Fat-cat charities vs tiddler charities? The “double-ended” problem that endangers the UK charity sector’s credibility and impact.

The UK charity sector does such great things – from funding most of this country’s cancer research to helping so many needy individuals.  But I wonder if the sector needs to take greater heed of threats at both ends of its structure.  At one end, it has super-sized, super-paying charities and, at the other, a long, long tail of micro charities.  The situation threatens the overall credibility and efficiency of the sector.

Recent evidence about high pay levels at top charities came from the 2017 review by Third Sector magazine of the accounts of the UK’s largest charities.  Amongst the top 100 charities it studied it found the average (mean) pay level for top-earners was £255k (a rise from £212k in 2015).  That quarter of a million salary is about £75,000 more than what the UK’s Prime Minister gets for running the whole country, not just one charity!

Thirty-seven of the top 100 charities pay their highest earner more than £300,000 a year.  Fourteen out of the hundred pay more than £200,00 a year.  What amazed me, though, is the whopping size of the pay-outs amongst the very top of the pile – all packets worth above £400,000 a year:

Wellcome Trust – £3m;  Nuffield Health – £1.25m;  Royal Opera House – £730k;  London Clinic – £540k;  Consumers’ Association – £490k;  Anchor Trust – £480k;  Church Commissioners for England – £460k;  St Andrew’s Healthcare – £430k;  City & Guilds – £430k;  and Marie Stopes International – £420k.

It’s not just a question of singling out the top earners, though.  The survey also identified the overall number of people paid more than £60k in income:  they included as many as 300 at Wellcome Trust.  The figures for all ten of the top charities are as follows, also noting the charitable income of each organisation (in brackets):

Wellcome Trust – 300 (£390m);  Nuffield – 275 (£768m);  Royal Opera House – 115 (£142m); London Clinic – 77 (£142m);  Consumers’ Association – 107 (£103m);  Anchor Trust – 95 (£367m);  Church Commissioners (CoE employees excluded) – 17 (£148m);      St Andrew’s Healthcare – 144 (£199m);  C & G – 185 (£141m);  Marie Stopes – 95 (£266m).

I noted too the pattern amongst these top charities that they come not from household name charities but from philanthropic foundations, charitable private hospitals and arts bodies.  None of them are fundraising-based charities.  This suggests two thoughts….

On the one hand, it’s possible to argue that the general public perhaps doesn’t appreciate enough the wide range of services and activities that today’s charities are actually engaged in and so the sector (simply) needs to work harder to ‘educate’ the public more about the true scope and variety of today’s charity sector.

On the other hand, one could argue that some of the charities in the above list should not really be considered to be ‘true’ charities at all and they are simply exploiting the ‘star dust’/virtuous image and valuable range of tax perks and privileges that go with charities and they could/should be made to convert to a different form of non-profit or even commercial organisation.  They could then be free to pay super-high salaries but they wouldn’t be able to do so on the back of any charitable tax breaks.

The overriding problem here is the simple but well-established fact that the general public do not like or support high salaries being paid by charities.  A poll of 1,000 people by the consultancy nfpSynergy in 2016  found a majority (27%) thought that a charity CEO should be paid less than £30k a year!  Only 5% felt that a charity with an income of more than £100m a year should pay its CEO £150k or more a year.  In another survey – this year’s annual Donating Trends survey on behalf of Third Sector – found that “spending large amounts on senior executive pay”was the top issue that would reduce consumers’ trust in charities.  That survey also found that only 10% of respondents consider that a charity’s CEO should ever receive more than £100k a year.

So, I am sure, if more of the general public really knew about the above sort of high pay levels actually being paid at many top charities, they would be shocked and very disapproving.   Their trust in and support for the sector would be dented severely.

It seems to make no impression at all on Mr and Mrs Joe Public that many charities do need to pay to attract decent talent to be able to run their organisations – some of which, of course, are complex and large and come with many types of risk.   The big gulf remains between what the public expects of charities and what charities themselves are doing today with pay levels.

Even if some of today’s super charities were to stop being charities, the core problem would not go away as consumers would still think charities should pay a lot less than they do.  I agree with sector commentators like Craig Dearden-Phillips who believe that, if charities worked harder at explaining how they operate and how they need to pay for talent, then the general public will be able to accept moderately high salary levels for charity CEOs – up to about £100k (or even £150k a year), BUT the public will quite rightly continue to balk at super-high salaries.  He believes that it’s time to for the Charity Commission to get tough on those paying silly money and stop them.  I would agree entirely.

Alongside this issue of some very high salary levels, some large charities, arguably, also deserve the label ‘fat cat’ because of their high level of unused reserves or their low dispersal rate of income on charitable expenditure.  Altogether UK charities have about £50 billion – yes that’s billion! – in their reserves:  that’s a lot of spare money sitting around, even allowing for some buffer cash reserves needed by all charities.  A study at the end of 2015 by the True and Fair Foundation (A Hornet’s Nest) found, for example, that the Wellcome Trust alone sits on long-term assets worth £19 billion and that the Church Commissioners has similar reserves of over £6 billion!  That study also calculated that one in five of Britain’s biggest charities spend less than 50% of their total income on good works:  for example, it found a rate of just 48% for Age UK, 46% for the British Heart Foundation, 46% for Sue Ryder, and just 24% for the Consumers’ Association.

There’s no space here to delve into that study, but it does raise the thought that some well-known charity names are holding onto their cash rather too much and/or are having to cover rather high overheads out of their income which is limiting what they can spend on good works.  Furthermore, it is altogether rather a black hole because the sector lacks a consistent measure that donors and funders can apply across all charities to compare and appraise individual charities’ income to expenditure effectiveness.

Now let’s look at the other end of the UK charity sector – the tiddler end.

On this front, I think the following table says it all:  it’s taken from the Charity Commission’s own website and shows the breakdown of the sector based on its records at the end of December 2016:

Annual income band         No of charities         %            Annual income £bn        %            

£0 – £10,000                             65,842               39.4%              0.218                       0.3%         £10,001 to £100,000              56,853               34%                2.007                       2.7% £100,001 to £500,000            21,956               13.1%              4.826                      6.6%                 £500,001 to £5m                       8,972                5.4%              13.409                    18.4%                 £5m +                                           2,201                1.3%              52.647                     72.0%           Not yet classified                      11,285               6.8%                   0                            0                     TOTAL:                                      167,109             100%              73.107                    100%

The startling figure for me is that nearly 40% of all charities have an income of less than just £10,000.  Furthermore, almost three quarters (73.4%) – yes three quarters – have an income of less than £100,000.  But altogether from those two income bands – a mighty 122,695 charities – their total annual income represents just 3% of the overall sector’s income.  In contrast, if you’re a charity with an income of just half a million pounds or more, you’re in the top 6.7% of all charities in terms of size!

Only 1.3% of all charities have an income of £5 million or more.  Within this category (based on the NCVO’s 2016 ‘almanac’ review of the sector) just 40 charities have an income of more than £100 million but they, as a ‘super-group’, account for nearly a fifth of the sector’s entire income.  What’s more, the clear trend for several years now is that the sector’s growth has been highly concentrated amongst these very largest charities, with the UK’s smallest charities that exist on under £1 m a year having seen their incomes decline.  The extreme dominance of the biggest charities is getting more pronounced, not less.

Of course, any market or industry has its big boys and its minnows.  But no business sector could have so high a proportion of its firms with a turnover of £10k (or even £100k) or less like the UK charity sector and actually survive.  Such organisations would simply not be viable – an income of less than £10k is hardly enough to pay a part-time salary and a small weekly rent!  Of course, in the commercial sector there is a ready inclination and market incentive for inefficient small players to be taken over by their more effective rivals.  In the UK charity sector, though, such economic reality and an inclination for mergers seem to be really lacking.  Whilst an increasing number of local, small charities are realizing they have to at least collaborate with other small charities to stand any chance of winning public contracts against national charities, the sector overall still sees many more new charities created each month than it does mergers or closures.

Ah, but we are ‘values-driven’ and quite different from those ‘grubby’ profit-seekers in the commercial world, I can hear many in the charity sector claim!   But this is just defensive self-talk.  There are thousands and thousands of ‘for-profit’ businesses that serve communities and the wider public and make valuable contributions to society – not just providing employment to millions, providing various public services, and paying oodles of tax into the nation’s coffers,but more modest things like the local café providing a meeting point for local residents!  There are also thousands of non-profit ‘social enterprises’, of course, that are making more obviously direct social contributions, but they are not set up or run specifically in the form of a charity.

It’s just not credible to argue that it’s fine for the UK charity sector to have loads of small, micro organisations like the UK grocery sector has loads of micro/local shops alongside the large supermarkets.  Obviously, those micro retailers do not enjoy the many and various tax perks that small charities do and they have to pay-out real-life, economic expenses to survive.  On the high street, think of the many small local businesses (e.g. café owners, bookshops, clothes shops, bric-a-brac shops) that face the unequal, ‘subsidised’ competition from the many charity shops.  Take away the crop of tax savings (e.g. no business rates to pay) and then see how many small charities would survive!

The most significant problem with too many small charities, though, is the compromised levels of efficiency and impact they bring about overall.

Remember that donors and funders give money to charities with the expectation that those charities will operate as efficiently as possible – that their donated money will be spent as well as possible.  But high levels of efficiency are, of course, compromised where there are loads of micro-charities all lacking enough critical mass or joined-up integration to achieve maximum effectiveness.  In a similar vein, commissioners of public service contracts require/expect charity bidders to offer adequate size and scale of experience, resources and capability, but if a sector suffers from loads of small uneconomic charities, that level of efficiency is not going to be possible:  in which case the charity sector is ill-serving the beneficiaries it exists to serve and will widely lose out – as happens all over the country today – to larger, more economically-sound commercial organisations.

Unfortunately, the cause of a lack of mergers between charities is down, to a large degree, to the attitudes or hesitant/defensive leadership of their trustees themselves.  Too often trustees do not want to give up their ‘little empire’ or they worry about losing a role to occupy their time in their retirement, or they worry about losing status if they become part of a larger organisation.  Alternatively, some trustees are put off by the perceived complexity of carrying out a merger or fear of embarrassment should the merger not be successful.  It does not help matters that the UK has approaching a million trustees – about as many as the actual number of paid employees working for charities – and very many trustees in small charities lack decent skills in governance or business management.

If charities want to carry on attracting grants and donations and continue claiming their current bag of tax privileges, they need – as well as increasing their overall efficiency as a sector – to explain, show and justify much better what they do and the beneficial impact they are making on society or in communities.    The struggling café owner next door to the charity shop needs to understand what is different or special about what the charity shop is doing to make him ineligible for the same tax privileges.  Just declaring that you are a charity is surely no longer enough to make people accept that you’re really doing something good or wonderful in the world.  Charities need to work harder at measuring, explaining and communicating the actual outcomes they are bringing about for the ‘public benefit’.

The Charity Commission should be expected to use its weight and power to promote, or require, change by charities in a lot of the ways identified in this article.  I would agree with the outgoing chair of the Charity Finance Group, Ian Theodoreson, that whilst the body perhaps should not actively dissuade or prevent people from starting charities, it should encourage such people – from the very time of registration – to co-operate with other organisations that already exist in the same field or are doing something similar.

But, of course, it’s not just a case of guiding new charities to be more collaborative.  The Commission – together with the sector’s infrastructure and representative bodies (ideally showing the way be merging themselves along the way?!) – should be doing a lot more to push existing charities to either combine or collaborate with (the typically, at least, hundreds) of other bodies that are doing similar things in their field.  I noted recently, for example, that this country has over 2,000 charities for veterans:  why on earth does there need to be so many as that?  (no wonder the government felt it necessary recently to set up a dedicated website portal to help the public actually to navigate their way around all those charities!). 

Sure, many small charities are small because they serve a very local area or because they are driven passionately by a founder whose energy and devotion it would be wrong to stop.  That’s fine and splendid, but one needs to balance that argument with the need to consider the overall efficiency and effectiveness ‘in the round’ for charity sub-sectors.  Do so many parents really need to set up their own charity in memory of their son or daughter who tragically died of cancer?  There’s a balance to be struck  here, of course, but the pendulum seems to have swung too far towards too many tiny, charity minnows.  Surely many of those minnows would be more effective if they weren’t so small and independent and worked more in conjunction with other similar charities ?

Mergers are not the only way, of course, for small charities to gain greater benefits of scale and efficiency.  Alternatives include setting up a joint venture company together to run a joint activity;  a joint venture project where two charities bring their respective skills and resources together and act together on a focussed initiative;  shared ‘back-room’ functions e.g. HR, IT, telecoms services;  and informal staff networking and co-operation.

Another approach – at a higher level – is for several charities operating in a specific field to form a collective ‘alliance’ or working partnership together whereby they jointly plan/share/co-operate on activities like fundraising, PR, marketing or lobbying.  In this vein, an argument could be made that large charities should be expected to reach out to the many smaller charities operating in their field and set up semi-formal ‘support’ structures and services (e.g. HR, IT).  What a transformation that could be!

Altogether, the “double-ended” problem I’ve outlined in this post is a major challenge to the UK charity as a whole.   At its heart it raises the basic question of what exactly is a charity and what the public has a right to expect of charities if they are to keep their valuable range of tax privileges.  Charities do indeed wonderful things for society, but they mustn’t over-reach themselves in thinking they’re too special that they can escape scrutiny.  More modesty (and transparency) in pay levels amongst the largest charities would certainly help, at one end, as would more collaboration and mergers, in the long tail at the other end of the sector.  Otherwise, both the credibility and overall effectiveness of the sector will really be in danger.

Written by Mike Owen, CEO & Principal Consultant at Owen Morris Strategy Group.

If you have any thoughts or comments on the issues raised above, do let us know.

If Mike can assist your organisation with any of the issues or challenges discussed in this post, please get in touch too.

T:  01886 881092       E:  mpo@owenmorrispartnership.com

Copyright of Owen Morris Partnership

 

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What’s so special about ‘values’ in charities? How to choose and embed values in a charity for maximum effect.

Values are commonly seen as a central driving force – indeed a defining feature – of charities.  But why is this?  Values are also used in many for-profit organisations.  More significantly, though, many charities, whilst keen to say they have values, appear to leave them as lofty words hidden in internal strategy or HR documents and hardly mention them externally – as I found in a quick survey I did for this post.  To be worthwhile, though, values must not only be linked to a charity’s wider strategy and be developed openly with stakeholders, most crucially, they need to be strongly embedded in a charity’s culture and be actively promoted.  The key issue is how to make these things happen?

What actually are values?  They are the major beliefs, attitudes or principles that guide how an organisation should be run or what it seeks to achieve.  A value shouldn’t be seen as just a word because words have different meanings to different people.  For guiding the running of an organisation, a value should represent a specific, preferred behaviour, so it’s important to define each value with a longer explanation and to give examples of the behaviour expected.

Values are part of the wider trend over the last decade or so for all types of organisation to embrace a more ‘purpose-driven’ approach to leadership.  Purpose means an organisation having a core, aspirational reason for being that connects with wider society or the public at large.  The idea is that, by acting on this purpose, organisations can achieve more for their owners and stakeholders over the long-term than just by pursuing financial or other goals based on narrow self-interest.   Most FTSE companies nowadays, for instance, declare some form of statement of values and publicly report several non-financial as well as financial measures.

Very interesting research on values is produced by The Great Place to Work Institute UK, who compile each year an overall list – across all sectors – of the UK’s ‘Best Workplaces’, based on a survey of companies’ employees and managers.  According to a follow-up survey of the 100 organisations of the UK’s list from 2014, 97% of Best Workplaces said they have ‘values statements’, they put their values at the heart of everything they do, and they attribute their business success to them.

Also interesting from this research was the list of particular values that were found to be the top 20, most common across all the organisations surveyed.  They were:  integrity, passion, teamwork, customer, respect, people, fun, learning, creativity, excellence, accountability, quality, courage, collaboration, honesty, commitment, expertise, innovative, professional and service.  Notable too was how certain values tend to predominate in certain sectors.  Thus, for example, integrity was found to be the most commonly stated value in the professional sector, whilst ‘fun’ was the top value amongst media firms!   Sadly, I couldn’t see a summary just relating to the charity sector.

So, I did a very quick (yes, very unscientific!) ‘micro’ survey of the websites of ten national, well-regarded charities to see what coverage and range of values they had.  I was shocked to find very little mention at all of things labelled ‘values’:  furthermore, I had to dig deep into the ‘about us’ section of sites to see the few references I did find.  The charities in question might be mentioning values in their strategic plans or other ‘internal’ management documents, but they’re clearly not detailing or promoting them openly in their outward-facing communications.

The National Trust was one of the first charities I looked at – one I have always admired.  At a seminar recently in Bristol I was able to ask their CEO (Dame Helen Ghosh) what she made of charity values:  she said they are very important indicators of behaviour and they were clearly on the Trust’s website.  But, I’m afraid, Dame Helen, they are not clearly promoted on your website:  I had to put the term ‘values’ into the website’s search facility and nothing came up, as far as I could see!  The nearest I could find was a reference to something called The National Trust’s “cause” – which is obviously related but not quite the same thing as a set of organisational values.  This was despite Dame Helen also saying her charity has “lots of HR people embedding the Trust’s values across the organisation”.

On The British Heart Foundation’s website I could only find a single line reference to ‘values’ on the third page of a strategy document under ‘About us’ (“brave, compassionate, driven and informed – in our fight for every heartbeat”).  I visited a local BHF shop in Worcester and couldn’t find any leaflets that stated what the charity’s values were and when I asked the shop manager she didn’t know what they were.  Likewise, when I looked at the website of Blue Cross I couldn’t see any reference to things called values – not on the home page or under ‘About us’.  I found summaries of the charity’s vision and mission, but no values:  this was despite my seeing ads on the site for jobs that boasted “Blue Cross is a values-driven organisation” and their having a ‘Supporter Charter’ that also said nothing about any organisational values.  I also visited a local Blue Cross shop and – you guessed it – found no leaflets or information that declared anything about values.

On a more positive note, on The Samaritans’ website, I readily found that their values are “listening, confidentiality, people making their own decisions, being non-judgemental, and human contact” – and each value had a summary explanation next to it.  On Oxfam’s website, there were three values declared: “empowerment, accountability, and inclusiveness” and there was also a brief explanation for each.  On the Sue Ryder website I found under the ‘About us’ tab a short summary section identifying three corporate values (“make the future together, do the right thing, and push the boundaries”), with an explanation against each too.

On the Barnado’s website I couldn’t find any distinct section about values – merely a sentence under ‘Our Mission’ that said “we value and embrace diversity and are committed to creating a society for our staff …. that is free from discrimination, victimisation and harassment”.  Volunteering Matters’ website declared five values but with no accompanying explanations:  “valuing staff and volunteers, working as a team, being agile, being ambitious, and demonstrating mutual respect”.  On the Cancer Research UK website I couldn’t find any section identifying any values:  I turned to their strategy summary document and gave up!  Likewise, on The Dogs Trust’s website, I couldn’t find any mention of values – a simple mission description, yes, but nothing called values.

Despite these mixed findings here, in theory at least, the use of values is meant to offer a string of benefits to charities.  In particular, they can support vision and mission statements in instilling a sense of strategic clarity; they can provide a deeper bond and source of motivation for employees and volunteers;  they can guide the definition of organisational policies and processes;  they can help act as a steer and selection screen for new projects and innovations; and they can help attract and motivate donors and funders.

The problem is, though, simply crafting and declaring a set of values does not automatically lead to better organisational performance (or winning a contract from a local or national public authority!).  In a US academic study of The Great Place to Work data and organisational performance covering the period 2007 to 2011 there was found to be no correlation between an organisation’s publicised values and its performance.  However, there was found to be a positive relationship when there was “a culture of strong values as perceived by employees” – in other words – and this is the crucial point – where the values of the organisation are actually embedded properly and ‘lived’ throughout the organisation, performance improves.

But ahead of effectively embedding values, a charity should make sure first it has integrated those values with the rest of its medium to long-term ‘strategic framework’ and developed and shaped the values openly and collaboratively across its stakeholder groups.

Values are often seen as sitting alongside a charity’s vision and mission to act, together, as the guiding ‘North star’ for the future of the charity.  The three elements are meant to be mutually supportive, shining an overall light for the future and indicating what type of character or culture the charity is to have.

A problem, though, is that sometimes Vision (how a charity wants the external world to change) and Mission (the charity’s role in supporting that vision) are themselves poorly defined – for example, they say almost the same things, they are too internally-focused on the organisation itself, are too bland, or are too unrealistic – so then values cannot be integrated meaningfully with them.  A second problem is that values should be – but often are not – reviewed and updated regularly – at least every two years or so – to check they are in tune with and supporting the charity’s latest strategies and activities.

When you develop your charity’s values it is vital to actively consult and involve all your key stakeholders, rather than the Board or senior management team select them by themselves in a closed room!  This is to both gain a good cross-section of informed opinion to help shape the values and increase the chances of widespread support when the values are adopted.  The usual, key stakeholders to consider obviously include:  trustees, senior managers, other employees, volunteers, beneficiaries/service users, major funders, donors, and major partners/supplier organisations.

Choosing values should start with surveying how stakeholders currently view the charity and what range of words/emotions/attitudes they use to describe how the charity ‘comes across’ and what it is perceived to stand for.  These need to be compared to current value statements and related to the existing heritage, history and wider brand image of the charity and the image and branding of rival charities and other main players operating in the sector.  A good, external facilitator can help a Board/senior team with these tasks.

Stakeholders then need to be asked what type and range of key values they would think appropriate for the future – as part of a wider briefing/discussion about the future direction (vision, mission and key strategies/goals) of the charity.  Current values/feelings can be mapped against people’s future feelings and key differences identified.  Objective findings from a quantitative survey may be needed  – if affordable – to help or inform discussions.  The final part of the process is usually best handled by a dedicated cross-stakeholder task-group to review all the findings and choose/define a particular set of future values (or modifications to current values).  These then need to be tested out on further samples of stakeholders, with a final choice confirmed by the trustees.  It’s usually best to go for no more than about half a dozen or so values.

Finally, once values have been carefully selected, the important issue is making sure they are ‘lived’ and encouraged day-to-day in the organisation.  How to do this?  Here’s a quick list of ten key measures I would urge:

a) Senior management should take time to brief and explain to employees, volunteers and other key stakeholders the background (strategic) reasons and aims for adoption of a charity’s latest values.  People won’t embrace values unless they understand the context and have had some opportunity to raise any questions first.                                                 b) Organisational values need to be reflected in the local mission statement of every department or team and everyone’s individual job description, including definition of appropriate behaviours, attitudes and standards they will be expected to adopt.                   c)Training and support must be provided to people, where needed, to help them adopt the behaviours and standards expected.  At the same time, some operating policies may need to be adjusted:  for example, if  ’empowerment’ is a value, it won’t help if customer service policies insist on no refund being given without prior approval from a director!                   d) Departments and teams in an organisation need to be well-integrated to support their collective values.  So, it’s very helpful to arrange cross-team ‘get-togethers’ for people to discuss values together and check how everyone is going to work in support of each other.  e) Employees’ performance reviews should include discussion about how they have acted and performed against the specific attitudes, behaviours and standards defined in relation to organisational values.  Where volunteers are used, their managers’ informal reviews must cover similar ground.                                                                                                                  f) Managers’ salary reviews should partly be based on how well they have personally displayed and – crucially – encouraged and promoted in others the organisation’s values.  g) Organisations should use numerous ways to publicly thank, recognise, celebrate and generally reinforce people’s adoption of organisational values.  Techniques range from coverage in the staff newsletter to various type of award scheme.                                             h) There should be regular Boardroom discussions to consider and reflect on the culture, values and ethics in the charity (in my experience this doesn’t happen much).  And, critically, trustees and senior staff need to act as suitable ‘role models’ for the organisational values.                                                                                                                           i) Recruitment processes and selection decisions need to include consideration of how well candidates match up against defined value behaviours and attitudes.                         j)  A charity’s main communications tools and media – externally as well as internally-facing – must be widely used to help explain and promote its organisational values.  This includes, of course, social media.

If your charity is a membership-based body where members have definite powers in the governance of the organisation, that wider accountability may usefully boost concern for a healthy culture and sound ethics.  Furthermore, if the charity is a professional association or trade body, values and ethics can be powerfully reflected and bolstered by the ‘codes’ of professional standards or conduct that such organisations often have.

My overall take from all the above is that, whilst values are, of course, valuable for charities, they are not something uniquely special to the sector.  I was surprised not to see the charities I looked at referring to their values more fully and outwardly as part of their descriptions of their purpose/cause.  If values are left mostly just as an ‘internal’ strategic concept rather than be actively used as part of an open and external leadership and mission-promoting aid, that is sad – because values can indeed play a powerful, engaging role in charities.  So, I hope the above range of ‘how-to’ suggestions in this post are helpful in pointing how to go about applying values for full effect.

What is your opinion on the significance / role of values in charities?  I would be interested to hear.  As always, if I can assist your organisation, do get in touch.

Mike Owen

E:  mpo@owenmorrispartnership.com      T:  01886 881092

Copyright of Owen Morris Strategic Partnership

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The new 2017 Charity Governance Code: a very welcome initiative to help raise standards, but wider action still needed

A higher standard for UK charity governance: that’s the aim of the new ‘Charity Governance Code’.  Recently developed by a steering group of some of the sector’s leading bodies, it’s aimed at the UK’s 850,000 trustees and replaces the old 2005 Code (Good Governance: A Code for the Voluntary & Community Sector) last updated in 2010The new Code echoes much of what was in that previous code but there is a fresh, updated feel to it and it does include a wider, more stretching set of expectations of trustees in several areas – which will help to elevate the leadership effectiveness of many UK charities.

It’s reassuring and pleasing too that the new Code – whose final version will appear soon after its recent consultation period – received positive support across the charity sector.  But that’s not to say the Code doesn’t have some gaps or issues!

The first thing I was struck by from reading the draft was the intention that the Code “is not simply another piece of guidance …. Instead, it draws on a range of legal requirements, guidance and established practice and is designed to push and challenge boards …. in the spirit of continuous improvement”.  Moreover, the Code adopts the position that trustees – especially at large charities –  should ‘apply or explain’ i.e. follow what is in the Code or explain why not!  This is a bold, but welcome stance.

It’s impressive that the Code is particularly supported by the Charity Commission – including the ‘apply or explain’ call – because it has said it will now be withdrawing its own, current guidance document ‘The Hallmarks of an Effective Charity’ (CC10).  So, this Code is clearly intended to be the standard of principles for all charity trustees to follow.  It will also be very helpful to other types of non-profit bodies, even where they also need to follow their own sector-specific code (e.g. housing associations).

The Code starts with a general ‘foundation’ principle that all trustees should be committed to their charity’s cause, understand their role and legal obligations and are committed to good governance.   Building on that foundation are seven other principles:  organisational purpose/direction; leadership; integrity; decision-making/risk/control; diversity; board effectiveness; and openness/accountability.  The section for each principle includes a summary explanation and a set of indicators of recommended good practice (though these range from the quite broad to the very specific for some principles).

As well as echoing the six principles of the previous 2005 Code, the new Code chimes with the well-established Nolan Principles – the seven ethical standards expected of office holders in the public sector and of people who work in other sectors where they are delivering public services (e.g. health, education, housing, social and care services).  Those principles are: selfishness;  integrity;  objectivity;  accountability; openness; honesty; and leadership.  Altogether, then, quite an extensive framework of guidance for trustees!

So, what are some of the fresh, new expectations set out in the new Code?  Here’s a selection of some of the main points, with some concerns and issues that struck me.

-The new foundation principle that all trustees should be committed to their charity’s cause and understand their legal duties obviously makes good sense and nobody is going to dispute its importance:  the issue is rather making sure the charity sector steps up to provide more extensive reference resources, training, peer networking, courses and qualifications to support trustees.  Except in larger, national charities, there simply is no deep inclination amongst most trustees to gem up on charity governance/law.  A higher, general standard of trusteeship will only develop if the Code lays down firmer, minimum (even mandatory) requirements for governance training of all trustees –  especially for chairs and senior trustees at large and mid-sized charities – and the sector does a lot more to ensure wider provision of relevant training and resources.

-The new Code expects trustee boards to undertake regular strategic reviews – including checking the sustainability of current business models and income sources, evaluating the charity’s impact and checking their charitable purposes are still relevant.  Larger charities will be expected to benchmark their performance against other suitable organisations.  These are sensible expectations, but I was surprised that the Code did not say more about impact assessment, including measuring and assessing outcomes and results rather than just considering charities’ purposes, which can often be quite vague and general.

-More significantly, the Code will now require charity boards to consider mergers, partnerships or – yes – even winding up their charity, if other organisations can be seen to be fulfilling similar charitable purposes more effectively.  This is a big, welcome push in the right direction, given the massively ‘long tail’ composition of the UK’s 165,000 charity base and the heavy level of duplication and the need to do something to improve sheer lack of efficient scale of tens of thousands of small charities.  However, of course, nobody should really expect much to change anytime soon:  only about 100 charity mergers happen each year in the UK compared to about 1,000 new charities that are started-up each year!  Given the conservative thinking of many small charities’ trustees with their typical concern for keeping their charity independent and protecting their own role, the Code will need to be boosted by a range of legal or other obligations forced upon trustees  for the sector to see a radical increase in the number of mergers or even collaborations!

-The Code says more about ensuring sound leadership and board effectiveness.  Points include more emphasis on the chair’s role in promoting good governance;  the view that a board should have a least five but no more than 12 members;  the need for strong arrangements for managing the CEO and relationships between him/her and the board; and – yes – the encouragement for board trustees to have different, diverse views between themselves as a healthy sign of good governance!  The Code also recommends that trustees should be appointed for limited terms (with nine years being the usual maximum) and that larger charities should externally assess the performance of their board on an annual basis.  All good points – but I think a maximum term for trustees of just six or seven years would be slightly better than nine years (to be similar to many commercial boards).

-The Code has a lot more to say too about decision-making, control and risk – certainly compared to the equivalent principle 4 in the 2005 Code.  It usefully outlines a broad range of recommended practices – ranging from the fairly basic like a call for a detailed document that sets out all delegated areas of authority and defined terms of reference for board committees to several specific points about risk management, including how the board should promote a culture of “prudence but not over-caution” with resources; that the charity’s approach to risk management should be described in its annual report and that a charity’s audit committee should consist of at least three trustees and be chaired by a person who actually has some financial knowledge.  Again, all very welcome points.

-The Code has a new section stressing the importance of diversity on charity boards.  This is an important section because, although the charity sector is assumed to promote diversity, it is actually a weak feature in terms of the make-up of the average UK charity board.  What impressed me is how the section calls for diversity in its widest sense: “diversity includes the seven protected characteristics of the Equality Act 2010 (e.g. gender, sexual orientation) as well as different social-economic backgrounds and diversity of thought”.  Included in the section are a dozen or so recommended good practices, including the expectation that the board will ensure that “trustee vacancies are widely advertised and it looks at best how to attract a diverse pool of candidates”.   So, I hope board chairs will do less tapping on the shoulders of friends to find recruits and trustee recruitment agencies will be more open-minded in their approach and put forward more diverse candidate profiles to clients – especially younger people or individuals who have had more unusual careers or think differently.  Certainly, for charities that are membership-based bodies, there is a crucial need to ensure their boards don’t just consist of individuals who come from amongst their member base.

-There is an expectation that charities – especially larger ones – should be more open and accountable to their various stakeholdersThis was the subject of principle 6 in the previous Code, but there are additional best practices recommended in the new Code – including how large charities should publish an annual statement of the steps they have taken to address the diversity of their leadership and how they have applied the Code to help run and develop their organisation.  More fundamentally, I would suggest the Code could say more about requiring trustees to report in some detail each year about how efficiently they have managed the charity’s operations and what (ideally measurable) impact they have made on the world.

So, there’s a definite mix of good and some weak points in the new Code.  But I also think the Code has missed commenting on a few quite fundamental issues about the nature of trusteeship itself and the need to adapt to match the more commercial world today and the more varied structures that are increasingly seen by not-for-profit bodies today.

Most fundamentally, the draft Code, as it stands currently, does not question or raise a doubt about the traditional trustee board as the optimum form of modern governance for non-profit organisations.  It assumes – by default – that the philanthropic model of the 19th century (a volunteer trustee board alongside a separate executive team) is still appropriate for all charities today.  But this is no longer a reasonable assumption – for a number of reasons, as I covered in my October 2016 post here:  for large, complex charities relying on 12 volunteers meeting only occasionally is not a modern, safe form of leadership;  the executive team does not share in equal liability if things go wrong; having two leadership teams is obviously more complicated, time-consuming and costly than a unitary board;  and the total number of trustees required in the UK under the present system is too large (about 100,000 trustee vacancies are unfilled at any one time!).

Equally, the Code does not question or raise a doubt about a charity being the right form of legal entity to serve a social or community benefit.  But, of course, beneficiary-mission serving bodies don’t have to be set up as charities:  there are Community Interest Companies and ordinary companies backed by shares or guarantee, for example.   What’s more, non-charitable social enterprises come with several key benefits, including simpler governance and reporting requirements, fewer restrictions on their range of activities, more flexibility in how they can be funded, they can pay their directors, they have a unitary governing body, and they can be freer to act in policy areas where charities are restricted.

Finally, three other particular observations about the Code are worth mentioning.

-The Code says surprisingly little about governance issues involved with a group structure, dealing with trading subsidiaries, managing relationships with commercial partners/sponsors, or working as part of a joint venture or alliance.  But such wider organisational/operational arrangements are going to be more significant in the future, of course, as charities adapt to a more connected, complex environment to serve their missions.  I also thought the Code should say something about ‘closed member’ companies where the trustee board members are also the members of the charitable company:  where none of the trustees are openly elected or appointed by an external constituency (e.g. service users, general membership, funders or partners), there is a risk sometimes of a rather conservative, inward-looking perspective pervading.

-The Code avoids commenting on the question of payment of trustees.  I think the Code should have recognised that some bodies in the sector (e.g. NPC) and some charities themselves would support making payments (it can help to recruit more disadvantaged individuals to be trustees, for example).  The Code should at least endorse the right for each charity to decide on the matter and be able to pay trustees, if it judges this helpful.

-The Code could usefully include some pointers regarding good practice for the hiring and engagement of charity CEOs, since they work so closely with the board, even though they are not normally an actual member of the board itself.  In particular, echoing the expectation that trustees should have fixed terms, I think the Code should similarly prescribe fixed (renewable) terms for the CEO.  After all, a CEO who overstays can stifle fresh thinking and change a lot more significantly than an individual trustee!

Overall, I would say ‘congratulations’ to everyone who contributed to the new Code!  There are always opportunities to improve such a document, of course, but it is a most valuable step forward for the UK charity sector.  I do hope it will be supported across the sector, but also that it will be reinforced and boosted by necessary, wider action on other fronts.

To read the full draft Code, visit:  http://www.governancecode.org

 

/witten by Mike Owen, CEO at Owen Morris Strategic Partnership

E: mpo@owenmorrispartnership.com               T: 01886 881092

Copyright of Owen Morris Partnership

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The problem of poorly-skilled charity/nonprofit Board chairs: research suggests it’s perhaps time to share-out the role, not just boost their training and support

Charity and not-for-profit board chairs are expected to provide significant leadership to their boards and their organisations.  But recent research – from both sides of the Atlantic – reminds us that too often board chairs are ill-prepared and ill-equipped to fulfil the role effectively.  It’s a serious issue that calls for thinking about the role itself and overall board leadership, not just the (recognised but neglected) need for better training and support for chairs themselves.

The US research in question – a survey of 635 American non-profit chairs carried out earlier in 2016 by the Alliance for Nonprofit Management (entitled “Voices of Board Chairs”) – produced the following stark findings:

-More than half (51%) of board chairs said they had not done anything specific to prepare for their role, with just 19% viewing their appointment as part of a planned “natural progression”.   Having been the chair of a Board committee within the organisation was the most common past experience (65%), rather than vice chair (48%), secretary (22%) or treasurer (19%).  Just 56% had been at their organisation for at least three years.

-In the absence of a formalised preparation process, the main sources of advice for preparing for the role were talking with the CEO (58%) or talking with the outgoing chair (50%) – even if they had been weak in their role!

-The top three duties of a chair in relation to the board were seen as keeping the board’s focus on strategic direction, ensuring the board fulfils its governance duties and chairing board meetings.  However, despite recognising these valid duties, chairs identified these same areas as where they needed most advice on:  guidance about boards and governance (77%), guidance about leadership (69%) and guidance on how to manage meetings (65%).

-Most chairs (56%) felt that their leadership style was/should be that of a “team builder who cultivates others and delegates responsibility”.  Just 25% saw it as their role to try to   ” build consensus before action is taken” and only 8% thought their role was to “take charge, forge ahead as a decisive leader”.

-70% of chairs said they sometimes feel frustrated in their role, with 9% often feeling so.

Echoing some of these disturbing findings was the smaller member survey carried out by the UK’s Association of Chairs (AoC) in February 2016.  Based on a respondent base of 439 chairs, vice chairs and some prospective chairs, that study’s key findings included:

-only 19% of chairs said their organisation had an allocated budget for board development.  Just 34% of chairs had had an induction for their role.

-the main support chairs received was access to publications, conferences and events.  Fewer than 50% had received any kind of development support in the previous year.

-a wide range of additional support was wanted by chairs.  A third wanted help with improving the effectiveness of board meetings, understanding the impact the organisation makes, assessing the board’s effectiveness, chairing meetings on time, and handling their relationship with the CEO.

If you have experience on non-profit/charity boards, you probably – like me – recognise many of the above findings and are concerned by them.  In my non-exec/trustee experience (nine boards, including chair of a non-profit joint-venture enterprise), whilst I would actually applaud anyone who takes on the role of a non-profit/charity Chair – it is indeed a very difficult role – the key weaknesses of (some) chairs that have alarmed me the most include:  limited knowledge about charity law/good governance; the chair thinking a bit too much on occasions about his/her own company or personal status rather than the charity; preferring the status-quo too much / too unwilling to push colleagues for change;  not good at leading a strategic discussion or running an agenda to time;  and reluctance to set firm performance frameworks for the CEO and executive team.

Sadly, with most of the CEO roles I’ve had so far in my career – mostly mid-sized non-profit bodies – I have been shocked by how I have had to spend almost as much time advising and ‘managing’ upwards i.e. my Chair and other Board members – mainly on ensuring good governance/business management, getting Board members to do things they promised to do, and managing politics between board members themselves – as I did on managing staff employees!  Sure, it’s part of the turf of being a CEO in the not-for-profit sector and larger charities normally do have a very experienced leader as Chair, but wouldn’t it be so much better if all (or at least most!) nonprofit board chairs brought ready with them to the role an elementary, core level of governance and leadership acumen, not just their passion or expertise in the relevant cause or sector?  Think how much more productive the typical charity CEO (and the charity as a whole) could be!

In my experience, the chair and the board as a whole work much, much better where there is, in particular, a strong diversity of individuals (in terms of different skills, gender, background and ideally age) sitting around the board table.  I have been fortunate to be on some boards where I have seen this very much to be the case.  In contrast, I have been on boards or been the reporting CEO – particularly in some (but not all) membership associations – where all members of the board had virtually the same background (job role, age level and mostly just worked in the same profession) and this just so obviously fostered conservative/narrow thinking, weaker business management, a reluctance to change, and a disproportionate interest in jockeying for personal prestige or status.

What to do, then, to improve Chair performance?  Some of the solutions needed are surely obvious and both surveys mentioned several measures.  They include, for starters, organisations adopting a more proactive and systematic approach to board chair succession planning and preparation.  There is obviously a need to provide more elementary training and accessible resources for chairs on core governance knowledge and chairmanship/facilitation skills.  Then there’s a need to provide more ongoing support to chairs with facilities like coaching, mentoring, online peer support networking, and local  seminars.  It would help too, I think, if the UK third-sector had a national qualification or award system that chairs could strive for that both guided their learning and recognised their professionalism:  sadly, it’s the chairs of smaller charities that would be less interested but who would typically be most needy, so having a national award system would hopefully ‘nudge’ them to gain the award as the ‘expected’ thing to do.

But, whilst noting all the above, what particularly struck me from the US study was the recommendation that nonprofits/charities should look much more at adopting ‘shared leadership’ models rather than relying on just one individual to fulfil the role of chair – which would obviously both make the leadership role less onerous and help build overall future leadership capacity.  The US study revealed that just 6% of the chairs described themselves as ‘co-chairs’, with a similarly very low figure (8%) of chairs having ‘co-executive’ i.e. shared CEO leadership in their organisations.  As in the commercial and public sectors, it does appear that the traditional ‘heroic’ individual model of leadership is still very much seen as the norm!

The UK’s AoC survey revealed that over a third (35%) of chairs are spending 5 days or more a month on their chairing role, with 54% spending 4 days or more per month.  I think that’s probably understating the situation at many very small charities and at some of the very largest charities.  I know some chairs who put in an average of two or more days per week – and that’s a big ‘ask’ when chairs are normally unpaid volunteers.   Sure, many of the individuals don’t mind the time commitment because they believe passionately in the mission of the charity and they have the spare time to offer.  But, is such a time commitment fair or reasonable?   Don’t such individuals risk losing their objective detachment as a trustee or risk compromising/duplicating the role of the CEO?  Or, in some cases, I wonder, is such an intrusive chair not actually masking the actual lack of basic viability of the charity concerned?        

The US study suggests that there are actually several different models of shared leadership that boards could consider, including:  a) co-chairs – two board members who divide up the chair’s duties between them;  b) multiple leaders – three or more individuals who share different aspects of the leadership responsibilities;  c) making more use of Board committees (their chairs, in particular) – especially for monitoring or co-ordinating duties;  and  d) delegating more to the CEO.    I would also add the option of adopting a ‘unitary board’ – which brings together trustees with some senior executives to form one governing body.  Another  suggestion is that more UK charities should perhaps merge or collaborate more closely with other charities/nonprofits so that fewer single-body board chairs are actually needed in the first place and the charities that do remain can enjoy a higher-skilled chair!  (Does the UK really need 160,000 different registered charities, each with its own Chair, alongside 750,000 other trustees?)

Reinforcing the case for more exploration of shared leadership is the simple fact that not all chairs enjoy or are interested equally in all the different parts of their role.  For example, some chairs enjoy, or are better at, the public-facing/representative side of their role more than the strategic governance or board meeting duties.  With other chairs, the opposite could apply.  For this reason, some nonprofits – for example, certain membership associations – have two senior roles – a President who does the external, ambassadorial duties and a Chairman who focuses on chairing the board and supervising the CEO and day-to-day operations.  Splitting the chair’s role like this can potentially benefit the organisation a lot because individual duties can be performed by better-matched individuals and it makes it easier to attract future leaders who might be deterred from taking on an onerous traditional, full chair role.

Overall, the two surveys outlined above are telling reminders that  there is a serious deficit in governance and leadership acumen amongst many charity/non-profit board chairs today.  This fact obviously does not help the organisations concerned – and the 3rd sector overall – deal with the major challenges and pressures faced nowadays. The ideas suggested of more shared approaches to board leadership are worth exploring.  The wider point, though, is that there is a need for the sector as a whole (particularly the national charity representative and support bodies) to get together to address the problem and improve significantly the development of and support to charity/non-profit board chairs.  Give me a call if anyone wants my humble support!

Mike Owen

Copyright of Owen Morris Strategic Partnership

December 2016

Tel:  01886 881092    Email:  mpo@owenmorrispartnership.com

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Why traditional charity boards and trusteeship need a serious makeover: thoughts for a coming governance mini-revolution

Perhaps the revolution has started?  In the face of the many challenges and criticisms the UK charity sector has faced over the last year (issues like fundraising, Kids Company, and CEO salaries, for example), it was striking how Oxfam International’s treasurer, Bob Humphreys, said at a recent conference that perhaps the traditional two-tier structure used by charities of trustee board and executive team is no longer fit for purpose.  And also that charitable status is perhaps no longer an advantage over a social enterprise model.

This followed (provocative!) remarks in August from the boss of the Institute of Directors who suggested that the charity sector needs to look more to the governance codes of big business.  And just last week came a striking finding from the National Trustee Survey that over a quarter of trustees have considered stepping down from their role because of  increased pressures and scrutiny facing trustees.

It does seem that charity governance is in the dock – which is actually good timing given the launch soon of a consultation of an update of Good Governance: A Code for the Voluntary & Community Sector.   Other leaders and commentators in the sector need to pick up and spread the debate, please.  For my part here, from my non-profit CEO and varied trustee experience, I would like to highlight a few changes that I suggest should be particularly addressed:

Firstly, though, what are the key reasons why Humphreys argued that “the philanthropic model of the 19th century really doesn’t scan when you start to look …. at what is expected now of trustees”?   I can think of many reasons, not least:

i)Trustees nowadays carry a heavy burden of legal liability and responsibility for the conduct and performance of their organisations with a depth of scrutiny expected of them that does not fit well with the profile of the average trustee:  a volunteer, not well trained in governance, and who attends only a few board meetings a year.  Such individuals simply cannot be expected to keep up-to-date enough with the affairs of their organisation.  This is a huge weakness, of course, for the largest charities which have turnovers in the hundreds of millions and many of which bear huge commercial risks in carrying out large public sector contracts.

ii)It is surely not right that just trustees carry such legal responsibility whilst the executive team – particularly the CEO – hold no such liability at all!  It is the latter individuals who know about the detail of the charity’s affairs and it is they who shape the detail of most operational decisions, yet they can simply walk away when things go wrong – often claiming a handsome pay-off as they go!  The disconnect is unfair, unbalanced and divisive.  Both non-execs and executives should share the same degree of liability together.

iii)Having two governance teams obviously makes things more complicated, time-consuming and costly compared to having one ‘unitary’ board.  It is also quite silly that it is anyway the normal case that chairs and trustees often prefer to hold all or most of their meetings together with the CEO and executive team present, so the typical board meeting can easily have about twenty people present.  This may help to improve communication and help to make everyone feel as one extended team, but why not then create one equal team, rather than an inefficient ‘2-in-1’ team?  Let’s remember that a unitary board is quite a common feature at other types of non-profit and public-sector organisation, including, notably many social enterprises and most NHS trusts.

iv)Too many trustees are required and sought by UK charities.  There are about a million trustees in the UK today, with about 100,000 roles actually unfilled at any one time.  As a result, too often, small charities, in particular, struggle to attract decent individuals or they rely on the archetypal white, grey-haired over-50 middle-class male!  Instead, wouldn’t it be far better – and simpler – if charity boards had up to, say, a third of their positions taken by executive team members – still keeping non-exec trustees in the majority but allowing one united board?   In which case the UK would likely need around 300,000 fewer non-exec trustees!  What a saving and what an opportunity to really then invest in a high quality cadre of remaining charity non-exec directors!

The call by Humphreys for charities to consider the merits of other legal forms of social enterprise is equally welcome.  Let’s remember that beneficiary/mission-serving bodies don’t have to be set up as charities:  there are Community Interest Companies and ordinary companies backed by shares or guarantee, for example.   Non-charitable social enterprises come with the key benefits, in particular, of simpler governance and reporting requirements, fewer restrictions on their range of activities, more flexibility in how they can be funded, they can pay their directors, they have a single governing body, and they are also freer to act in policy areas in which registered charities might not be.  In fact, given these advantages, it is increasingly questionable if the ‘charity’ badge is really worth the effort – especially as the general public increasingly wonders what it means to be a charity today and shows lower levels of trust in charities compared to years ago.

Whilst looking at charity board governance, here, briefly, are some other associated opportunities to enhance charity board governance, which I suggest would complement a unitary-style board and moves to more of a social enterprise model:

Allow charities to pay their trustees, if they feel it would be helpful:-  I agree with bodies like the NPC who argue that, given the duties and level of responsibility that goes with being a trustee nowadays – especially at larger charities – offering a reasonable fee to directors would help to attract the quality of individuals needed (I suggest an honorarium up to about £7,000 p.a. – and about double that for board chairs – certainly not the dizzy heights of several times that paid to many big company non-execs, which I think can cause such individuals to lose their neutral/independent perspective).  Providing payment would also help to boost the commitment and diligence of trustees because payment would need to be accompanied by individuals signing ‘role contracts’ that define clear duties/expectations.

Require trustees to have governance training and chairs a suitable qualification:- A recent Association of Chairs survey found that 46% of charity boards have no formal budget for board development:  this is shocking.  Given, then, the limited knowledge of the typical trustee about charity law and governance, I think it should be a legal requirement that all trustees – certainly at medium and large charities – can show they have a suitable, core level of such knowledge:  if they have not, they should be required to complete a short, accessible online course or a day’s workshop.  Furthermore, chairs and vice chairs of all larger charities should be required to attest to a suitably higher level of knowledge and experience, with ideally a new professional governance award developed by the charity sector.  I can immediately predict critics saying this idea would readily deter tens of thousands of individuals from wanting to be trustees or charity officers, but I would reply that, if we had unitary boards, then we would not need all those unwilling trustees, and the remaining trustees would be of a higher, assured calibre!

Require fixed-term limits for trustees, chairs and CEOs:- I have been on boards where some trustees have been there for 20 years and longer.  In a similar vein, I have seen many CEOs who have been in their post for 10+ years, preceded by several years also with the same organisation.  I believe such prolonged tenures are unhealthy:  they inhibit change, outside-in thinking and dynamism and can easily lead to cronyism and complacency in how a charity is led and managed.  Best practice – except for exceptional circumstances – should be for no trustee, officer or CEO to hold their position or longer than 8-10 years:  no matter how talented or motivated an individual is, the world moves so fast nowadays that fresh people with fresh perspectives should always be prioritised.

Require fuller annual impact and governance reporting by charities:-  I believe all charities should be required to report in their annual returns more fully and openly in two key areas:  i) what (ideally measurable) impact they have made in furtherance of their defined charitable objectives  and  ii) how efficiently they have managed and governed their organisation (a broader issue than just their fundraising cost ratio over the year – including, importantly, how the board has reviewed and developed its effectiveness).   These should be two key dimensions on which society judge charities – if they want to continue to enjoy the various tax perks society gives them.  Perhaps the charity sector should have an ‘effectiveness kite-mark’ award system based on periodic ‘governance/impact’ reviews by independent external auditors?  I think that would certainly be of interest to funders and donors.

Define expected ratio limits for salary levels for charity CEOs and directors:-  It angers many people, I think, that the salary level of some senior staff at some large, supposed charities (for example, in the health and pharmaceutical sectors) receive salary levels above £300,000 a year.  My own view is that I don’t think some of these bodies should be regarded as true charities and are abusing their right to claim various tax perks.  I think, if society is prepared to grant such perks, it has the right to lay down reasonable and fair markers or actual limits on how much senior officers can be paid:  in terms probably of a  ratio based on the charity’s average employee salary.

Charities need to increase the diversity of the people who are on their boards:-  Diversity makes for more enlightened, dynamic and effective teams.  The average charity, I think, is aware of this but finds it difficult to achieve often.  So, I believe, if charities actually needed fewer trustees on their boards (as proposed above) and they could offer the chance of a fee payment, then they should be able to ‘reserve’ some of their trustee slots for assured trustee profiles.  In particular, I think charities need to encourage more young people to join as trustees as well as individuals who are like the people who actually use or benefit from the charity’s services.  In the particular case of charities that are membership bodies, they should certainly avoid – as happens often now – having their board made up entirely of individuals who work  in that profession or sector.

Charity chairs (with trustees) must be ready to exercise assertive leadership over their CEO and executive team:-  In my experience some chairs, with their trustees, are very  happy just to leave the executive team to ‘run the show’ and can be too reluctant sometimes to assert their right and duty to set and define a framework of particular performance expectations for the executive team.  Some chairs think trustees are interfering in the job of the executives if they do this, but this is actually part of the role of trustees!   With a unitary board, such a responsibility of the chair would still apply, but the closer relationship with executive staff would help make things easier.

Trustees should be expected to think more commercially and be ready to collaborate with other organisations:-  Trustees – particularly of smaller charities – are often too ready to presume that having a mission or social cause behind them is an adequate basis for attracting funds, winning contracts, or surviving.  In today’s competitive environment, of course, the average charity needs to think more like a business – a social business.  This means, for example, avoiding the assumption that being a charity means providing services free to all users/beneficiaries:  actually in most cases a segment of those users may have the means to pay some level of charge, which will in turn help to subsidise other users who are less fortunate.  Likewise, trustees – particularly at small and local charities of national federated charities – must be readier than is generally the case to work with or actually merge with other charities or non-profits in pursuit of common aims.

Altogether, in the face of the greater pressures and risks they face today, charities’ traditional approach to board structure and many aspects of trusteeship and board governance have probably past their sell-by-date.  There is a serious need now for a major overhaul – some might say a mini-revolution!  The moves, in particular, to a unitary board and social enterprise will be suitable for many charities.  Let’s hope the leaders, other commentators and key players in the sector pick up the baton and encourage change.

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Managing trade / industry professional associations: 11 challenges facing the UK association sector

Trade associations are wonderful institutions and great places to take pride in a profession or trade and connect with other like-minded people.  They also play a vital role, of course, in representing industries to government and other stakeholders and helping to promote standards.  Unfortunately, though, the UK’s association sector – which ranges from many small associations to large cross-industry confederations – suffers from quite a few challenges and inefficiencies.  Here’s a list of some of the main issues I would recognise from my own CEO, director and consulting experience in the sector:

-i) A very fragmented sector with too many small associations:-   Firm figures for the number of trade associations in the UK are difficult to obtain, as much depends on the definition used.  For example, if local associations of street traders are included, then there are clearly many thousands.  If just national or regional bodies are considered, there are probably about a thousand associations in the UK.  What’s beyond doubt, though, is that there is a huge variation in size of association – with the largest 25% or so each having typically several hundred members whilst the smallest 25% have fewer than about 50 and only about 10% of associations have an annual subscription income above £1 million.  Another clear pointer to how small the average association is the fact that many associations employ no staff at all.

-ii) A lack of single voice for many trades/industries:-   The large number of associations means in some industries there are several different bodies rather than one organisation seeking to represent their sector.  This makes it harder for government and other stakeholders to understand and deal with such industries.  Whilst it can be a virtue that many small associations are specialists for part of their industry or profession, unfortunately too often such bodies are reluctant to come together in a wider cross-industry grouping with other associations for more effective representation or promotion of the industry overall.

-iii) Some trade associations have a risky, inefficient legal structure:-   Most trade associations – certainly the larger organisations – are constituted today as companies limited by guarantee, which affords their directors appropriate legal protection and enables the association to enter into contracts as a legal entity in itself.  However, there are still many associations – mostly smaller bodies or longer-established/more traditional bodies – that continue as ‘unincorporated associations’ which do not bring the legal benefits of limited-guarantee companies.  Making matters worse, the wider governance arrangements for operating such associations are often also poorly defined and those loose arrangements can easily lead to disputes or confusion between trustees/Board members and committee members as to who has the authority to do what.

-iv)  Heavy use of self-regulation breeds self-interest and reduces external credibility:-  For very many industries/sectors of the economy – especially given central government’s general dislike for statutory regulation – the relevant trade association takes on the role of de-facto chief arbiter of professional/trading standards for their members.  Unfortunately, though, where the association acts as both membership/representative body  and standards enforcer ‘under the same roof’, the inclination sometimes is to avoid standards which are too demanding and an assurance regime which is not too taxing, with the ultimate sanction for wrongdoers being simply termination of membership (rather than, for example, a heavy fine or immediate closure of the member’s business).   A more credible approach is for a membership body to run its standards and membership operations as quite distinct organisations and, also, with external/consumer representatives on the governing board of the standards operation to convey extra objectivity (as happens, for example, in the legal sector which has the Law Society and the separate Solicitors Regulation Authority).

-v)  Conservative thinking from lack of outsiders on associations’ main boards/executive committees:-  The vast majority of trade associations have only members – either elected or appointed – on their main governing committee/board, with no external or lay individuals to sit alongside them.  Unfortunately – as I have witnessed many times – this situation can lead easily to insular thinking and conservative decision-making – because everyone at the table sees issues from essentially the same perspective!   The result, though, of course, is that the status quo is too much taken for granted or is not questioned or challenged enough and the association becomes slow/hesitant to adapt or innovate.  Whilst some associations do appoint one or two external individuals to join perhaps a Board sub-committee (e.g. professional conduct reviews), this usually does little to transform the thinking of the main board itself.

-vi)  Poor knowledge of the law and good-practice concerning the running of not-for-profit bodies:-    In my experience this is a very common feature amongst the directors and committee heads of trade associations (and smaller professional bodies) and I have seen such ignorance be a major cause of such problems as avoidable legal battles, excessive financial losses, excessive risk-taking, directors not acting legally or ethically, role confusion between directors and managers, and animosity between board members and the CEO.   Even though association directors normally fulfil their role in a voluntary capacity, they are still responsible for running an organisation, and so they need to ensure they know enough about professional governance.  The CEO can do his/her best to guide directors, but the sector needs to do more to help directors themselves get trained-up better about  governance matters.

-vii) Limited use of strategic/visionary planning:-   Like with many member-based bodies, trade associations are typically not the best users of long-term business/strategic planning – either for running their association itself or for leading/influencing the future of their industry.  Partly this is understandable, of course, because associations are ‘broad churches’ and their governing committees often comprise executives from member companies that compete with each other day-to-day and/or who hold office only for a year or two.  So, it’s not surprising that their focus in planning is on the short-term and why change within associations is usually slow.  More concerning to my mind, though, is the limited visionary thinking at the level of the industry overall by many associations, because they are failing to exploit a natural, neutral role as a catalyst for forward development and change in their industry for the benefit of all.

-viii) Lack of bold leadership and limited-depth management:-   Given this typical situation regarding the board at many associations, decision-making usually needs to rely on a high level of consensus being reached.  But developing consensus can often take a lot of time and political energy to secure and this can lead to leaders avoiding or putting off difficult decisions.  The political and ‘club’ culture of associations is also a key reason why quality and depth of management skill and performance are not seen as top issues or worries by the typical association President or Chairman:  a key indicator of this in very many small and mid-sized associations is that the ranks of employed senior managers are usually very limited indeed, with there often being just one single senior individual and several much lower-skilled staff who all report to him/her.

-ix)  Heavy reliance on member subscriptions and good member retention:-   Most of the UK’s associations continue to rely on annual subscriptions from their member companies as their principal source of revenue.  Often this degree of reliance is more than 70% of total revenue, which can be really dangerous if one or two larger members unexpectedly opted to cease membership.   The risk is more acute because many associations are not particularly skilled at member marketing or ‘relationship management’.   Most trade associations do not do enough to think commercially and seek to develop a more diversified revenue base beyond more obvious, ancillary activities like events, journal advertising, and sponsorship.  Most associations could do a lot more, for example, on the training, qualifications and professional development/support fronts.

-x)  Competition from the internet and other professional groups:-    For their information, business support, networking and certain other requirements, members nowadays are usually not reliant on their trade association as their only possible provider.  In particular, the internet, other associations/professional bodies or commercial firms increasingly act as alterative sources of support.  Compared to years ago, many associations need to step up how they promote themselves to their members and demonstrate the ‘value for money’ they provide.

-xi)  Need to act fairly in balancing the interests of different members and working with suppliers/partners:-    In most trade associations that seek to represent a whole industry the classic challenge is to balance the interests and expectations of large members on the one hand with smaller members on the other.  To do a credible job an association needs normally to be able to claim it has at least 60-70% of the sector in membership, but that means the necessary focus on satisfying the expectations of the largest members can sometimes easily cause smaller members to feel less valued and even side-lined.  Beyond this balancing challenge between sizes of member, an association also needs to make sure it keeps an open, ‘fair to all’ stance if and when any members (including associate/supplier members) perhaps try to enter into a special/advantageous partnership in some way with the association by offering a commission or other form of ‘kick-back’ reward in return for favourable treatment.

Overall, in my view, even though trade associations are worthy institutions that fulfil a very welcome and credible role in society, the UK sector as a whole is not as efficient or well-run as it could be.  The list above of 11 challenges surely indicate this – and other more topical issues could be added too e.g. uncertainty around Brexit on the future of regulatory standards.  It is a pity that there is no stronger, cross-sector leadership body that brings associations together and does more to assist with issues like governance and leadership (cue a bigger and better Trade Association Forum!).

The association sector deserves to be as professional as possible.  I am hopeful it will be – given time!

Written by Mike Owen, CEO at Owen Morris Strategic

Copyright of Owen Morris Partnership.  2016

E:  mpo@owenmorrispartnership.com            T:  01886 881092

 

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The surprising facts about UK social enterprise

If you want to understand more about social enterprise in this country, I recommend reading ‘State of Social Enterprise Report 2015′, published by Social Enterprise UK.  I did so recently and found it fascinating – and in some areas very surprising – in terms of the range of key facts the survey behind the report revealed.   Here is a summary of some of the main facts I noted:

  • Firstly, clarification of what social enterprises actually are:  they’re businesses that make their money from selling goods or services – like any commercial business – but they then reinvest their profits back into the business or in furtherance of a social, environmental or community mission.  More precisely, social enterprises have the following characteristics:  a clear social and/or environmental mission in their governing documents; they generate most of their income through trading; they reinvest the majority of their profits; they are independent of the state;  they are majority-controlled in the interests of their declared social mission; and they seek to be very accountable and transparent in what they do.
  • Social enterprises operate in a wide range of industries – from coffee shops and cinemas, to pubs and leisure centres, banks and bus companies. Some examples of well-known names:  The Big Issue, the Eden Project, Jamie Oliver’s restaurant Fifteen, Divine Chocolate, and Cafedirect.  Another example sis the Elvis & Kresse Organisation, which takes industrial waste materials, turns into into stylish luggage and then donates 50% of the profits to the Fire Fighters Charity.
  • Size of the sector in the UK:  there are about 70,000 social enterprises in the country, contributing an estimated £18.5 billion to the economy and employing about a million people.
  • Size of social enterprises:  the sector has a very wide range of turnover, ranging from 13% with an income of less than £10k to 6% having a turnover of more than £5m a year.  The median turnover was found to be £151k but most enterprises operate at small or micro business levels.
  • Age of social enterprises: just under half (49%) are five years old or less.  35% are three years old or less – which is more than three times the proportion of SME start-ups.
  • Growth rate of social enterprises:  52% of social enterprises had grown their turnover over the past 12 months. That’s a significantly higher rate than mainstream SMEs, which was 40%.
  • Business-focus & profit rate of social enterprises:  73% of social enterprises earn more than 75% of heir income from trading, whilst 50% reported they had made a profit in the last year, with 26% breaking even.
  • Focused on services and UK domestic market:  The vast majority of social enterprises provide services, with only 13% providing goods and 14% providing a mixture of goods and services.  The top industries in which social enterprises operate are education, business support/consultancy, employment/skills, retail, and social care. Just 14% of the enterprises exported or licensed abroad.  A differentiating feature:  more social enterprises operate in the UK’s most deprived communities than do mainstream firms – 31% of social enterprises work in the top 20% of the most deprived areas of the UK.
  • An inclusive and diverse leadership:  40% of social enterprises are led by women;  31% have black, Asian or minority ethnic directors; and 40% have a director with a disability.
  • An inclusive and diverse workforce:  59% of social enterprises employ at least one person who is disadvantages in the labour market.  For 16% of enterprises, this group forms at least half of all employees.
  • Paying fair:  The average pay ratio between social enterprise CEO pay and the lowest paid is just 3.6:1.  This compares to a ratio of 150:1 for the CEOs of FTSE 100 companies.
  • Type of customers/markets:  The most common main customer for social enterprises is the general public (30%), but for 27% the public sector is the main source of business (a sharp rise from 18% in 2011).  17% of enterprises have the private sector as their main source of income whilst just 7% have income from 3rd sector organisations as their main source.    The largest social enterprises – those with turnovers of over £5m – are nearly three times more likely than their smallest peers to cite the public sector as their main source of income.

Alongside these interesting facts, it is valuable to note that social enterprises use a variety of legal forms:  the term social enterprise is actually a general title,  not a specific legal type and there is no single regulator for social enterprises.  A social enterprise can be a charity, in which case it is regulated by the Charity Commission.  If the enterprise is a standard company limited by share or guarantee, it is regulated by Companies House.  And, if the enterprise is a community interest company (CIC) – there are now about 11,000 such companies set up in the UK – there is regulation by both Companies House and the CIC Regulator.

So, it’s interesting/important to remember, that if a charity (established or new) actually raises most of its income by trading, actually it can correctly be considered to be a social enterprise.  It is a myth that a registered charity cannot be a business.  Many charities are social enterprises through and through:  they don’t rely on grants and donations, but instead earn the bulk of their income through selling goods or services.

So, armed with all the above understanding we should all appreciate the significance and value of what social enterprises are about today in the UK.  Furthermore, as more and more traditional charities find it increasingly tough to rely on donations or grants, looking at more trading will be a necessity for most 3rd sector organisations for the future – alongside too other more novel income sources like community crowdfunding or community ownership.

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