Last week, Merryn Somerset Webb, editor-in-chief of Money Week, fired off an extraordinary series of criticisms of tax relief and charitable regulation in a piece in the Financial Times, entitled The charitable giving model is an undemocratic use of funds. Almost without exception they missed the mark.
It’s spurred me to think about the actual issues we should be addressing, and I reckon that almost every scandal in the past five years is down to failures of governance and core functions. The public say they want less money spent in these areas, but when they learn the results of doing so, they're furious.
I have to confess I already fired off a series of tweets on this at the weekend.
So what's wrong with this piece? Apart from the fact that it's about regulation of charities, but got the name of the regulator wrong. Let's take a look. https://t.co/i2mKZcuacc— David Ainsworth (@daveainsworth4) February 25, 2018
But for those of you with better things to do than read about sector regulation on a Sunday, here's a round up.
What's wrong with Gift Aid
One of the two main arguments the FT piece advances is about Gift Aid - that it's an unfair tax relief because it allows wealthy people to give money to art projects that the government could have spent on schools. The more cash given to charities, the less there is for public services. This is problematic because apparently almost anyone can register as a charity.
Somerset Webb mischaracterises Gift Aid as public spending rather than tax relief. I feel as if the rationale behind Gift Aid is subject to some confusion, but I understand the principle to be this: income forgone for the public benefit is not subject to tax.
Gift Aid is very similar to a salary sacrifice scheme. It’s not much different to when you buy a bike or pay into a pension.
To say that the state is losing out on teachers because philanthropists are supporting museums is nonsense. The government spent well over a billion pounds on art and culture last year, so any concerns in that direction should be directed at the DCMS budget and the Arts Council first.
And if you think Gift Aid is subsiding the wrong organisations, that’s not an argument against tax relief but against the public benefit requirements. Which, to be fair, could do with some tightening up. Parliament debated at length in 2006 whether to do so and effectively fudged it. You could make a case for removing tax relief for religion, or public schools, or theatres, or applying a different standard to organisations which primarily deliver public services. Parliament is the place to do so.
Deregulate 99 per cent of all charities
The second argument is that we should deregulate 99 per cent of charities, and press ahead with a few hundred "official charities" which would be the only ones to get tax breaks. This idea is so bananas I’m amazed it's gained space in a national newspaper.
We would effectively be removing from regulation and registration a huge number of organisations receiving public donations, and working with disadvantaged and vulnerable people. The next time there was a scandal, the Charity Commission would just have to sit powerlessly on its hands.
The idea of one charity for each cause springs from the "one big factory" school of thought, which is oddly communist for a financial journalist. It didn’t work in the USSR and it wouldn’t work here.
Saying there are too many charities is like saying there are too many corner shops. Charities are created according to need and close down if no one wants them. It's messy and disorganised and I think we'd serve beneficiaries better if a few more merged, and if they were more common in poor areas rather than affluent ones, but at root it works.
The alternative is to have some committee of apparatchiks or plutocrats select these "approved charities". No thanks. We've seen what Whitehall picked as its charity partnership: Kids Company. Let's register anyone who hits the standards, and let the public vote with their feet. That’s what a democratic use of funds looks like.
What are the real issues?
Okay, with that over, what are the systemic issues we need to tackle? Rather than talking about the many problems caused by the state - underfunded regulation, terrible commissioning, growing need - I'll confine myself to the things we can fix ourselves.
One common thread runs through almost every scandal that the sector’s faced in the last five years: the public expect charities to behave more ethically than others in every area, not just with regard to their own beneficiaries. The sector has to expect this. Charities sell the public hopes and dreams of a better world, and you better believe they will be cross if those dreams come crashing down.
The truth is, though, that charities can’t be as good as the public wants. Imperfections and failure and reality will get in the way. There will always be scrutiny and criticism and quite bloody right. Ideally we can manage it down a notch from the hysteria around Oxfam, but rather than be chastened and depressed, let's just accept it shows people care, and use it to get things right.
Almost every recent scandal shares another common issue: it’s down to a failure of governance or core functions. Either the processes and systems are too weak, or the board and executive don’t have the capacity or resources to ensure they’re properly implemented.
This most recent crisis is largely about two of the most mundane and boring things in any organisation: HR and safeguarding. It's not about the use of prostitutes, so much as how it was dealt with. How are safeguarding incidents reported? What process was followed with the use of references? How are dismissals handled? What monitoring and compliance systems are in place?
The sector has form on monitoring and compliance. It was weak for third party suppliers of fundraising services, and that led to two years of scandals.
You can pick other processes which might easily be vulnerable, too. Volunteer management is often weak. Investment process often take little account of ethics. Pension deficits are not rigorously handled. Even data protection, despite all of the focus on GDPR, is a major weak point. Charities are getting good at capturing consent to process but not at managing it securely thereafter.
I would say this is a clear call to arms. If you want to avoid a scandal, get your processes strong and invest in strong leadership and governance behind them. That doesn’t mean pay your chief executive more money. It means give the executive and the board all the tools they need to do the job.
I would say it’s a waste of time reducing costs anyway. The public have no idea what you spend on overheads. They think it’s 50 per cent. They'd be happy with 30 per cent. It's probably already lower. So just spend what you need to do the best job.
Oversight and feedback
I've written before that the feedback loop in charity isn’t great. Neither donors nor funders are great at accurately choosing the strongest projects. Funding is short term and provides perverse incentives, Charities aren’t good at assessing the most effective interventions. People with the best ideas aren’t empowered and motivated to help them grow.
And why, when charities exist to do good, not make money, do we insist on focusing on the money? We compare charities by size of income, when two charities with the same income come be delivering vastly different sums net of costs, and we account obsessively for income, but do almost nothing to measure public benefit, when it’s that benefit which matters.
If we want charities to get better, we need better systems for identifying best practice, disseminating it, and implementing it. We need quality assessment for donors (a simple star rating would do, like Charity Navigator in the US) and we need proper public benefit audits.
Having said all that...
The FT article, early on, makes an odd assumption. Basically that money spent by the state is, pound for pound, more effective than that spent by charities. I think we can see that isn’t true. If the public believed that, they’d donate their money to the state.
As I said on Twitter, and will say again here, the truth is that despite all the flaws and issues, the charity sector is pound for pound more effective than either the public or the private sector. The idea that either the state or business could step in and sort it all out is incredibly arrogant, and utterly ill-founded.