Shakespeare, James I and Oliver Cromwell were all still alive when the Act of Charitable Uses was passed in 1601. Its intention was to ensure that charitable gifts were spent on charitable purposes, and to shake out ‘fraudes, breaches of truste and negligence’ by what today we would call charity trustees.
Since then, charities have evolved to undertake the wide range of activities that we see today. But their governance is still based on the law of 1601 – and they are run by a small group of trustees who usually control the appointment of their successors, and are accountable only in extremis to the Charity Commission.
As the government is currently issuing its thoughts about the future of charitable law and the development of the charitable sector, this is a good time to reconsider some of the sector’s fundamentals. We want to explore charitable governance and accountability, and to develop further the discussion about alternative approaches to the governance of charities, and who should control the governance process.
Specifically, we propose experimentation in different models of charity governance. In a world where charities can have an income ranging from hundreds to hundreds of millions of pounds (Oxfam £187m, Wellcome Trust nearly £400m), and can have widely divergent attributes, it’s time to reconsider how best to govern these organisations.
Today, there are many different types of charity. They have a wide variety of needs and will properly operate in very different fashions. They are often complex organisations, but their trustees frequently have the skills or time to provide only a limited overview. Trustees are also human and have their own idiosyncrasies, which can colour their decision-making.
Sometimes decisions are easy: where the interests of the stakeholders are aligned, managers make the decision which enhances the position of all stakeholders. But when the interests of some stakeholders are in conflict with the interests of others, decisions are more difficult. In these cases, one way of helping to clarify what decision should be taken is to distinguish the primary stakeholder group. But even if management and trustees have good intentions, how can they best be held to account for their decisions, and by whom?
Like the snake Kaa from Kipling’s The Jungle Book, trustees simply say: ‘Trust in me’. This may be an excellent model for some charities, but there may be alternative models that are just as good, and may prove better at taking proper account of the interests of different stakeholders. For example, some charities already operate on a membership model, in which the members of the charity may have the ability to vote for (or against) the trustees.
In the traditional corporate model the primary stakeholders are the shareholders, although the interests of customers may have to be paramount in order to ensure they keep providing the income that enables shareholders’ interests to be maximised. Of course, company directors have to bear in mind the interests of other stakeholders, but there’s widespread acceptance of the theory that the interests of shareholders have greatest weight.
Charities, too, need to be held to account, but the Charity Commission has limited resources. Whoever does call the charity to account is akin to the shareholders, but charities have goals very different from maximising shareholder value.
There seems to be two basic scenarios. Firstly, the donors can be the primary stakeholders. The dividend is the pleasure of helping allay a particular social malady, or protection of a particular pleasure. The beneficiaries, or recipients of the service provided, are consumers.
Secondly, the beneficiaries can be the primary stakeholders – they get the dividend of the goods or service provided, and it’s their interests that should be primary. The donors are in this view more like customers, or perhaps investors in a venture capital fund, providing money for projects.
Although both views have their limitations, they do indicate potential problems with the current model, in so far as neither the recipient nor the donor is easily able to call the charity to account.
Therefore, it’s time to re-think the ‘self-perpetuating group of trustees’ model. To take into account the varied nature of charities, we propose that the charitable sector explores three alternative models for governance.
In the first model donors should be empowered to control the governance of charitable activities, while in the second it should be the beneficiaries.
In the third model, the existing trustees should remain in control.
These alternatives, and the many issues around them, need to be considered in detail and the potential concerns associated with them reviewed. We appreciate each of these models has aspects that will need to be addressed.
For example, if the donors are in control, how are the voices of past donors to be balanced with the voices of current donors?
If it’s the beneficiaries who are the primary stakeholders, how are the interests of the actual beneficiaries of today to be balanced with those of the potential beneficiaries of today and tomorrow?
And, if the trustees remain in control, to which stakeholder group should they pay most attention when formulating policy?
However, it’s not necessary that charities choose one of these three suggested models of governance to the exclusion of the others. Rather, they need to decide where to position themselves on what we call the accountability triangle, which represents the way in which, in most charities, accountability is shared between the three groups of stakeholders – the existing trustees, the donors and the beneficiaries.
Each charity has to come to its own decisions about how to implement the institutional mechanisms that will serve its position on the triangle – in other words, how to balance the accountability of these three groups.
How each charity does this of course needs further debate, but we firmly believe that it is possible to develop appropriate mechanisms.
We recognise and accept the existing model of governance by trustees who appoint their own successors, but recommend the development of alternative models. These different governance models could then compete with each other to see which one proved to be the most effective, and in what circumstances and contexts.
In the 21st century, accountability is critical. This is an era in which donors whose views are neglected may end up walking away, and every extra neglected beneficiary is another blot on the charitable landscape.
Charitable endeavour has had many great achievements, but the prevailing model of accountability is dated. It’s time to welcome a wider range of contestants in the competition for the most appropriate forms of charitable governance.
- This is an edited extract from an article that appears in this month’s edition of our sister title, Financial Director.
FAIR TRADE WILL SAVE LIVES
Oxfam this month launched a hard-hitting campaign to change trade laws and raise awareness of fair trade products in a bid to ‘tackle the roots of world poverty’.
‘World trade could be a powerful force for poverty reduction,’ says Oxfam.
‘Many poor people could work themselves out of poverty by selling their products to rich countries at a decent price.’
The campaign is calling on governments, institutions and multinational companies to change the rules so that trade can ‘become part of the solution to poverty, not part of the problem’.
For more on the campaign go to www.maketradefair.com.
UK senior partner Phil Verity has been elected for a second term at Mazars
An audit partner has been appointed at Grant Thornton in its North West offices
KPMG has been appointed with “immediate” effect as the auditor of Dorcaster
The audit for Ibstock will be taken over by Deloitte following a competitive tender process