expect someone whose salary is paid for by public donations to do his or her job to the best of their ability and with the maximum effort. Why then does a bonus come into it? Are these executives saying that without bonuses they won't do the job properly for which they are being paid? This may be the attitude in the private and public sectors, but it spells doom for the third sector.
This is all so unfair for the great majority of charities, where remuneration is very reasonable, indeed relatively low, and where the mindset of the management is totally in line with that of donors, volunteers and the general public as a whole.
With the principle of transparency not in dispute, the listing of charity salaries above a certain level will become inevitable. Even if this doesn't emerge as a formal recommendation, it will be achieved by the media. The genie is now out of the bottle and donors and volunteers will be wanting information on remuneration. Charities which have remuneration excesses will be in the firing line and will suffer accordingly.
PENSIONS. There is another problem looming. The public want their donations to go straight to helping people in need. They are prepared to accept minimal necessary expenditure required to run charities. Apart from salaries and bonuses, there is the issue of pensions. It goes without saying that the public would be unhappy about financing the pensions of executives on big salaries. But there is also the problem generally of funding charity pensions. Donations are being increasingly used to shore up defined benefit charity employee schemes because otherwise they would be in trouble.
It would make sense for the NCVO/Charities Commission remuneration investigation and guidelines to take pensions into account – even if only to recommend a separate investigation into the issue. Better the public discussion is initiated by the sector itself than a campaigning newspaper.
FROM THE EDITOR: We all know that charities are facing severe pressures and simply to meet these without significantly compromising the extent and quality of their activities is in itself an immense challenge. Then there is the even more demanding challenge of charities being able to go forward in an enhanced way so as to grow the impact of what they do. Many argue that neither just being able to stand still nor moving forward are possible without transformational change. Tweaking existing structures and operational procedures isn't enough in the harsh realities of today's financial stringencies.
This feature consisting of four articles considers how transformational change should be achieved. One of the most talked about ways of achieving such change is to merge. So we have run as our first article a piece by Susan Bickerton of Norcare which explicitly rejects this "obvious" way forward as a solution. There are alternatives, as she spells out in her own charity's case.
However, if a merger is the preferred solution, there are some issues which have to be addressed, as David Sewell of Napthens points out. For an honest appraisal of how a merger can work and create a completely new charity, see the joint article by Thea Stein and Andrew Cozens of Carers Trust. But for transformational change to be really worth all the effort it has to be undertaken in a certain way. The concluding article by John Roberts of myProteus seeks to take charities out of their comfort zone when considering and implementing this kind of change, otherwise it will fail.
So please read all the four articles below by clicking onto each headline.
Housing support charity Norcare was set up in 1984 and has grown from our original remit of helping ex-offenders struggling to find housing to supporting a wide range of vulnerable people, including ex-servicemen and women. In 2012 we took a big step by becoming a partner in Fabrick Housing Group, a new partnership aimed at boosting housing and regeneration in the North of England.
I don't understand why more organisations in the charity sector don't look at formally partnering with larger organisations as an option for future development and sustainability.
When it came to considering how to drive Norcare and its services forward, there were a number of options on the table. However, most, such as a merger, would have lost us many of the things we have worked hard to achieve, and which we hold dear.
The Norcare name, which is well respected in the sector, might have disappeared, along with some staff, our very strong board and even our charitable status, and these would simply not have been acceptable sacrifices.
Big player in the voluntary sector
I would have found it very difficult to enter into a structure that didn't allow us to remain a significant player in the voluntary sector. I like to make a contribution in this way, because Norcare has traditionally been a big player in the voluntary sector. I would have had difficulty dealing with anything which led to us losing our charitable status.
Last year we took a big step, becoming a partner in Fabrick Housing Group. It was a move which, while presenting challenges and changing the way we think about many of the things we do and how we operate, has also created vast opportunities for growing our services and developing the support we offer for vulnerable people in the North East of England.
Some two years ago, I had asked the board to look at our options for the organisation's future. Too many people in the voluntary sector tend to hang on and hope for a happy resolution to the challenges we face in the current economic landscape to come along, but in this climate it's not going to happen.
We decided to look at our options when we were in a relatively strong position. It is fair to say that, while our significant reserves meant we could have survived if we hadn't joined the group, the constraints we were beginning to feel would have hampered our ability to invest in the development and quality of our services.
Without the benefit of the group, we felt we would have just been turning the handle on our services, which was again not acceptable.
A more sustainable future
The change was something we would choose to do because of the greater benefits to the organisation. Our future is now more sustainable.
As well as retaining our identity, staff, board and charitable status, the partnership has brought with it the strength of being formally allied with the group's other partners – landlords and developers Erimus Housing and Tees Valley Housing, both housing associations.
The strength we have gained, without having to make the unthinkable sacrifices, is a testament to the model and makes it even more incomprehensible why others in the charity sector are not rushing to do the same.
Yes, as with any big change, there are challenges. We need to think and act differently to link with our partners in the group and develop best working practices, as well as make efficiencies of scale and service, to deliver the best support we possibly can.
However, the differences between ourselves and our partners are balanced with our shared goals and ethos. We have to accept that one size does not always fit all, but the benefits hugely outweigh the changes we must all implement.
Fabrick was founded four years ago and there are naturally greater similarities between Erimus Housing and Tees Valley Housing than there are between either of those organisations and ourselves.
They were also well ahead in terms of integration when we came on board, having learned an awful lot about working as partners since the group's formation. This is an area of thinking which has had to be incorporated into Norcare.
Alison Thain, Fabrick's chief executive, has a very strong sense of making sure that the group gets the benefits of all partners bringing something different to the partnership, and celebrating these differences is a philosophy we embraced from the start.
Delivering services more robustly
Fabrick is able to deliver our corporate services more cheaply and more robustly than we were able to do in-house, freeing up valuable resources so that we can invest more time and money into the quality of service. In turn, Norcare's quality and development team is able to deliver its services to Tees Valley Housing, expanding its reach.
This means we really now tend to think of ourselves as a dedicated charitable service, focusing all of our efforts on the frontline. What more can any charity want?
Both Tees Valley Housing and Erimus Housing are well established housing providers, with a total of around 15,000 properties in communities from York to Tyneside.
While Norcare does not develop its own properties, there are some similarities in the support we and Tees Valley Housing provide, as well as geographic overlaps, and it is important to find ways of bringing out the benefits of such areas of cohesion.
We also now have the strength of a major housing association behind us when we want to look at things such as building accommodation for our clients – further strengthening our ability to give a bespoke service in the best possible surroundings.
Whilst championing this model, I would give a note of warning. This arrangement wouldn't have been considered by Norcare had it not been for the fact that we recognised in Fabrick – its group chief executive and its board – an ethos very similar to our own.
There were a number of other housing organisations out there which might have been keen to have gone into partnership with us. But because of the Fabrick Group's wider values, and how they reflected our own, I didn't hesitate to recommend the proposal to the board.
When the services an organisation such as ours provides are so vital to so many people, decisions about our future cannot just be about financial strengths. It's as much about ensuring the right fit. With Fabrick, we feel we have achieved that.
Such opportunities are out there, if charities are minded to look for them. Integration does not need to lead to loss of identity and direction, and while different ways of thinking and working need to be engaged, great things can be achieved.
Charities are all about benefiting the community in the best way they can. However, sometimes a charity may struggle to find new trustees and volunteers willing to commit so much of their time free of charge. With funding often under pressure, many decide there is no point duplicating efforts and resources, and a suitable solution can be for charities to work together.
Linking with another charity can provide real advantages – something as simple as making premises available, sharing staff, or jointly promoting training and other events.
However in some cases a full scale merger can be the best answer. This may sound a little intimidating but a merger of this sort has many of the features of a business transfer. If matters are approached systematically, with a realistic timetable established, the process can lead to a well managed merger and the work of both charities is enhanced for the future.
What does a merger involve?
A merger usually involves Charity A taking over the assets and obligations of Charity B. The charitable work continues and at the end of the process Charity B can simply be removed from the charities register. In some cases it is possible for Charity B to continue if there are particular reasons to do so.
A real life example of a successful charity merger is the merger of the Cancer Research Campaign and the Imperial Cancer Research Fund, which came together to form Cancer Research UK in 2001.
According to a government report, this merger was carried out because the two charities overlapped in four key areas – retailing services, corporate sponsorship, commissioning of research, and the acquisition and exploitation of intellectual property rights. The two charities were a perfect fit and the years have proved that the union was a successful one.
Other areas which have seen successful mergers are in the fields of homeless welfare and advocacy services.
Before a merger
Before a merger goes ahead there are many points to consider such as the synergy between the two charities. Activities, ethos and charitable objects need to match, and it will be necessary to consider whether any objects need to be amended with Charity Commission approval.
It is vital that all the bodies with whom Charity B works, including service users and funding bodies, are kept informed. Any parties with whom Charity B has agreements will need to consent to those agreements being transferred across to Charity A, otherwise they could come to an end.
In some cases funding bodies may require novation agreements (where there have been significant changes to the original agreement) to confirm the terms on which Charity A is allowed to take over, but responses are usually fairly positive if a good case for the merger can be shown.
Employment law issues will arise on any transfer of operations/assets and specialist advice will be required. Trustees, staff, members and supporters need to be fully informed and "on board" as matters proceed. A merger may also require a resolution of the members.
Rights and obligations in relation to property, especially leases, need to be checked carefully and properties transferred where necessary.
If Charity B is to pass over its assets and operations it will need to ensure it has no outstanding liabilities and/or that Charity A will take them on. Insurance arrangements need to be checked.
Income and legacies are often tricky areas because charities may understandably be reluctant to change bank accounts and disturb regular gift income. It may be possible to retain bank accounts for a suitable period.
To merge or not to merge
If a charity is having problems and looking to merge it should take both legal and accountancy advice quickly. Good causes should identify other charities they would feel comfortable working with and consider confidential exploratory meetings with a few trustees.
Prior to a merger there is plenty that can be done to prepare. A "due diligence" process can be carried out, similar to that which takes place during a corporate transaction. This can ensure that all relevant assets, contracts and liabilities are taken into account and identifies areas of overlap or contract.
Opportunities should be made for trustee boards to meet and gain trust, and both staff and volunteers should be kept informed and consulted so they are not surprised by a sudden announcement.
It may be that a merger is simply not suitable for a charity. This may be the case if a charity has real financial, staff, relationship or morale problems that no other charity may wish to take on, or if the objects of the two charities do not match or cannot be legally altered to achieve a match.
Each charity will need to authorise a group to take the process forward in terms of planning and decision making. Often a joint working group is established with representatives from both charities. As rights and liabilities in respect of property and possible trustee liability are involved, both charities should take professional advice.
Not all mergers need consent, as in many cases a charity's rules will give its trustees the power to merge. If not, the Charity Commission will need to be contacted.
When one charity merges with another, one of the original organisations may well close, in which case the Charity Commission will be asked to update the register of charities. Charities can also voluntarily register their merger to help future legacies find their way to the correct organisation.
Legacies can arrive unexpectedly but if the charity no longer exists the gift may fail. The Charity Commission holds a register of mergers which is designed to assist in directing legacies to successor charities.
A merger may not be suitable for every charity, but with careful planning and preparation such a move can be of real benefit to both parties.
Carers Trust is a new national carers charity formed through the merger of Crossroads Care and the Princess Royal Trust for Carers. The merger process was a long journey with lots of lessons learned along the way. We are pleased to share the experience with other charities through the pages of Charities Management.
Carers Trust's launch on 1 April 2012 represented both the start of an exciting new venture for the UK's largest carers charity and the culmination of three years of strategic planning, engagement and hard work. Both founder charities had a strong and long history of supporting carers. Crossroads Care was formed in 1974 and the Princes Royal Trust for Carers in 1991, bringing close to 60 years of combined experience to the new Carers Trust.
Before the merger was discussed, the charities had a history of working together on a number of programmes, including Carers Week and wider policy campaigns. Even in this early collaboration stage the benefits of joint working were apparent. Not least being the fact that we were able to draw on a much wider range of carers' experiences which proved invaluable when campaigning or lobbying on carers' issues.
The next natural step was to create joint policy posts, which enabled us to share a strategic direction for policy strategy and gave us greater authority and a stronger voice. As the benefit of these posts became apparent, both sides were keen to look at strengthening the arrangement. The two boards came together to discuss options of merger, further organic collaboration or a strategic partnership short of merger.
Both boards independently took the decision to pursue the option of merger. This led to the creation of the Merger Steering Group (MSG), made up of members from both boards.
One of the first actions was to run the plans by Her Royal Highness Princess Anne, president of the trust, and she was highly supportive of our plans. One of the main issues was that the trust was the only charity which carried her name. It is quite a significant step to remove the royal name, and it was obviously important that as president of the charity she was content with this.
Once the decision to look at merging had taken place, a whole raft of technical requirements came up – developing a business case and shared strategy, and then consulting with both networks to explain the case and win their commitment to it.
Throughout the process there was wide engagement with carers, staff, our networks, funders and other external stakeholders. This was particularly important concerning brand development, where it was key that we should create a brand that had the potential to become a household name.
It was vital that our staff felt engaged with the process throughout, especially around the development of brand and strategy for the proposed new Carers Trust. We were aware of the impact the process was having on staff.
The length of time required to carry out the due diligence meant a protracted period of uncertainty, and both boards were most grateful for the continued commitment of the staff. As well as investing a great deal of time in the merger work, they were also able to achieve significant progress against their own work plans.
We did engage some external support, most notably around legal matters, and were very lucky to receive a substantial amount of legal pro bono advice from our lawyers and supporters, Slaughter and May.
In a merger where a NewCo option has been chosen (rather than a takeover), you have three decision makers. Key documents had to be referred back to the boards of both transferring organisations, which had to be certain it was the right thing to do. We also had to create a decision making receiving organisation board, so we created a shadow board for what became Carers Trust.
We took an early decision that Carers Trust trustees would be drawn, in the first instance, from both organisations. The nature of the new organisation's board now differs from the composition of both the previous organisations, in that half of it is from the network and half is appointed.
With hindsight we would have set up a formal decision making board for the new organisation earlier than we did, as this would have given us the ability to speed the process up. We had a merger steering group which steered but could not commit the new organisation, so a whole lot of decisions were held waiting the formal constitution of the new board.
We did not formally empower the new board until the January before the merger in April, which meant that the new entity was only making formal decisions in those last three or four months of the process. In hindsight we should have had that structure in place nine or 12 months before the actual merger date.
If Carers Trust had had a shadow chair and board we could have made three-way decisions much earlier on, rather than it being a two-way recommendation process, waiting for a new body to ratify its proposals.
Carers Trust is born
Carers Trust came into being on April 1 2012. It has a presence across all four nations and, with its Network Partners, supports close to half a million carers.
Even though we had officially merged, there was still a lot of work to do to get the new charity fully functional, from team structures to internal communications, IT and invoicing. Everything had to be delivered as Carers Trust.
Many of the big issues we faced were the same as those when carrying out a merger of public or private companies – issues about different cultures, values, systems and processes and different leadership styles. There is a wealth of management literature about what you must do around those areas when you merge. But for us it has been a lot more nuanced, because this has been a merger of two membership organisations.
The external facing work has been about how we engaged with the 199 individually owned and operated charities which constitute our network. They are completely rooted in their local community and local issues, and we needed to show them how they could benefit from helping to form and inform a new UK-wide organisation with major aspirations. This is not something about which there is a mass of literature around!
While it may be complicated, the glue that binds the process together is the focus on the outcome for carers, and the passion that people feel in both the voluntary and public sector to do something of social value and social worth. And this strong thread is running through the process of how we are taking the merger forward.
We also have to remember that merger with a membership organisation does not mean that one local member has to merge with another local member – for us it was about local solutions to local issues. We've had amazing support from the existing networks of local service providers, with more than 95% joining up as Network Partners of Carers Trust.
With us on the journey
People are still with us on the journey and we are very much taking the approach, and saying to Network Partners all the time, that we are doing this with you, not to you. We are always aiming to get the balance between real consultation and maintaining the pace in decision making so we can continue to move along.
There is significant engagement with Carers Trust, and great enthusiasm to be involved. We have both formal and informal ways for people to be part of the process and a myriad of channels for informal and formal two-way conversations.
The enormous strength that is already apparent is our ability to be one strong, clear voice working on behalf of carers. Both founder charities had the same ultimate beneficiaries and purpose. What we have had to do is clarify together what the outcomes are which Carers Trust will judge itself by, and clearly what others will judge us by.
One of the things we've always said is that as a merged organisation we'll be able to increase funding and raise our profile, and so we were thrilled to be chosen as the Co-operative's Charity of the Year for 2013. This is an amazing opportunity for us and, most importantly, for the carers we work with.
Charities which fail to get to grips with the realities of the current economic climate face difficult times ahead unless they implement organisational change now.
Many charities find themselves in a particularly challenging economic dynamic. On the one hand demand for their services is increasing as the recession continues to impact all aspects of society, but on the other hand government, public and private funding is falling.
This demand on resources and squeeze on finances is creating uniquely tough pressures on the sector and balancing this difficult dynamic is a very real issue for a significant number of charities. The risk is that many charities postpone key decisions around what needs to be done to secure a sustainable future until it's too late. This is especially a concern as typical transformation journeys of the type charities will need to implement are two to three years in duration.
Looking closely at fundamentals
Charity leaders need to look closely at the fundamentals of their operating model, decide what is core to the business, what could be shared or outsourced: and even consider more drastic measures such as merging with a charity with similar goals. The latter may sound drastic but when considering what is best for the target audience it could deliver the best outcomes.
Whilst the full range of charity functions should be considered – from the projects it pursues to its distribution channels and fundraising – there is no doubt that very quick efficiencies can be delivered through sharing back office functions, such as human resources and information communication technology. A word of caution when evaluating these options: charities should consider opportunities not only within their sector but also across industry sectors as quicker efficiencies may be more readily available.
It's not all doom and gloom however. The good news is that organisations which act decisively can not only avert disaster but also increase their capacity to respond to the ever increasing demand for their critical services. Transformation – and securing the real efficiency gains necessary for survival – can be challenging but can be made easier if the following key requirements for success are satisfied:
VISIBLY LEAD FROM THE FRONT. Too many transformations fail due to a lack of visible and appropriate leadership. To successfully drive the transformation, charity leaders must step up and visibly lead the transformation from the front, injecting pace, instilling accountability across the team and ensuring that people are aware that delivery is non-negotiable.
Understanding the final look of success
DETERMINE SUCCESS AT THE OUTSET. Too many organisations rush into getting on with delivery without understanding what success will look like at the end of the journey. Charity leaders need to proactively work with staff and key stakeholders to ensure that there is a common understanding of what "good" looks like early in the lifecycle in order to mobilise quickly, reduce the amount of rework, confusion and wasted time.
ENSURE THERE IS A HOLISTIC UNDERSTANDING OF HOW THE CHARITY WILL CHANGE THROUGH TIME. By their very nature, transformation programmes tend to impact on most of an organisation's activities and rarely is it confined to one team or department. A common reason for transformation failure is the lack of management of the holistic picture of change and the increasing feature of design misalignment leading to conflicting executive priorities and mixed messages within the business about what's important.
BE CLEAR ON HOW EACH PRIORITISED PROJECT AND LINE INITIATIVE WILL DELIVER MEASURABLE OUTCOMES. Demonstrating how outcomes will be achieved and ensuring there is a robust outcome realisation regime in place will ensure valuable funding is not wasted on unnecessary initiatives. This not only requires a strong prioritisation of a do-able portfolio of change that is driven by the organisation's good rather than personal agendas, but also clear accountabilities of who owns the realisation of the outcome.
ENSURE DESIGN IS GOOD ENOUGH. Many charities waste valuable time by endlessly debating and over-engineering the "solution" design in an attempt to make it "right"; only to find that what eventually gets delivered is out of date or no longer required. Charities need to ensure that not only a "good enough" design approach is adopted but that there is minimal "customisation" of the technical solution. Changing the operating process to fit off the shelf plug and play technology solutions should be the key principle.
Being more dynamic
BUILD CREDIBILITY AND CONFIDENCE. With so many transformational failures, successful charity leaders recognise the importance of designing transformation programmes such that quick wins can be achieved and visible progress can be demonstrated. Building credibility and confidence that the outcomes will be achieved within the whole stakeholder community is critical and builds its own momentum.
MAKE EFFECTIVE DECISIONS FASTER. In the past, organisations could afford to wait until they had "perfect" information before a decision was made, as the pace of change and volatility in the environment was much lower. With today's more dynamic environment, charity leaders cannot afford to wait for all the information to be available before making a decision. Instead they need to learn to be more adaptable and be confident to use the information that's readily available to make decisions to allow the transformation to move forward.
ENSURE THE IMPLICATIONS OF THE TRANSFORMATION ARE UNDERSTOOD BY KEY STAKEHOLDERS. Adopting a transformational approach, particularly in charities, is different to more traditional projects and rarely does one size fit all. By adopting a transformational approach in a charity, all stakeholders need to understand the significant impact on factors such as culture, individual and collective capability, behaviours, governance, teamwork, funding allocation and organisational structures. It is not trivial and can't be given lip service.
SEEK THE RIGHT SUPPORT. Charity leaders need to seek the right external support as appropriate. This is not about bringing in an army of consultants, but people who have done it and been there and can help shape and deliver the transformation agenda quickly and cheaply. Transformation programmes are not a training ground for the inexperienced consultant so don't accept them even if they are free.
ESTABLISH EFFECTIVE VISIBILITY OF STATUS AND COMMUNICATE, COMMUNICATE, COMMUNICATE. Charity leaders and the executive team need appropriate visibility of status and prognosis in order to make timely decisions. Too often this is too detailed, onerous to produce and fails to aid decision making. This visibility needs to be supported by an effective communication regime – which should not only communicate what is being done, celebrates success and recognises failures, but also share what is still not known.
Ticking time bomb
The drive for efficiency and optimisation is a ticking time bomb for the sector and charities which fail to adopt the right strategy, or worse still, fail to act at all, unfortunately face an uncertain future. On the flip side, early intervention can deliver significant efficiency gains and ultimately ensure a sustainable and long term future for this ever increasing critical sector. Transformation is doable – adopt the elements of success and try it.
Not long after the Upper Tribunal handed down decisions on the public benefit of educational and relief of poverty charities (see R (Independent Schools Council) v The Charity Commission for England and Wales and H.M. Attorney General v The Charity Commission for England and Wales  UKUT 421 (TCC) and H.M. Attorney General v The Charity Commission for England and Wales and others  UKUT 420 (TCC)) the Charity Commission finds itself embattled over the issue of public benefit again: this time over charities established for the advancement of religion.
In June 2012 the Commission turned down the application of the Preston Down Trust, a conservative evangelical congregation of the Plymouth Brethren, for charitable status. In this article we examine the reasons for the Commission's decision and the implications for religious charities.
Reaction to the decision
The Commission's decision not to grant the Preston Down Trust charitable status has come at a busy time during which the Commission has been consulting on the revision of its statutory guidance on public benefit. The decision also coincides with the publication of Lord Hodgson's review of the Charities Acts, and with the proceedings of the House of Commons Public Administration Committee which has been taking evidence on the Charities Acts and the regulation of the charitable sector.
One member of the Public Administration Committee reacted to the Preston Down Trust decision by describing it as a test case. He expressed a concern that the Charity Commission would then move from targeting the small Christian charities to moving against the larger churches. Hansard reports him as saying that "the concern of many of us is that they [the Charity Commission] are actively trying to suppress religion in the UK, particularly Christian religion, with a kind of North London Hampstead secularist approach".
Similar comments about a secularist agenda were picked up by many newspapers, including the Sunday Times, and found voice in Parliament where a Private Members' Bill seeking to amend the law of public benefit in favour of organisations such as the Preston Down Trust obtained strong support.
The perception that the Charity Commission is pursuing a secularist agenda is almost certainly wrong. The new chair of the Commission reported to a parliamentary committee in December 2012: "The Commission has registered, I think, 1,000 new Christian or Christian related charities in the last year and 400 new charities of other religious faiths. I was asked by a Member of Parliament recently whether the Commission was part of a plot to secularise British society, and I said 'Absolutely not'. I can confirm that: this Commission has never been in the business of doing that and it never will be, as far as I am concerned."
The idea that mainstream religious charities are or will come under attack by the Commission is very unlikely. However, the Preston Down Trust decision does highlight elements of the Commission's guidance on the public benefit of religious charities which are of wider application and which deserve careful consideration.
No presumption of public benefit
The decision of the Charity Commission contained in a letter to the trustees of Preston Down Trust is based upon the Commission's December 2008 analysis of the law underpinning the advancement of religion for the public benefit which is available to view on its website. A key premise in the Commission's legal analysis is that the commencement of the Charities Act 2006 marked a watershed in the public benefit requirements which educational, relief of poverty and religious organisations had to satisfy in order to be declared charitable.
This is the abandonment of the so-called "presumption" that organisations set up for those three charitable purposes are for the public benefit. The Commission's guidance is that organisations have to provide positive proof of public benefit. The Commission in its decision referred to the passage in the recent Independent Schools case where the Upper Tribunal said that there is "no presumption that Christianity or Islam are for the public benefit and no presumption that the Church of England is for the public benefit".
As such the Commission has expressed doubt that several propositions which were considered good law before 2006 remain so now that the presumption of public benefit has been removed. Among them are the propositions that:
• The law stands equal between religions and that any religion is better than none.
• Courts are not required to consider the worth or value of any religion unless it is clearly subversive to religion or morality.
• Even a private congregation of believers can be of public benefit if it allows members of the public to attend services or where the interaction of members with a section of the public has an improving or edifying effect on them generally.
The Commission's guidance draws these and other authorities into question.
The Preston Down Trust decision
In this brave post-2006 world the Commission decided that it was not able to satisfy itself and conclusively determine that the Preston Down Trust is established for exclusively charitable purposes for public benefit. The Commission felt able to depart from a pre-2006 case (Holmes v Attorney General) where a Plymouth Brethren congregation, sharing many of the attributes of the Preston Down Trust, was judged to be charitable.
As the doctrines of the Preston Down Trust advocate separation from society and its meeting times are not advertised, and access to Holy Communion restricted, the Commission determined that there was not sufficient engagement with the public in order to show public benefit.
Although the trust had attempted to show that it engaged in good works for the local community, the Commission was not satisfied that it encouraged its members to conduct themselves in the wider community to provide an edifying and improving influence on others. Furthermore, the Commission was aware of public criticism of the strict disciplinary practices said to be exercised by the trust on its members and stated that it had a duty to balance the public benefit of an organisation with the detriment caused by it.
Analysis of the decision
Although probably entirely consistent with its public guidance and legal analysis the decision is odd in several ways. The decision relies to a significant degree on the shift from the pre-2006 regime to the regime which now prevails, where, in the absence of a presumption that religious charities are for the public benefit, the Commission demands evidence.
But if the Upper Tribunal was correct in its analysis of the pre-2006 case law in the Independent Schools case, there never was a presumption of public benefit in the way "presumption" is understood by lawyers, and in each case the facts were relevant to the court. If the Independent Schools case was decided correctly it does bring into question the Commission's view that the 2006 Act radically changed the way in which religious organisations have to prove public benefit.
Should the Preston Down Trust case go to the Upper Tribunal it is hoped that the Commission's premise that much of the old case law has been affected will be tested.
Applying the Independent Schools case
Although in the Independent Schools case the Upper Tribunal restricted its ambit to educational charities, there is every reason to suspect that its analysis will be relevant to religious charities (as it was relevant to relief of poverty charities in the Various Benevolent Societies case which quickly followed). In that decision the Upper Tribunal said that the public benefit test is essentially two-fold. What it called "public benefit in the first sense" was where "the nature of the purpose itself benefits the community".
Common purposes which are for the "advancement of education" are of their nature for the public good. The tribunal said that educational trusts of an ordinary sort, such as an independent school, are seen as being for the public benefit in the first sense. It will not be difficult for a charity to show this kind of public benefit. Public benefit in the "second sense" however was when those "who benefited from the carrying out of the purpose were numerous and identified in such a manner so as to constitute a 'sufficient section of the public'".
This is more difficult to establish. An educational trust of an ordinary sort can fall down by not being for the public benefit in the second sense by not providing a benefit to a sufficient section of the public. Applying this reasoning to religious organisations, it follows that a religious organisation will be seen for the public benefit in the first sense because it is established for the "advancement of religion". That much will usually be plain.
Public benefit in the second sense requires there to be a benefit to a "sufficient section of the public". In Cocks v Manners (1871) a gift to a closed community of contemplative nuns was held not amount to a public benefit. Any intercessory role that their prayer played was not amenable to scientific proof. It was held that religious purposes are charitable only when religious services tend directly or indirectly towards the instruction or edification of the public.
This formulation was in turn expanded upon in later cases such as Re Hetherington (1990). Cases such as Holmes v Attorney General and Neville Estates v Madden suggest that this improving and edifying or instructive effect needs only to be minimal. It is difficult to see how the Charities Act 2006 has changed that.
So long as members of the public can readily access church services or interact with the membership, however minimal, the case law has deemed them to be capable of benefiting from the improving and edifying effects of the religion. Is the so-called removal of the presumption of public benefit in fact something of a red herring?
Balancing benefit with detriment
Arguably another perhaps somewhat dubious aspect of the Charity Commission's decision is that the Preston Down Trust's doctrine was said to have some negative aspects which had received public criticism and therefore could be seen as taking away from the public benefit of the trust. This premise is contained in the guidance of the Commission but appears nowhere in the legislation: "Benefits must be balanced against any detriment or harm."
It is odd that the Commission would choose to rely upon this ground, without showing evidence for the detrimental effects mentioned. Again the decision relies upon the Commission's own publicly stated interpretation of the law, but it would seem to sit uneasily with the development of a case law which holds that courts will be strictly neutral on matters of doctrine.
The classic statement of judiciary neutrality is by Sir John Romilly MR in Thornton v Howe (1862): "...the Court of Chancery makes no distinction between one sort of religion and another sort of religion…Neither does the Court in this respect make any distinction between one sect and another."
The usual exception to this is when the doctrines are so clearly subversive to religion or morality – an example being a satanic cult. What the Commission appears to have done is to row back from the position the courts have taken to be strictly neutral between religious sects and to refuse to be drawn on whether particular doctrines are more edifying or improving than others. The Commission appears to have become sucked into a more active role in this regard than the framers of the 2006 Act might have envisaged.
The danger of such a development is that when the doctrines of a religion are not seen as being compatible with modern social attitudes (religious doctrines on homosexuality, the covering of women and all-male priesthoods are but a few examples) one can see that the balancing act set out in the Commission's public guidance could put the Commission in the invidious position of judging the public benefit and detriment of religious doctrines from an illusory "objective" point of view.
What next for religious charities?
The Commission's decision to reject the Preston Down Trust's application is being appealed by it to the Upper Tribunal. If the case is considered by the Upper Tribunal we will have an opportunity to see whether the Commission's interpretation of the law is, in fact, the right one. The case will turn on the facts of to what extent the Preston Down Trust practically separates itself from the general public so as to limit the interaction between the brethren and the improving and edifying effect of their doctrine on sections of the public.
The Private Members' Bill before Parliament would seek to reinstate the presumption of public benefit to the Charities Act. It is an open question what the pre-2006 presumption of benefit actually was and whether the Commission and the promoters of the Bill are right that the position has changed as radically as many have supposed.
Although the Commission's decision not to register the Preston Down Trust does not foreshadow a secularisation of charity regulation it does serve to bring into question the Commission's interpretation of the law of public benefit of religious charities. While case law may yet develop in the direction of the Commission's guidance it remains to be seen whether the Commission has got the law wrong and placed too great an emphasis on the supposed change brought about by the abandonment of the presumption of public benefit.
If you wish to discuss anything in this article with Ian Blaney, please call him 020 7222 5381, or email him at email@example.com.
"The idea that mainstream religious charities are or will come under attack by the Commission is very unlikely."
"…the balancing act set out in the Commission's public guidance could put the Commission in the invidious position of judging the public benefit and detriment of religious doctrines from an illusory 'objective' point of view."
"It is an open question what the pre-2006 presumption of benefit actually was and whether the Commission and promoters of the Bill are right that the position has changed as radically as many have supposed."
Employment law generally applies to charities as it does to all other employers whether in the public, private or voluntary sector. What charities have to understand though is that charity employees tend to be more aware of their rights or more sensitive about their rights than employees in other sectors.
Over the past 10 years there has been a dramatic increase in employment claims across all sectors, including against charities. Claims making it to tribunals across all employment sectors have increased from approximately 135,000 in 2001 to approximately 220,000 in 2011. This is a rise of 63% and shows a general wider acceptance and understanding by employees of their rights and wherewithal to pursue them.
Employment issues impact smaller charities much harder as they often don’t have specialist in-house resources and the legal costs associated with a claim can run to thousands regardless of whether a claim is ultimately dismissed, of which over 50% are.
While the claims can be significant and grab the headlines, what is often overlooked and can be equally damaging are the internal costs and management time along with third party costs, especially legal fees, which can often add thousands to the costs of a claim, whether it is upheld or not.
This article explores what actions charities, especially those run as "smaller businesses", need to take to ensure that dismissal, redundancy or any changes to an employee’s terms and conditions do not result in huge costs, regardless of whether the employee wins the case or not.
This is especially important for charities, as they will be bound by employment law for both full and part-time employees, and also have obligations to voluntary workers, which need careful compliance in order not to fall foul of employment law or the like of HMRC. For this reason we look at both the obligations that charities have for employed workers and their voluntary staff.
Most data collated regarding employment issues is on a macro level and therefore what we have sought to do in this article is add experience based on 26,720 commercial claim enquiries in 2012 and those made in previous years.
Working time directives
The six most frequent claims brought before an employment tribunal last year in order of numbers are working time directives 114,000; unauthorised deductions 71,000; unfair dismissals 48,000; breach of contracts 35,000; equal pay 35,000; and sex discrimination 18,000.
Employment law is a discipline in its own right so this article can only cover some of the main issues. Firstly, I would recommend that all charities buy legal expenses insurance, which, at a cost from around £300, will cover potential legal costs of up to £100,000 per incident. There are many good providers and an insurance broker will be able to guide you.
First of all, and this may seem obvious, but experience shows that most employers don’t keep up to date with the basics of employment law, employees’ rights and any new regulations which are being brought in. Working time regulations are a case in point. They came into force on 1 October 1998 to ensure that workers do not work excessive hours, get regular rests and have a minimum amount of holidays per year.
As an employer you have an obligation to monitor staff and keep records to ensure that the weekly average of 48 hours over a seven day period, for example, is not exceeded.
Unlawful wage deduction
Unlawful deduction from wages is another of the most popular claims accepted by employment tribunals (ETs). Under the Employment Rights Act 1996 no deduction from a worker’s wages can be made unless it is required by statute; permitted by the contract of employment; or the worker has given his prior written consent to the deduction. Although unauthorised deductions are unlawful, employers do have a simple mechanism to make deductions by introducing an appropriate clause in the contract of employment.
Unfair dismissal is another of the top six claims. Basically, an employee who qualifies can challenge their dismissal in the ET. The maximum compensatory award for unfair dismissal is currently £72,000. In addition, the successful employee will be entitled to a payment equivalent to statutory redundancy pay which is currently capped at £12,900.
I would recommend that charity employers familiarise themselves properly with fair disciplinary and grievance procedures. The ACAS Code of Practice for Conducting Disciplinary and Grievance Procedures lays down minimum guidelines for employers to follow, and this information is freely available online.
Problems with employees should be dealt with as soon as they occur. Issues with performance should be discussed, minuted, reasonable targets set and time frames implemented for improvement. Any training needs should be addressed. If no improvement is made after this process, the disciplinary procedure can be invoked and after going through the various stages a fair dismissal can be made.
Charity employers need to follow the rule book closely as many of their workers are fully up to date with employment regulations and are not afraid to exercise their rights.
However, the performance management process need not be overly time consuming and, compared with the time the employer concerned would need to spend in defending an unfair dismissal claim; it is certainly worth going through the appropriate procedures.
Employment tribunals do, however, take into account the size and resources available to small and medium sized employers – and that includes charities. What is important is that the employer shows itself to be as diligent, fair and reasonable as it can be with the resources available.
As mentioned at the outset, charities are in a somewhat unique position with regards to the use of volunteers and their rights as there is no legal definition of a volunteer. The safest way to prevent a problem with the employment status of the volunteer is to firstly make sure that none of the defining factors of the legal definitions of a worker or employee actually apply.
A volunteer agreement (not a contract) should not define any requirements or reimbursements for service. The agreement can accept costs of travel, food and accommodation, if appropriate, but the easiest way to bear these costs is to provide transport and catering, removing the need for expenses receipts.
A pitfall of meeting a volunteer’s expenses can be when a charity pays a flat rate of reimbursement for all the volunteers. If a volunteer is paid, say £3, for travel and does not incur any travel costs, that payment is viewed as a payment for work and therefore makes the volunteer eligible for national minimum wage as a worker. Many volunteers expect similar rights to employed workers, and they might try to use employment law as protection, when in fact they are not covered by these rights.
Discrimination legislation (age, disability, gender reassignment, pregnancy and maternity, marriage and civil partnership, race, religion and belief, sex and sexual orientation) aims to protect not only employees (regardless of length of service), but also prospective employees, casual workers and self-employed contractors. It is important to bear this in mind when recruiting, particularly in the charity sector where the vast majority of workers are part-time, contract or casual workers.
No discrimination limit
Employers should note that, unlike unfair dismissal, where there is a cap on the maximum compensatory award made at tribunal, for successful discrimination claims there is no upper limit to the amount of compensation that can be awarded. Charities, like any business, need to take heed; they simply cannot afford to find themselves in this position.
However, claims of disability discrimination, for example, can be easily avoided if the employer concerned understands what is expected from them in law when faced with a charity worker with health problems.
Charity employees probably know better than any other employees the rights of disabled workers. Employers should therefore take care to make reasonable adjustments to take into account the employee’s disability.
Often, this is less onerous than anticipated. This does not mean that employers should create a new role or make adjustments that would be a serious financial disadvantage to the business. It is always advisable to obtain medical reports and to ask the medical professional what type of reasonable adjustments are necessary.
Keep paper records
If such adjustments cannot be made or implemented and there are good reasons for not doing so, it may mean that the employee can be dismissed on the grounds of capability, but it is advisable to keep paper records which evidence cogent reasons for being unable to meet the employee’s needs. Dismissal in these circumstances should be a last resort.
Employment tribunals will not accept ignorance on the part of any employer as a defence whether you are part of a large corporation or a small family-run business. The same goes for charities. It is, therefore, worthwhile investing in the compilation of a fully comprehensive staff handbook which complies with current employment legislation and which is regularly updated.
Whether you are the financial director for a small charity, or an HR officer of a larger, more corporate-style charity, you should always seek comprehensive legal advice when dealing with any areas of human resource and personnel management. This need not always be expensive and can save a lot of money in the long term.
"Charity employers need to follow the rule book closely as many of their workers are fully up to date with employment regulations and are not afraid to exercise their rights."
"A pitfall of meeting a volunteer's expenses can be when a charity pays a flat rate of reimbursement for all the volunteers."
"Charity employees probably know better than any other employees the rights of disabled workers."
Over the last 20 years or so there has been a huge increase in the number of charities. The creation of the National Lottery made sums available to community groups and other not for profit organisations that otherwise would have been unattainable. The granting of funding inevitably led to informal groups becoming registered charities, whilst existing charities grew in turnover and recruited employees accordingly.
The phrase "charity sector" might suggest there is a homogenous block of charities all working in the same or similar ways. Of course, this is very far from the truth. The sector can encompass national organisations with six figure turnovers and hundreds of employees, often run along corporate lines, down to local organisations run by a handful of volunteers living a hand to mouth existence. Unfortunately though, as a general rule, employment law applies equally to all employers, regardless of size.
Since the late 1990s and the election of New Labour, the growth of the third sector has also increased the proportion of charities, including commercial charities, as employers. Many of these organisations bid, or tender, for government contracts and again can have substantial turnovers. The individuals with the expertise in delivering the services being tendered for are not necessarily experienced managers, with skills and knowledge in employment law.
Too many employment tribunals
Even so, far less of the workforce is employed in the charity sector than the public or private sectors. Yet it seems that charities see a disproportionate amount of employment tribunals. As far as I am aware, no data is collected on the types of employers in tribunals. But my own view is that charities are prone to problems in this area and, furthermore, they often tend to be more knotty and difficult than usual.
So why is this? The lack of internal employment law expertise, or the availability of external expertise, is certainly a factor with smaller charities. So all the normal processes and procedures which should be followed during the recruitment and hiring process are likely to not be followed properly. Equal opportunities monitoring, anonymous application forms, skill or psychometric testing, issuing of contracts of employment and induction on all the appropriate policies might either happen sporadically or even not at all.
Because of this smaller charities might be less able to monitor performance, undertake appraisals or implement disciplinary procedures. Ultimately, the handling of an individual’s dismissal can be fraught with dangers, without the expertise to ensure that the reason for their departure is recognised in employment law and, crucially, that the process is fair.
Catastrophic for a small charity
The consequences of a tribunal claim can be catastrophic for a small charity. First of all, the advice might be that the tribunal will find that the dismissal was unfair and that there is a liability for an award for loss of earnings. If the charity is an unincorporated association, this liability could fall on the members, some of whom may never have been involved in the events leading to the dismissal.
Managing expectations, and enforcing consistent and acceptable standards of conduct, can be an issue for those who are employed by, and run, charities. The fact that a charity exists for wholly philanthropic purposes, as opposed to being driven by profit for owners or shareholders, might create an expectation that the working environment and culture is more amenable and caring. Whether this is true or not will depend on the people involved and the internal politics of the organisation.
However, it is probably accurate to say that the culture in the charity sector is such that there are likely to be fewer procedures in place and less compliance with those procedures in practice. A culture which is more open and relaxed can also encourage the expression of views and opinions that are discordant, so personalities may clash.
People who become trustees or managers of charities might not truly know what they are getting themselves into before joining the organisation, and thereafter find deep divisions of opinion on a variety of issues including employment matters. It is also more likely that managers are recruited from within, and the processes for recruiting will be less formal.
No performance management processes
Typically, employees who are good at the role they are recruited for are deemed to be fit to manage others. Of course, this can be far from the case. In the private sector competency-based interviews, group discussions, a presentation and personality profiles are commonplace, and are all designed to assess aptitude.
If the successful applicant then doesn’t measure up, there will be a performance management process to address the situation. No doubt many smaller charities will say that they do not have the resources for these sorts of processes, but this has to be weighed against the cost of recruiting an unsuitable candidate and the problems that can flow from it.
Some years ago, I was involved in a case relating to a charity shop in an East Midlands town with only one employee. There were issues about the employee’s performance, and suggestions that she had misused her status as a signatory to the bank account to make improper withdrawals. The trustees of this local charity were deeply divided in their opinions on the employee. One camp was happy for her to carry on, whilst the other believed there were grounds for dismissal.
Neither side had a majority and, without following any procedure, a letter was sent by some trustees that terminated her contract of employment, and the employee then sued the charity. The up-shot was that the trustees were unable to agree on how to handle the situation, with some saying the employee should be reinstated. The limited funds ran out, the charity was made insolvent and the Charity Commission also became involved. The needs of local people, which this charity was formed to meet, went by the wayside.
Employees influenced by their own work
The charitable objectives of some charities and the nature of the work or services they provide might also provide an explanation. Many charities provide a range of advice, including legal advice, to vulnerable and needy people. If employees are familiar with enforcing legal rights and, if need be, pursuing claims on behalf of others, perhaps it is not surprising that pursuing one’s own claim is a less daunting experience. Charities which provide this advice periodically feature in reported employment dispute cases in the legal press.
Whether these cases arise because of a lack of people management skills, a difficult and challenging employee, or perhaps a mixture of the two, is hard to say – but there certainly appears to be link.
For many years I advised one of the leading "welfare to work" training providers in the UK. Although the organisation had a skilled HR function which was able to handle the day to day employment law problems, still nothing could prevent a steady stream of tribunal claims.Once word gets out that an employee has issued a claim, others can follow.
"…smaller charities might be less able to monitor performance, undertake appraisals or implement disciplinary procedures."
"A culture which is more open and relaxed can also encourage the expression of views and opinions that are discordant, so personalities may clash."
There can never be any doubt that charities are devised, founded and run with the best of intentions. As we know, a charity exists to improve the lot of some group or sector of society who are receiving either no help or inadequate assistance. The paid staff and unpaid volunteers involved with charities often go way beyond the call of duty to ensure that their organisation can bring the maximum benefit to those most in need of it. Let’s never forget the great work that is done. However, let us also never forget to exercise a little caution.
Charities, like any public company or private organisation, can vary in size and structure. However, what they will have in common is that much work is carried out voluntarily and that sources of income may never be continuous. As a result, many charities employ two types of staff. There is the paid professional hired for their expertise and there is the unpaid volunteer who diligently carries out one or a number of functions – such as book-keeping, publicity, membership records – for little or no reward.
If a charity is large enough to be able to employ professional staff the chances are that its size means it has a genuine need for them. And if smaller charities have not reached that stage it makes sense to make the very best of the volunteer talents available. In the first scenario, therefore, a vast amount of knowledge about the charity is concentrated in one person while in the latter a number of people will each have their own specialist areas. But whichever scenario a charity faces it has to be aware of the potential for fraud within itself.
Fraud in charitable trusts
There are currently cases working through the UK court system which involve charitable trusts being used to allegedly funnel money around the world. Like many fraud prosecutions, these ones are complex, international and involve huge amounts of money. To the uninitiated, reading about a charitable trust’s involvement in a major international criminal operation may seem perverse. But there are a number of reasons why involvement in an existing, legitimate charitable organisation or the creation of one for completely criminal reasons would be attractive to a fraudster.
Perhaps most importantly, the tax status of a charity is appealing to the criminal. In the UK a charity is exempt from tax on many of its sources of income, providing that income is used for charitable purposes. Tax relief is available on donations from individual and corporate donors and, while a charity’s accounts are public documents, the tax affairs of charities and donors are not publicly available.
Also, arguably most importantly, charitable donations can be made in cash without any banking record being available. Such a situation is clearly attractive to someone who wants to avoid tax or hide the proceeds of ill-gotten gains. Of course, in Britain HM Revenue and Customs reviews the activities of charities and looks for unusual patterns of donations in their accounts and tax returns.
But HMRC has only limited manpower and will always struggle to sift through the activities of every charity in pursuit of fraud. “A Report on Abuse of Charities for Money Laundering and Tax Evasion’’ by the Organisation for Economic Co-operation and Development found that suspect charities are being used as a vehicle for suspect tax-free loans and investments, with money being transferred overseas.
But on a simpler level, charities can fall prey to the criminal intentions of those working for them. Earlier on I mentioned the scenarios where either one person has the all-encompassing overview of the running of a charity or it is run by a small group of people who share the responsibilities. Either can provide the potential for fraud.
The “man at the top’’ with the overview can manipulate the books to hide the fact that he is syphoning money off while smaller charities run by volunteer groups may lack the operating systems and the expertise to prevent or recognise wrongdoing. The result can be a loss of a charity’s assets but also a loss of its reputation as public confidence in it – and willingness to give it money – diminishes.
This year, the National Fraud Authority estimated that fraud had cost UK charities £1.1 billion a year. Whether it is done by taking donation money, abusing the charity’s assets and accounts or instigating bogus financial transactions, fraud can hit charities hard. So what must be done?
First and foremost, every charity must develop an anti-fraud policy. This means that the charity must draw up a series of guidelines, outlining what it considers to be fraud, how it will respond to allegations of fraud and the responsibility of individuals within it to prevent, detect and report fraud. Ideally, this policy will explain to whom people can report suspicions of fraud. No such policy can function adequately unless the charity has carried out a full risk assessment of all its operations.
A charity’s trustees must work through all its activities and procedures to examine how its work is carried out, what scope exists for potential fraud and what improvements could be made regarding security.
It may be that such a review would be best carried out with the assistance of an expert, such as a lawyer who specialises in fraud cases, a representative of a law enforcement agency or an appropriate representative from one of the umbrella organisations for the charity sector. A whistleblowing culture of reporting any suspicions should be encouraged, so that no one believes they will be criticised for voicing their concerns.
Whatever anti-fraud policy a charity introduces and however it adjusts its activities in the wake of any review, it must make sure it has appropriate financial controls in place. A charity’s trustees have a legal duty to protect its assets and this is especially important regarding the manner in which the proceeds of fundraising are handled. It may be difficult for smaller charities but there has to be a clear segregation of duties when handling finances.
Complete records of all activities should be kept and a system of spot checks introduced for the charity’s bank accounts and donor data. In addition, all financial activity should be reviewed regularly. There should be a culture of “no short cuts” – no pre-signed blank cheques issued, no slow paying in of donor cash and immediate and full recording of all transactions.
Suspicion of fraud
It may not always seem necessary at first glance, yet even the slightest suspicion of fraud should be notified. What may at first seem a minor suggestion of wrongdoing – not worthy of recording – may later come to be seen as part of a pattern of prolonged fraudulent activity. Trustees and other senior figures in a charity should not be afraid to make a formal note of any possible misdemeanour and those working below them should feel that the whistleblowing culture means they are free to come forward and express their concerns.
Fraud can be hard to detect so open discussion is needed if any possible fraud is to be uncovered. Accounting discrepancies, missing documents, unusual looking patterns of payments and transactions may all be genuine mistakes or have a valid explanation. But those explanations must be sought by those with the charity’s best interests at heart.
Only by looking for such explanations can matters be resolved. If questions are asked and only vague answers are given, if those handling the cash are adamant they would rather “manage on my own’’ when help is offered, if the financial reports now seem much more complex than in previous months or if audits are being delayed then there may well be reason for serious investigation.
If matters are to be investigated there has to be a clear procedure. Just as it is vital that people within the charity must know who to contact with their suspicions, that person has to know exactly what they need to do when receiving any such reports. They have to decide how to investigate the allegation and whether the police or other authorities need to be alerted. Staff should be kept informed – although they do not need to know every single detail – so they are aware of what is happening.
The person who has the task of responding must ensure that the charity’s bank accounts and all other assets are secure, with access blocked to anyone under suspicion. This person must also decide exactly what should be said to the trustees, who have a legal duty to safeguard the charity, and what can be mentioned if the press come asking questions.
Alerting the authorities and informing people connected with the charity is never enough. If a charity is to make itself more capable of preventing fraud it has to learn from what has happened, tighten its procedures and review its approach to HR and security.
The OECD says in its report that there should be greater cooperation and exchange of information between between tax and law enforcement authorities regarding charities. But for now at least, the charities have to look out for themselves.
"…most importantly, charitable donations can be made in cash without any banking record being available."
"A charity's trustees must work...to examine how its work is carried out, what scope exists for potential fraud and what improvements could be made regarding security."
"Complete records of all activities should be kept and a system of spot checks introduced for the charity's bank accounts and donor data."
It was with a fair degree of surprise that some months ago I found myself coming to the end of a 36-year career in the Army and taking over the appointment of chief executive, ABF The Soldiers’ Charity – a medium sized charity supporting serving and retired soldiers and their families. I say surprised because I had always intended to do something quite different from the Army environment and also certainly not work in the third sector. Yet now I find I have apparently failed on both counts.
So what is this particular charity like and why should a retired general run it despite its title? The answer is perhaps not as predictable as it might seem!
The Soldiers’ Charity has existed since 1944 and is unique amongst the ex-Service charity sector in that in many respects it is very much "the Army’s charity". Certainly not in terms of its constitutional position and governance, which very much follow the normal arrangements for any independent charity, but in its complex and sometimes curious symbiotic relationship with the Army and its people.
Originally a rather modest charity, largely relying on volunteers found from the ex-Army community, it has grown into a substantial charity which dispenses some £8 million annually to around 5,000 individuals or causes.
Unlike other ex-Service charities, which tend to focus on a discrete area of need, The Soldiers’ Charity will support anyone in difficulty: the terribly wounded soldier who needs some rapid support on first discharge from hospital; the bereaved; the soldier who on leaving the Army has fallen on hard times often as an indirect result of his service; families; and the traditional elderly veteran whose injuries and loss of contemporaries have finally caught up with him.
Close partnership with organisations
Essentially we represent the final safety-net for our people. A particular characteristic of our work is the very close partnership with the regiments which provide the first line of support; and with other ex-Service charities or organisations like Help for Heroes which help fund our activities, and other charities which deliver niche services on our behalf.
It is not a simple support structure which a management consultant might be proud of, but we all collaborate and it works – reflecting as it does the intensely tribal nature of the British Army.
So why have a chief executive who has just retired from the Army – why not try something different? For The Soldiers’ Charity, perhaps surprisingly given our antecedents, there is no definitive answer and I would certainly encourage our trustees to range widely in considering senior appointments for the charity. But what is critical is that any incumbent has the ability to empathise with that rather curious institution, the British Army, and that sometimes even more curious creature – the serving soldier or veteran and his/her family.
Modern major general
Part of the dynamic is an understanding of just how far a "modern major general" has, I hope, departed from the stereotype – although I must acknowledge that after 36 years in the same profession there is bound to be a degree of institutionalisation. But many of us have been employed in an extraordinary range of different circumstances and increasingly have to exhibit a wide array of managerial and financial skills.
For my part until recently I was responsible for, or supported, much of the Army based across the central UK which included direct responsibility for the performance of a £2.5bn Private Finance Initiative – not a task a senior Army officer would have anticipated discharging perhaps 10 years ago.
So an ex-military chief executive, quite apart from his obvious knowledge and empathy for Service people and their families, should bring substantive managerial, financial, project management and people skills to the charity. Crafting a serviceable and robust strategy, clear prioritisation, risk management and running the organisation on a day to day basis should all be second nature to him or her.
Strikingly similar characteristics
But of course running a charity, albeit one closely linked to the Army, is clearly not the same as commanding soldiers. Some characteristics are strikingly similar: both cultures should have a strong vocational ethos, most people regard their commitment as more than "just a job", and they are very "people-focused" activities. However, a charity has other very different dynamics – which of course will vary from charity to charity.
For us fundraising is clearly a major focus and here I must lean heavily on those in my organisation who have specialist knowledge and experience in that area. But a lot of our fundraising is either done in collaboration with the Army or amongst the wider ex-military family who number in their millions – so the blend of our skills works well.
More comfortable ground
Running major events at both national and regional level is another critical aspect of our activities and here I feel on more comfortable ground, having run Royal visits and national celebrations, but again I feel it is the blend of my experience and the imagination and energy of our young staff which serves our particular charity so well.
Other areas of our work are much more closely linked to the concerns of the Army and its people. So, for example, in my view it is critical that our grants and welfare team is populated by a strong smattering of ex-Service people who can really empathise with those who need our support.
Whilst I may feel there is no insurmountable challenge on the management or organisational side, this might not be the same with some of the wider cultural differences. Thirty six years in one organisation which is inevitably quite regimented – essentially hierarchical, and with a culture of demanding high performance, quick responses, flexibility and a robust physical and mental approach – could sit uncomfortably with the charity.
Adapting behaviour accordingly
Some of our people are also ex-servicemen and women but the overwhelming majority have no military background whatsoever and they rightly require a different approach. But for me this is just about recognising a different context and adapting your behaviour accordingly. And this is a familiar challenge.
My previous military appointments include being parachuted in at relatively short notice to help create a new government department and security force in what some might have regarded as a failed Balkan state – and circumstances seldom come more byzantine and tangled than that.
In both cases the management style should be more inclusive, consensual and a lighter touch is required – which is not to compare my charity to a failed state!
Blend of staff
Other charities might have a different dynamic but the underpinning purpose of our charity, and the need to work closely with the Army and its people, suggests a blend of ex-Service and outright civilian staff should work well for us. But "blend" is the key word and I certainly would not encourage a fixed view that the chief executive appointment, or senior appointments within the charity, need necessarily be earmarked for ex-Service personnel or indeed people from any other niche background. As ever it is the overall composition of the team and its approach that matters.
So does having an ex-Service chief executive work for ABF The Soldiers’ Charity? I certainly hope so. Could I envisage someone from another sector heading up the charity? I certainly could. But what I am clear on is that any incumbent must have that sense of empathy and cultural understanding with the people we seek to help, however it may have been developed.
"For us fundraising is clearly a major focus and here I must lean heavily on those in my organisation who have specialist knowledge and experience in that area."