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Lekan Ojumu

Investment Manager

Charities Aid Foundation

To be or not to be?

Ultimately it is a question of governance and purpose

26 November 2019

On our travels over autumn, CAF Venturesome attended a debate exploring the pros and cons attached to the traditional charity model. The sector event, kindly hosted by Stone King, debated the motion ‘to be, or not to be (a registered charity)’

With CAF Venturesome’s unique position as one of the few UK social investors wholly funded by philanthropic capital, the debate was of particular interest. In the last two years, 60% of CAF Venturesome loan approvals were to registered charities. We also have significant experience of investing in social organisations without charitable status. We recognise some differences and similarities between the two. The recent debate included a lively panel debate alongside audience input and left us pondering over our own experiences.

debate 780

Does voluntary mean trustworthy?

Some of the discussion centred on the perceived ‘seal of approval’ given to organisations with charitable status. Trust in charities was of course another discussion point. For charities; having a voluntary board is a valuable feature that creates a clear and respected line between management and those ultimately responsible for a charity (the Trustees). But is the additional regulatory burden too heavy for trustees of smaller charities? Especially as over 90% of charities have an annual income level of less than £0.5m. The voluntary nature of trusteeship can also mean the roles can be difficult to fill and therefore diversity of opinion and experience can be difficult for smaller charities to attract.  The charity model is clearly, at its best, mission focused and comes with built-in mechanisms to safeguard charitable purpose. A legitimate question is whether areas such as trading limitations, voluntary boards and regulatory onus placed upon trustees is an absolute necessity all of the time? At CAF Venturesome, we have seen small charities fall short due to the external barriers imposed and unless a systemic change is made, this will remain a market-wide issue.

A new dawn, a new model?

For those arguing for social enterprise (in whatever legal structure is appropriate), the focus had been on the need for organisations (including charities) to become more entrepreneurial. This is something that CAF Venturesome has seen over the past decade, especially with the effect of austerity demanding social organisations revisiting their business models. We have seen in our portfolio, situations where charities are prevented from pursuing opportunities due to restrictions placed upon them by charitable law. Many of the restrictions are imposed for good reason, and therefore, social organisations need to examine what they need from a legal and governance structure from the outset.  A social enterprise legal structure can, for example, allow for a formal representation of the senior management on the board. This is valuable input as they are closer to the day-to-day realities of the organisation, but needs to be safe-guarded with a strong and engaged non-executive representation to bring independence, insight and stewardship to governance. Perhaps learnings should be taken from the Principles of Trusteeship?

A consensus?

After the panellists and audience had their say, our host posed the motion to the floor at the close of the debate: 67% voted in favour of the motion defending the ‘traditional’ charity model. Among other notable responses, 73% of attendees believed there should be a legal definition of ‘social enterprise’ and 67% agreed they should be subject to specific regulation. Furthermore, 70% of attendees were in favour of charities having paid executive trustees and 71% felt charities should be allowed to undertake purely commercial trading to raise funds. (i)

At CAF Venturesome, we will continue to support both charities and social enterprises to sustain and grow their impact. We hope to see more organisations being able to demonstrate a considered approach that takes into account their purpose and how that can be achieved with an appropriate legal and governance structure. There isn’t a one size fits all approach. Social organisations will always need to think how the various restrictions will impede development and what conditions are needed for good governance to thrive.

(i)  https://www.stoneking.co.uk/news/sector-debate-poses-can-traditional-charities-survive-advent-social-enterprises

Our mission is to provide social enterprises and charities with the affordable, repayable finance they need to sustain and grow their social impact.

Want to know more? Talk to our team on 03000 123 300 or email us at venturesome@cafonline.org and we’ll be happy to help.