Current Events and Philanthropy / Philanthropy and the State / Philanthropy in the News

Charities in the Firing Line

Editors’ Note: As part of HistPhil’s forum on philanthropy and the state, this week we bring you a series of posts on the situation in the UK, where a series of controversies in the charitable sector has led to calls for increased governmental regulation. Peter Grant opens the discussion.

Both charities in general and fundraisers in particular have recently been receiving something of a battering in the UK. The dramatic collapse of Kid’s Company, one of the leading children’s charities much favoured by successive governments, has focussed attention on governance. The charity, which had an income of over £25 million, closed in 2015 after many years of surviving on a knife-edge with no reserves. A Parliamentary enquiry heavily criticised the Trustees of Kid’s Company for not acting with greater financial prudence.

At the same time fundraising techniques and the proportion of money spent on fundraising have received major criticism in the British press. Some of this criticism has certainly been merited. The suicide of a veteran charity fundraiser, Olive Cooke, was blamed on her ‘hounding’ by direct marketing companies acting for charities, and though this was shown to be untrue at her inquest, some charities’ control of commercial organisations working on their behalf has been shameful.

However, many of the attacks are less justified and have recycled less substantial critiques of the sector that have been around for more than 100 years.

The Parliamentary report on the collapse of Kid’s Company emphasised the lack of oversight by the charity’s trustees, which was certainly a major factor in its demise, but the report severely underplayed the fact that the charity had been the darling of politicians of all shades and had been awarded grants often against the advice of experts or civil servants. Supporting charitable causes based on political expediency has always been a feature of government and despite new rules being drawn up to ensure that all requests are properly assessed against rigorous criteria one suspects that personal ministerial bias will always trump objective due diligence.

Then we have the issues of fundraising and especially income versus expenditure ratios. The Charity Organisation Society in late nineteenth and early twentieth centuries often pontificated about the excessive sums that were spent on fundraising. Their campaign reached a crescendo during the First World War with the COS, the press and many others demanding legislation on the issue. Though they got their way over the registration of charities, the government wisely resisted calls to impose fixed ratios on fundraising or administrative costs.

In the hundred years since the First World War the issue of expenditure ratios has been repeated many times and in some countries an expenditure ratio is required by law. In 2013 Oregon enacted the USA’s toughest law on spending by nonprofits. Charities that do not spend at least 30 percent of their donations ‘to support their mission’ no longer qualify for tax exemptions.

There are several problems with any kind of ‘ratio’. The first is the technical issue of what to count as income and what to count as ‘charitable expenditure’. If a charity receives an endowment which has to be invested, does this count as income? How do you include amounts spent on fixed assets to take forward the charity’s mission? And what about trading, or profit-generating, activities? Many UK charities derive a substantial proportion of their income from trading, whether it be selling goods or running charity shops – a familiar feature of every British High Street. However innovative these trading arms are, should their ‘profit’ – the surplus they return to the charity to further its philanthropic mission – be treated the same as, for example, a legacy left by a wealthy donor to a charity?

Secondly any ratio is likely to arbitrary and, ultimately, futile. Charities might be able to improve on the trading profit ratios of some commercial organisations by, for example, utilising volunteers, but any legislation in this area might well lead to the situation of indirectly barring charity trading. Some countries, for example Canada, have rules on minimum disbursement by charities. Here charities must, each year, spend at least 3.5% of the value of assets they own that are not used directly in their charitable activities or administration of the charity. These assets include reserve funds, endowments, investments and buildings. But why 3.5%? Why not more, or less? Is there any evidence that this legislation has had any positive impact?

Thirdly, and most importantly, any use of financial ratios as a performance indicator is fatally flawed. For many years the sector and a line of experts from Kendall and Knapp (2000) and Porter and Kramer (2011) onwards have grappled with the conundrum of what measures should make up the overall impact and effectiveness of charities. No agreement has been reached, and possibly never will be, but one thing all agree on is that financial measures alone are not the answer. Yet the critics continue attempting to judge charities on the basis of financial criteria. Partly this stems from another long-standing criticism of charities, that they are not sufficiently business-like. This can sometimes be a well-founded critique. Professional development, understanding of risk, and performance management are just three of the ideas that charities can profitably adapt from the commercial sector. However, charity’s critics often come from the business world themselves, where financial information is the critical performance indicator, and they forget two things. First, that similar information is simply not adaptable to the charity world and second, that others have thoroughly investigated such ideas in the past. For example, the issue of financial ratios as a key metric for measuring the effectiveness of charities has been comprehensively covered in the academic literature, and universally dismissed (e.g. Steinberg and Morris, ‘Ratio discrimination in charity fundraising’, Voluntary Sector Review 2010). Those currently besieging the UK charity sector with claims of waste or mismanagement are invariably ignorant of the history of this literature, believing themselves the first to have hit upon a brilliantly simple way to benchmark charity performance.

Most recent of the assaults on charity has been the government’s announcement that any charity in receipt of government funding will be barred from using that funding to attempt to influence government, parliament, their MP or the Charity Commission. This is part of the current government’s attempts to limit the ability of charities to engage in political lobbying, which has also been the subject of legislation through the Lobbying Act, which covers what can be legitimately engaged upon in the run-up to elections. More worrying has been the explanation of why this latest step has been taken. In making the policy announcement Cabinet Office minister Matthew Hancock said the government’s decision was based on ‘extensive research’ from the free market think tank (and charity) the Institute for Economic Affairs. The ‘research’ referred to has been described by Andrew Purkis, a former board member of the Charity Commission, as ‘a polemic rooted in a Tea Party type vision of government, politicians and bureaucrats as inherently self-aggrandising, conspiring with subservient fake charities for selfish ends to rob and cheat the people’ and it failed to give a single example of the practice the government’s new regulation seeks to eliminate.

So we currently have a series of attempts to limit the scope and activities of charities. Whilst a few are well founded others are based on inaccurate and exaggerated personal stories, such as the tragic suicide of Olive Cooke, on spurious research or on discredited methodologies. I don’t want to speculate here on the motivations for these attacks but there is no doubt that the message that charities are engaged in self-aggrandising and disreputable behaviour is getting across. A poll published on February 24 showed that the majority of the public believes that the media accusations made against charities and third-party suppliers over the last 12 months have been fair.

During the First World War the government listened to charity’s critics, understood that they and the media had their own agenda and then passed some sensible and moderate legislation. The worry in Britain today is that the polemicists and their media supporters are dictating the government’s agenda and attempting to limit the legitimate and crucial role of charities in political activity. A few years ago a poll of charities, academics and others asked what had been the greatest achievement in history of British philanthropy. The overwhelming winner was the abolition of the slave trade. Today Wilberforce, Clarkson and their supporters would probably face a near universal hostility from the press and government regulation to limit their campaigning.

-Peter Grant

Peter Grant is Senior Fellow in Grantmaking, Philanthropy and Social Investment at Cass Business School, City University, London. His book The Business of Giving: The Theory and Practice of Philanthropy, Grantmaking and Social Investment was published in 2011. His latest book, Philanthropy and Voluntary Action in the First World War, was published by Routledge/Taylor Francis in 2014. His next book will be National Myth and the First World War in Modern Popular Music from Palgrave Macmillan. Peter is a Fellow of the Royal Historical Society, trustee of the DHL Foundation and of the Amy Winehouse Foundation and former Chair of the Voluntary Action History Society.

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