Last May, the House of Lords appointed a Select Committee to consider issues related to sustaining the charity sector and the challenges of charity governance. The Committee published its 156 page report at the end of March. The report focuses on charities in England and Wales and on the interests of small and medium-sized charities.
For those interested in getting to grips with all the Committee's conclusions, the report begins with a brief précis on page 3 and summarises the Committee's conclusions and recommendations found on pages 106-118. Whilst the broad thrust of the recommendations is likely to be welcomed by the sector, for the most part they are rather vague and contain few surprises. However, the report contains some interesting reflections on the history of charity and the state of the sector today. This article aims to pick out some highlights from the report and its key recommendations.
The central topics covered within the report are:
- The history and shape of the charity sector;
- Improving governance and accountability;
- Funding: grants, contracts and commissioning;
- Supporting sustainability;
- Charities and digital technology;
- Alternative forms of charity finance;
- Regulation and the role of government.
Improving governance and accountability
The Committee approves of the draft update to the Charity Governance Code (the Code) and the decision of the Charity Commission (the Commission) to refer to it as the benchmark for good governance. In the interests of full disclosure it should be noted that the Specialist Adviser to the Committee also acted as Independent Chair of the Charity Governance Code Steering Committee so a certain degree of synchronicity between the two committees on the topic of governance is understandable.
The recommendations in this section contain little in the way of surprises and largely mirror established good practice as espoused by the Charity Commission and the Charity Governance Code. There is also reference to umbrella bodies taking on tasks or grant-makers providing funding to help support governance initiatives. The recommendations on governance include:
- Charities should undertake regular skill audits of their boards and for larger charities the audit should be annual.
- Grant-makers should consider applications from infrastructure bodies and governance professionals to develop templates for inducting new trustees aimed at smaller charities.
- Trustee skills could be enhanced through improved connections between the charity and business communities, eg via secondments, mentoring, and networking. Government should do more to encourage such connections.
- Diversity on boards should be encouraged (given a lack of diversity identified by the Committee) and limited terms of office for trustees may be one way of achieving greater diversity. The Committee recognised maximum terms of office will not suit every charity and it stopped short of recommending a maximum term for trustees, provided the charity explained in its annual report the reasons why a maximum term for trustees was not imposed.
- Trustees should not be paid for acting as such, other than in "highly exceptional circumstances, where people are otherwise unable to act as a trustee". An explanation and justification for remuneration should be set out in a charity's annual report.
Transparency, accountability and impact
The report notes that public expectations of transparency have increased in recent years, so charities should operate with a presumption of openness. One of the more interesting recommendations in the report was that all but the very smallest charities should have a simple website or social media page. We note that the Charity Commission have started showing a greater interest in the online presence of new charities and we've recently had a case where the Charity Commission asked if a charity had a website as one of the queries raised during the application process.
Evaluation and impact reporting
The Committee heard some evidence that impact measurement can distort a charity's activities, and is often undertaken to impress funders rather than to understand and improve services. Nevertheless, it is important, and the Committee recommended all charities seek independent evaluation of the impact their work has on beneficiaries.
Funding, grants, contracts and commissioning
The Committee identified that the move from grants to contracts by local and national government since 2003/4 has primarily benefited the largest charities. The contracting landscape has made life a struggle for some smaller, specialist charities, which are unable to offer the scale of services demanded by public sector commissioners. The Committee was concerned that smaller charities are acting as sub-contractors for the larger service providers; which often result in a bad deal for the smaller charities. The recommendations of the Committee in this area included:
- When contracting on the basis of payment by results, public sector commissioners should consider the sustainability of the organisations delivering the services.
- Public sector commissioners should pay realistic and justifiable core costs.
- Long-term contracts (with appropriate break clauses for performance and viability) should be the norm, to promote sustainability and allow charities to plan for the future. The report does not give a figure, but cites evidence that funding is often "for just 3 years" and mentions funding "of up to seven years" with apparent approval.
- Public sector commissioners should refrain from setting overly-detailed requirements for the mechanisms of service delivery in order not to stifle innovation.
- The Committee recognises the reduced funding available to local authorities, but recommends they maintain or revive grants wherever possible to promote innovation and sustainability.
Charities and digital technology
The Committee recommended that trustees consider designating one of their number as the 'Digital Trustee' on the Board with particular responsibility for ensuring that the charity embraces opportunities technology may offer for developing the charity's work.
Alternative forms of charity finance
The limits of the social investment market in its current state were identified by the Committee and it was encouraged by the efforts of government to increase access to social investment. The Committee was scathing of the Government's focus on social impact bonds calling it 'disproportionate to their potential impact'. The issue the Committee identified was that "[social investment bonds] are only relevant where they produce a saving that can be transferred to a private investor, and that limits their potential contribution to the mix of alternative finance options for charities."
Regulalion and the role of Government
Compacts are voluntary agreements between governmental and voluntary sector bodies. The first national Compact was drawn up in 1998 with the aim of promoting partnership between the two sectors. Local authorities began creating Compacts for their areas in 2000.
While national and local compacts still exist, the knowledge and awareness of the compacts has fallen significantly since the Commission for the Company (which had a monitoring role) was abolished in 2011. The Committee saw the continued value in compacts and recommended that:
- Where compacts do not currently exist, they should be re-established.
- National and local government bodies should review their compacts in collaboration with the voluntary sector, to ensure they continue to be fit for purpose. They should recommit to applying the principles of the compact and include a mechanism for ensuring they are observed.
The role of charity advocacy
It will not have escaped the attention of anyone in the sector that the Government's stance on charity campaigning has hardened in recent years. The Committee heard that the rules on campaigning in the run-up to elections (in the Transparency of Lobbying, Non-Party Campaigning and Trade Union Administration Act 2014 – the Lobbying Act) have caused charities a lot of uncertainty and concern. Witnesses to the Committee also criticised the first version of the Commission's guidance on campaigning during the EU referendum. The Committee recommended that:
- The Lobbying Act is amended to reassure charities that they will not be censured for carrying out ordinary campaigning activity during election periods.
- Any new regulation and guidance for charities should recognise that advocacy is an important and legitimate part of their work.
- The Government should review its approach to engagement with the sector before making policy announcements, with a view to ensuring that charities feel better informed about changes that will affect them.
Impact on charities of leaving the EU
The Committee recognised that Brexit will result in the sector losing significant funding, especially from the European Social Fund. The Office for Civil Society should carry out an audit of the impact of Brexit on charities and publish its assessment by the end of 2017.
Regulation of the charity sector
The Commission's efforts to become a more robust regulator were considered by the Committee although there was some evidence that the Commission's focus on regulation had come at the expense of its advisory and supportive role.
The possibility of charging charities for regulation was discussed in evidence. Some witnesses (particularly Commission representatives) offered the view that it was inevitable, but other witnesses warned that charging may disproportionately affect smaller charities. The Committee has "grave concerns" about the Commission charging charities for regulation. The Commission should make clear how a charge would benefit the sector, be open about how the additional revenue would be spent, and explain what services would be added or enhanced in return.
The Committee's recommendations cover a wide range of areas and it is not yet known which, if any, the Government will accept. Nonetheless, running through the report is a reassuring thread of respect for charities, together with a desire to support their work.
You can download the full report here.
If you require further information on anything covered in this briefing please contact Elizabeth Jones(email@example.com) or Rachel Holmes (firstname.lastname@example.org) your usual contact at the firm on 020 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, May 2017
 We published an article on the consultation draft of the Code in January, which you can find here