National Council for Voluntary Organisations (NCVO) – Written evidence (CHA0148)

Introduction

This written evidence is submitted by the National Council for Voluntary Organisations (NCVO). Established in 1919, NCVO is now the largest umbrella organisation in England, with over 12,000 charities and voluntary organisations as members.

NCVO’s mission is to help voluntary organisations and volunteers make the biggest difference they can, by championing and strengthening volunteering and civil society.

Executive summary

NCVO welcomes the opportunity to respond to this inquiry, which comes at a time when charities are facing increased pressures and new challenges in an operating environment that is perceived by many trustees as hostile.

Charities make an important contribution to the economy and society, not only by delivering public services but also through their campaigning role, building social capital and leveraging resources to tackle social problems.

Despite this, charities are having to adapt to changing attitudes by the public, as well as ongoing reductions in public spending whilst continuing to meet increased demand in their services and wider support. Furthermore, charities are having to respond to higher expectations about what they do and how they operate, particularly with regards to their governance.

The critical role of trustees and their responsibility in ensuring good governance have become more important than ever, both for individual charities and for the wider sector as a whole. The skills required for someone to be a trustee and meet their responsibilities effectively have become much more diverse, and most boards now have to ensure an appropriate presence of financial skills, legal knowledge, fundraising experience and business planning.

NCVO therefore supports the Committee’s aim to develop recommendations that will help charities strengthen their governance arrangements. This submission includes a number of recommendations for the Committee to consider, addressed at both government and charities. The aim is to ensure that the right governance structures are in place, organisations are accountable to the public and people have the necessary skills to meet their responsibilities as trustees.

However, it is important to remember that trustees are first and foremost volunteers: they are people who have chosen to give their time freely and manage this responsibility on top of other things they do in life, and should therefore not be discouraged or overburdened.

Trustees should feel empowered and supported in their role. That is why we are recommending a number of practical ways in which the experience of being a trustees could be made more accessible and positive. For example, government could amend the law to put trusteeship on a par with becoming a magistrate or school governor: this would not only raise the profile of trusteeship, but it would in practice make it easier to access. But more broadly, it is important that the Charity Commission strikes the right balance between its current focus on ‘enforcement led regulator’ and the need for ‘enabling regulation’.

There are also a number of steps that charities themselves should be taking to improve their governance and accountability. Such as:

-          Implementing the recommendations made by NCVO’s inquiry into chief executive pay, and being more transparent about the salaries of senior staff members.

-          Regularly reviewing the governance arrangements to ensure they are fit for purpose, including the tenure of their trustees and chairs.

-          Investing in their boards and making use of existing programmes such as ‘Step On Board’, ‘Trustees Bank’ and ‘Reach Volunteering’.

The role of trustees and how they can be better supported also needs to be considered in the wider context of the changing relationship between the government and the sector. Here much of the focus has been on charities and public service delivery providers, required to compete for contracts amongst each other and against large business corporates.

Charities have characteristics that make them unique in the service delivery, so it is important that their knowledge and expertise are put to full use. We have therefore made a number of recommendations on how the commissioning and contracting processes should be improved, recognising the importance of social value and the relational and transformative way in which charities work.

However, the focus on public service delivery has happened at the cost of charities’ role as a voice for their beneficiaries and their cause, and as key contributors to the public policy discourse. Effective government engagement with the sector means more than just letting them bid for contracts. It means trusting the sector, and its trustees, to work in the way it does best and not restricting the space for charities and civil society to campaign.

Yet, over the past couple of years, there have been a number of government initiatives that have either directly or indirectly limited charities’ ability to campaign, sending the message to trustees that their charity’s right to speak out is under threat.

For the voluntary sector to be unleashed to do what it does best, the government and the voluntary sector need to chart a new course in their relationship. That is why we are recommending that government should recognise the valuable role of charities in building social cohesion and democratic engagement, and ensure the sector is part of the solution as our country exits the European Union.

And now more than ever before is the time for government, led by the Office for Civil Society, to restate and demonstrate its support for the Compact principles as a framework for respectful collaboration between the voluntary and statutory sectors, while recognising their separation and the independence of the voluntary sector.

The purpose of charities

What is the role and purpose of charities in civic society in England and Wales?

The voluntary sector is a vital part of the fabric of a strong society in the UK. There are more than 160,000 organisations that make up the core of the voluntary sector which are incredibly diverse and represent a range of sizes, aims and activities.

Charities make an important contribution to the country’s economy:

-          The value of the UK voluntary sector to the wider economy – its Gross Value Added (GVA) – was estimated at £12.2bn in 2013/14.

-          The sector also employs some 827,000 people – more than two and a half times the number Tesco employs, and over half the number working for the NHS.

-          UK charities have an annual income of £43.8bn and spend £41.7bn each year helping millions of people in the UK and across the world. Their money comes from a range of sources, including donations from the public, trading to raise funds, and selling their services.

But most importantly, charities fill the gaps that government and the private sector cannot or will not, gathering together communities, including those that are hardest to reach, and enabling citizens to help each other.

-          When delivering public services, charities reach into places government struggles to touch. Charities have a better chance to engage those who are hardest to reach, because they are based in the communities they intend to serve, and because their independence from the state is more likely to foster trust.

-          They are also often more likely than the state to be able to develop innovative, nimble approaches. This is because they are prepared to take risks that arms of government are unable or unwilling to.

-          Through their campaigning role, charities act as a voice for their beneficiaries and the wider community with which they have established a relationship. It is because of their reach and links into communities, including the most disadvantages, that charities have not only the trust of those they represent, but the knowledge to speak out on their behalf.

As well as building financial capital, charities stimulate a flow of social capital by building local support networks and supporting some of the most vulnerable in society. The relational and transformative way in which many charities work means that charities not only offer help and aim to reduce needs, but while doing so they can also bring about a transformation of people’s capabilities.

And, last but not least, charities leverage resources to tackle social problems: there are countless foundations across the country that have a long history of helping people overcome disadvantage and lack of opportunity, supporting disadvantaged young people; and improving integration among communities.

How has this changed?

Expectations of charities have changed considerably. As demand for services increases and government takes a back seat, charities are stepping in and taking a greater role in society. This has led to organisations being held to a higher standard of account, and charities say they increasingly have to do more to prove their effectiveness and show that their work leads to positive outcomes.

Over the past 5 years there has been a continuing shift in the way charities generate their income: earned income (from providing goods and services) is higher than ever before than income from donations and grants. The vast majority of this income is received by the largest charities, providing services under large contracts. This is indicative of a different operating environment for charities, and a different relationship with government: one where charities are seen mainly as service providers and have to compete amongst each other to won contracts.

On a broader level, charities are no longer the only types of organisations known for their focus on ‘social good’. This space that has traditionally been filled by charities is now opening up to a range of actors, with Community Interest Companies, social enterprises and hybrids of government, business and social activity emerging. The lines that define charities have become increasingly blurred, raising the challenge for organisations to establish their role and build relationships with their respective stakeholders, including government and the public.

What role can charities play in community cohesion and civic action?

We believe that voluntary organisations and volunteers are at the heart of the society that people want to live in. Charites play a vital role in building social capital and one of the ways it does this is by growing and enhancing volunteering. Volunteering can contribute to community cohesion by:

-          Bringing people together to tackle some of the biggest challenges we face, from helping people to develop skills and experience to find work, to transforming public services and building more resilient communities where everyone can make a difference.

-          Providing people with a way in which they can express their views and take action on causes they believe in, part of an expression of citizenship and being part of a democratic society.

-          Engaging a diverse range of people across communities and involving people from marginalised groups. Research has shown that there is a relationship between volunteering and social activism,[1] and a connection between volunteering and expressions of other forms of citizenship like voting.

The voluntary sector and volunteering can also play an essential role in the future of a new generation of user-led, co-produced public services, transforming public services and the way they work with communities and empowering citizens to have a say. Volunteer involvement in public services offers opportunities for people to come forwards to give their time to a cause they value deeply, and has the potential to improve outcomes for communities.

How does the sector benefit from volunteering?

Volunteers are at the heart of the voluntary sector and most charities rely on the support they receive from volunteers who give their time, energy and skills. The number of volunteers involved in supporting charities far outnumbers the 800,000 employees.[2] Many smaller charities are run entirely by volunteers. For most charities, volunteers bring their skills and experiences to charity governance as trustees. Volunteers contribute skills and experience which enable charities to enhance their work, increase their impact and reach. As individuals choosing to give their time for free they also bring unique credibility, objectivity, luxury of focus, freedom to criticise, and an ability to experiment.[3]

However, viewing volunteering simply as an activity undertaken in the context of a registered charity would be quite a narrow view. Volunteers give their time to a diverse range of organisations and groups, including in the public sector, and undertake a range of roles (or multiple roles). Around the UK, 15.2 million people already volunteer every month[4] to support a variety of causes in their communities. Today, there are an estimated 3 million volunteers in health and social care[5], over 500,000 citizens supporting policing through voluntary action[6] and 15,500 volunteers in libraries.[7]

We are also seeing examples of charities working more in partnership with different sectors, which is opening up new opportunities for volunteers and helping charities find new ways of involving volunteers and increasing their impact. For example, charities are working with businesses to develop employee supported volunteering programmes and are involving volunteers in delivering or working in partnership with public services. There are more opportunities to build relationships across sectors for mutual benefit that can enhance volunteering.

How has the status of volunteers changed?

Volunteering seems to have had a higher profile in recent years, with government and others recognising the value of volunteering more. However, whilst recruitment and retention of volunteers is an issue for charities,[8] there has been too much focus on how to increase numbers rather than addressing the barriers to volunteering that exist at a local and organisational level. In addition, new national initiatives have been introduced and although these have been welcomed, the voluntary sector would like to see more support for existing volunteering initiatives. 

We have also seen an increasing movement towards the professionalisation of volunteering, with widespread development of training, volunteer job descriptions and personalised volunteer programmes. On top of this there has been a rise in qualified 'professionals' volunteering for charity in light of the economic downturn. The emergence of volunteer management and coordination as a career field has increased formalisation and professionalisation.

The implication of this is that volunteering may be increasingly perceived as a means of developing skills and a career, especially for young people. This professionalization can also lead to new expectations being placed on volunteers, particularly trustees.

Recommendations

NCVO supports the Committee’s aim to improve governance and help charities strengthen their governance arrangements. However, we would urge the Committee to ensure that any recommendation reflects the fact that charity trustees are first and foremost volunteers. They are people who have chosen to give their time freely and manage this role on top of other things they do in life, so it is important to manage expectations and avoid placing excessive burdens on them.

We recommend that Government should create a new access to volunteering fund. By contributing towards the costs and expenses incurred by voluntary organisations, the fund would provide an opportunity to build on the legacy of the Paralympic Games and open up volunteering opportunities for more people.

NCVO recommends that greater focus should be placed on the following aspects of volunteering:

-          The quality of the experience for volunteers. The quality of roles on offer and the quality of the volunteering experience is crucial to enabling effective recruitment and retention of volunteers. Organisations should have systems and processes in place to ensure good practice is embedded. This should ensure ongoing support, recognition for volunteers’ contributions, address positive relationships/conflict within groups and involvement of volunteers in decision-making.

-          Volunteer management and the value of investing in it. NCVO’s recent survey of 723 volunteer managers (2015) showed that there is an ongoing need for volunteer management training and support but that volunteer managers often don’t have a budget available to support their personal and professional development (38% of those surveyed had no training budget).

-          Improving access to volunteering and addressing barriers.

-          We need to find ways that allow people to fit volunteering into their lifestyles. The most common reason for stopping volunteering is ‘not enough time due to changing home or work circumstances’ (41%).[9] Developing a more diverse range of opportunities, including those that are more flexible or offer short-term engagement like micro-volunteering may help to address this.[10]

-          Financial circumstances should not be a barrier to volunteering, so volunteers’ expenses, like travel, should be covered. In challenging economic circumstances, however, some organisations struggle to pay expenses, which can disadvantage certain volunteers.[11]

-          According to government figures,[12] disabled adults are less likely to volunteer in comparison to the rest of the general adult population. A grant programme, such as the Access to Volunteering Fund, could help increase the involvement of people with disabilities in volunteering, as demonstrated by the pilot Access to Volunteering Fund (2010).[13]

This will help to ensure that we are developing an approach to volunteering that is fit for the future. Charities will need to adapt their approaches to engaging and supporting volunteers taking into account: demographic change, changes in people’s lifestyles and how people want to volunteer and ways to embrace digital tools to help facilitate this change.

Pressures and opportunities

What are the main pressures faced by charities currently, and what impact have these had?

The environment in which charities are operating has changed significantly over the last decade, and while a number of initiatives have proven helpful, for many charitable organisations this is a difficult time. Many charities are not thriving but on the contrary are struggling to survive.

There are several reasons for the precarious position charities are in:

-          Rising demand

Uncertain economic times are putting more pressure on vulnerable people, who turn to charities for their support and services. There are concerns that this trend could be exacerbated by the result of the EU Referendum, leading to a further increase in demand by those who are economically and socially disenfranchised.

-          Challenging funding environment

Like many organisations, charities’ income has been affected by the financial crisis and subsequent tightening of government spending. After steady growth in total sector income through the early 2000s, income did not exceed its 2007/08 peak (£43.2bn) until 2013/14 (£43.8bn), the most recent year for which data is available[14]. Individual giving has largely remained stable in the intervening years, while income from government has fallen, with the exception of the year 2013/14 when there was a small increase in government funding compared to previous years. However government funding has tended to move away from grants and towards contracts[15], leading to a loss of the operational and sustainability benefits that grants provide.

-          Increased scrutiny

The status of being a ‘charity’ no longer automatically leads to an organisation engendering the public’s trust, and some charities have found themselves the object of intense media scrutiny over recent years. This scrutiny has often raised legitimate questions and helped identify areas of clear public concern. In the longer term it will therefore be an important contributing factor to charities improving their practices and responding to changing expectations about how they should operate. However, it does raise challenges in the short term, as charities have needed to respond swiftly and rectify any problems in order to address the public’s concerns.

-          Pressures on governance

The critical role of trustee performance and the responsibility of trustees in securing good governance have been the common lesson learnt from recent failures in charities. It has become more important than ever for individual charities to ensure the appropriate governance structures are in place, and create the environment in which trustees and paid staff work together in a symbiotic relationship to produce effective results in line with the charity’s vision. This is important from the wider charity perspective as well because the charity sector as a whole is damaged by the poor standards of governance displayed in isolated cases.

What opportunities do charities have in the current environment?

Despite the recent negative headlines that some charities have received, it is important to remember that the majority of people trust charities, continue to support charities either by giving their time or they money, and see charity as the main way in which to do good (as demonstrated that up 5,000 new charities are set up every year).

This is a strong confirmation that the charity model is fundamentally working: people still believe in charity and that charities play a fundamental role in society.

NCVO believes that charities’ role is going to be even more important in light of the EU Referendum result. The EU Referendum has thrown into sharp contrast pre-existing social tensions and divisions within communities, which urgently need to be addressed in order to rebuild a thriving democratic society. Large, small and medium-sized charities are well placed to be part of this solution, as they already form an essential part of society.

The reason charities can play an important role is that thousands of them are responsible for delivering services to communities in need and to individuals which the state has no chance of reaching without them. In most cases they have reached into places where existing public services have failed to go. They respond in real-time to individuals’ needs and shape services around the person, not a funding opportunity. They are embedded in the communities they serve and supported by an army of committed volunteers, many of which have real-life experience of the need the charity is meeting.

Furthermore, charities are uniquely positioned not only because they are able to meet particular needs, but because of the relational and transformative way in which many of them work with their beneficiaries. Charities often help the most marginalised whilst at the same time enabling positive relationships with sympathetic professionals and volunteers. Charities can also bring about the transformation of people’s capabilities, offering hope and a fresh start, rather than simply the reduction on their needs.

These additional benefits brought by charities and their links into communities are especially valuable as government takes steps towards building better community cohesion and responding to the social needs and tensions that the Brexit vote has revealed.

Are there specific pressures affecting particular types of charity?

Smaller and medium sized charities are suffering disproportionately in the current funding and contracting environment.

The current funding and financial landscape shows a great disparity between the fortunes of larger charities and the rest of the sector. In 2013/14, charities with an income of £10m to £100m saw their income increase by 3.7%, while those in the categories below £1m have faced considerable financial challenges. In particular:

-          Smaller charities have experienced higher income volatility than larger charities.

-          Small and medium sized charities lost more income proportionally than larger charities.

-          Small and medium sized charities have been systematically excluded from the commissioning and tendering of contracts, due to their size, specifications and complexity.

There has also been significant variance in the way that different parts of government and local authorities have implemented their cuts, meaning that cuts have been felt unevenly across the sector. For example, equalities charities and infrastructure have been considerably impacted.

NCVO has also received anecdotal evidence that the following categories of charities are facing additional challenges compared to the rest of the sector:

-          Charities that campaign for unpopular causes. We are concerned about the number of reports from charities working with disadvantaged communities and ethnic minorities, who have experienced an increase in harassment and abuse following the result of the EU Referendum.

-          Charities that fundraise. The recent scandals about charity fundraising practices and the consequent changes to fundraising regulation mean that many fundraising charities are going to comply with new requirements, such as the Fundraising Preference Service. Furthermore, the Information Commissioner’s Office has recently updated its guidance on direct marketing, making it clear that it also applies to charities that want to communicate with their donors and supporters. All these changes are supported by NCVO, since we believe they will help restore public confidence in fundraising and ensure donors are treated fairly and respectfully. However, there will inevitably be a period of adjustment and unsettlement for many charities as they have to examine and change their fundraising practices.

Recommendations

Government should recognise the valuable role of charities in building social cohesion and democratic engagement, and ensure the sector is involved in the negotiation process led by the Department for Exiting the European Union. It is important that formal engagement opportunities are in place to ensure the sector’s views and contributions can be fed into the discussions.

The contribution of charities to the public policy debate through their advocacy and campaigning should be recognised and respected by government and the Charity Commission. An important step government could take to demonstrate its recognition of charities’ campaigning role is the implementation of the recommendations made by Lord Hodgson, following the review of third party election campaigning.[16]

Innovation

How do charities seek to innovate, particularly in the digital arena?

Academic literature frequently refers to the innovative capacity of charities, citing proximity to service users or knowledge of issues not known to policy makers as factors in enabling the identification of new approaches. Resource insufficiency may also drive the need for new or alternative solutions to old problems. Nevertheless, there are references in the academic literature to charities being ‘innovated out’ and more anecdotal evidence that the current operating environment is not conducive to innovation.[17] 

In particular, charities highlight that mechanisms used in public procurement such as payment by results inhibit rather than encourage innovation by reducing tolerance for experimentation and the failure that is a necessary component of innovation. Similarly, the challenge of generating surpluses on public sector contracts to generate risk capital has been attributed as an issue. While it could be argued that trusts and foundations provide the appropriate risk capital for the initial stages of innovation, this ‘pump priming’ model is predicated on statutory funders acting as stage 2 funders who would test more broadly whether innovations have wider application. Finally, it could be argued that in an era where charities are under more scrutiny than ever, the licence to take risks and fail that is an important part of the innovation process is reduced.

Recommendations

The role of capital, both for early-stage innovation and scaling, and public procurement processes should be further explored. This should provide commissioners with a willingness to experiment and open up space for innovative approaches; to recognise that grantmaking is an important and appropriate mechanism for the transfer of resources where innovation is desirable[18]; and to put in place procurement processes that enable small and medium charities to engage and deliver alternative approaches.

Within charities, the innovation process and culture could also be improved. NESTA[19] notes that ‘eureka’ moments are rare and that well-designed processes and a culture that embraces risk are conducive to greater capacity for innovation. Support to build this capacity is available and could be delivered more widely, although this in itself requires funding. Challenge funds, such as the Cabinet Office Innovation in Giving programme, run by NESTA, also offer a successful model for encouraging innovation.

Governance and leadership

What skills are required to lead and manage a charity?

Over the past few years, charities have been the subject of a number of scandals: from the collapse of Kids’ Company, unsavoury fundraising practices and involvement corporate partnerships, to media scrutiny of executive pay.

The recurring theme throughout these issues has been the importance of governance as a means of preventing bad practice and the role of trustees’ in avoiding charity failures. The case for good governance in charities led by motivated trustees with an understanding of their role, appropriate skills and ability to lead has therefore never been clearer.

In particular, it has become apparent that trustees need to be equipped with a range of skills, depending on a variety of factors such as:

-          the size of the charity;

-          how it operates;

-          what it does.

The lack of sufficient finance skills and fundraising knowledge have especially been at the heart of some of the most recent governance failures.

NCVO would also argue that the way in which charities are governed has not been appropriately reviewed and updated to ensure different governance models are in place to respond to different needs.

In many organisations a step-change is necessary to update and improve their governance: this could bring about huge improvements in the relevance and quality of the sector’s delivery to its beneficiaries. Too often, boards in the sector lack the skills that they need in this day and age and too often, they can struggle to meet good practice. Furthermore, boards in the sector are nowhere near as diverse as they could and should be, a lack of diversity that can lead to narrow thinking and that presents barriers to being able to most effectively represent the diversity of the beneficiaries that they seek to serve.

What support exists to develop these skills within the charitable sector?

There is a wealth of existing guidance describing what good governance looks like. Most prominently, the Code of Good Governance describes how an effective board operates effectively, and is currently being reviewed and updated to reflect the latest thinking about best practice in charity governance.

There is also a range of resources available to help organisations improve their governance. Programmes like ‘Step on Board’, ‘Trustees Bank’, and ‘Reach Volunteering’ already provide a range of services to help organisations improve their governance and recruit skilled trustees.

How can trustees be best equipped, enabled and supported to fulfil their responsibilities?

As highlighted by the review led by Dame Mary Marsh,[20] the key problem is that many organisations in the sector are unwilling or unable to invest in a significant way in their boards (whether that be recruiting new and more diverse trustees, training and inducting trustees, carrying out board performance reviews or individual appraisals).

NCVO agrees with the review’s conclusion that the answer should not be a top-down, Government-funded capacity-building programme. Instead there is strong a case for encouraging charities to invest more in their boards so trustees feel empowered and supported in their role.

Recommendations

The sector, in collaboration with the Charity Commission, should carry out a review of existing governance models, and ensure different governance models are in place to respond to different needs.

Government and the Charity Commission should support trustees as they make the changes necessary to change the structures and behaviours that undermine their effectiveness as a board. In particular:

-          The Charity Commission should review the information and guidance it makes available to new trustees, both in terms of its content and how it is communicated to trustees, so that it is widely disseminated but most importantly it sends the right message to trustees about the importance of their role, their responsibilities and the importance of continually investing in their skills. For example, at the moment when someone becomes a trustee of a charity that is also a company limited by guarantee, they receive a welcome letter from Companies House which explains their duties as a director and signposts to relevant resources and information. The Charity Commission does not provide such a service, which is simple yet would be effective in ensuring trustees feel supported and valued in their role.

-          Government should amend the law to put trusteeship on a par with becoming a magistrate or school governor. This would not only raise the profile of trusteeship, but it would in practice make it easier to access. By extending employees’ existing right to take reasonable time off for certain public duties (e.g. to serve as magistrates, councillors or on the governing bodies of schools) to being a trustee in the social sector, Government would be taking an important step in helping improve the supply of individuals onto boards in the sector.

NCVO also recommends that charities should regularly review the tenure of their trustees and chairs. In his 2012 Review of the Charities Act 2006, Lord Hodgson recommended that trusteeship should normally be limited in a charity’s constitution to three terms of no more than three years’ service each. Any charity which does not include this measure in its constitution should be required to explain the reasons for this in its annual report. Although we do not necessarily endorse the three-year cap, especially for smaller charities, we agree that one of the responsibilities of trustees is to try to refresh and bring in new ideas and look at new approaches.

Accountability

How can charities ensure that they are properly accountable to their beneficiaries, their donors and the general public?

By law, charities over a certain size are required to state what their charitable objectives are and how they are meeting them in an annual report to the Charity Commission, which are publicly available online. In addition, they submit a range of additional information to the Commission in the form of a Statement of Recommended Practice (SORP) which applies across the UK and Republic of Ireland. This includes detailed information on how they are spending their money and the state of their financial reserves.

Transparency around charity funding has improved significantly in recent years. Many charities publish detailed information on their website about their activities and how they allocate the funds they receive. However there are areas where this could strengthened further such as senior executive pay.

What, if any changes, might this mean for current arrangements?

An increasingly important area of charity governance is the involvement of beneficiaries and of the people affected by the cause in the running of the charity. Beneficiaries bring a unique perspective to any discussion about the work of a charity because they can talk with direct experience about what it is like to be on the receiving end of your services. Charities involve their beneficiaries in their work in a number of different ways: some may make direct appointments to the board, others may form an advisory group or panel or consult them on different issues.

Recommendations

Charities should adopt the recommendations made by the Inquiry into Charity Senior Executive Pay (NCVO, April 2014). The key recommendations suggest that:

-          Where trustees feel high salaries are necessary to attract the right people, trustees should explain their rationale openly.

-          Charities should go publish the exact salaries of named senior staff members in an accessible place on their websites, giving donors ‘two clicks to clarity’. This goes further that the legal requirement to provide an indication of the number of staff in pay bands over £60,000 in their annual report.

-          Charities should publish the ratio of the highest salary to the median salary across the organisation.

Charities should explore further ways in which they can offer their beneficiaries greater involvement in their governance, integrating elements of joint decision-making between the people they supports and people with a background in charity governance.

Resource management

What are the current challenges to financial sustainability, as well as efficient resources and risk management for the sector?

How can these challenges be overcome?

Recent NCVO research into the financial sustainability of the voluntary sector[21] drew in evidence from a broad range of sources, including the NCVO Almanac, to examine trends in the income, expenditure and assets of charities. The research found that while the sector’s income had slowly recovered since the financial crisis, the aggregate figures masked a significant redistribution of the sector’s spending power from smaller to larger organisations.

This conclusion was reaffirmed and examined in greater detail in subsequent research for the Lloyds Bank Foundation, focusing specifically on the experience of small and medium sized charities[22], and confirmed by the most recent NCVO Almanac 2016 figures, in which almost all growth in the sector’s income was attributable to a small number of the largest charities.

Small and medium sized charities face significant barriers to engaging in public service delivery, in particular a general trend towards larger contracts, with unnecessarily burdensome bidding and reporting requirements, short contracts as standard and limited pre-procurement engagement, inhibiting the ability of smaller organisations to bid for work. This has affected their ability to diversify their income as funding from government has overwhelmingly shifted from grants to contracts. Trends in commissioning indicate that without further policy intervention, these barriers may continue to grow rather than shrink[23].

These issues have arisen in the context of reduced voluntary organisation capacity and growing demand for their services, as public expenditure and household income have fallen. In order to keep frontline services running, many smaller organisations have cut back office and management capacity, limiting their ability in the medium term to adapt their funding models, or to even engage with funder programmes designed to improve their sustainability[24]. Use of reserves or sale of assets to fund ongoing expenditure by some smaller organisations has also left them vulnerable to further financial shocks.

What lessons can be learnt from past mergers or dissolutions of charities?

Mergers and dissolutions are normal parts of charity lifecycles, and are not inherently problematic when well planned and managed. Charities may naturally dissolve if their charitable purpose is achieved, or where the trustees decide their purpose can be best achieved by transferring assets to another organisation with similar objects. Similarly, mergers can result in more resilient organisations with a greater capacity to achieve social impact.

Dissolutions that are managed poorly can place charity beneficiaries at risk of sudden service withdrawal, reduce the chances of services, staff and assets being successfully transferred to other organisations, and create reputational risks for the wider voluntary sector, where such an instance is widely reported on. Ensuring trustees have the requisite financial skills and capacity to manage organisations sustainably is clearly important, but there is also a role for the regulator in detecting and addressing poor financial management before it results in the problems described above.

How can charities effectively deliver services and be assured that their work achieves successful outcomes?

Charities need to know that their interventions are worthwhile. Being mission driven, the ultimate metric of their success is the impact that they have.

Charities are often founded by people with direct experience as service users, or have services users on their trustee board. By being close to their users and communities, voluntary organisations often have a unique perspective on needs and how to improve services. This includes identifying where earlier intervention could have prevented crisis.

Often based within the communities they work with, charities bring a local expertise to public service delivery and are able to reach and provide a voice for some of the most marginalised and isolated people. Charities are also able to use their advocacy role to apply the knowledge and expertise gained through working with service users to influence service improvement.

Demonstrating consistent achievement in contributing to long term impact, such as the achievement of wellbeing or reduction in recidivism, is a challenge for all sectors. This does not diminish the importance of these goals but it does mean that we should be realistic when setting expectations for charities delivering public services.

It’s essential that service improvement is seen as a journey, rather than a destination: failure is acceptable as long as lessons are learnt and changes made. Key to success are: measuring what matters, including making greater use of qualitative evidence such as insight provided by service users; clarity on the outcomes and impact sought as well as a robust theory of change; access to relevant data, including that held by commissioners; promoting a positive learning culture in which honesty is rewarded rather than fingers pointed; and sufficient resource to ensure that quality can be maintained and user needs met.

What are the benefits and challenges of funding for charities being derived from commercial contracts?

Many voluntary organisations have pioneered the services they provide – by being the first to identify and meet a need and then persuading the state to take responsibility for making the necessary services available more widely. As such, in some case receiving statutory contracts can be seen as recognition that a voluntary organisations is delivering a high quality service.

For organisations seeking to expand their services, statutory income can be crucial - though  it must be recognised that for other organisations scaling up might neither be possible nor desirable, for example because their mission is to provide a specific service to a small and well defined community.

Winning statutory contracts can help to diversify an organisation’s income streams, better preparing them for financial shocks. However, a business model based predominantly on winning statutory contracts may not be sustainable, particularly given the ongoing need for public authorities to meet challenging spending targets.

Equally, poor commissioning practice can prove extremely challenging for many voluntary organisations to navigate. Procurement processes are often unnecessarily burdensome, failing to make use of the light touch approaches permitted by the Public Contract Regulations 2015. Short term contracts exacerbate this, leaving little time to embed and improve a service before bidding starts afresh. This is a significant drain on charitable resources especially given that contracts often do not cover the full cost of delivery, never mind the time taken to bid.

The use of inappropriate funding mechanisms, such as payment by results for supporting those with complex and multiple needs, can both distort service delivery and cause cash flow problems for providers. For example, the use of PbR in the Work Programme led to ‘creaming and parking’ by prime providers and the withdrawal from supply chains of a number of specialist charity providers for whom the programme was financially unsustainable. 

Each of these issues, plus the increasing aggregation of services into larger contracts, is more challenging for smaller organisations to manage and as a result they are losing statutory funding. As mentioned above, recent NCVO research has found that whilst voluntary organisations with total income over £100m per year saw their government funding grow by 18% between 2009/10 and 2013/14, all other income bands saw falls.

Recommendations

Funders should have a role in ensuring that recipients have strong governance arrangements and financial monitoring in place, by including these as requirement of the funding and putting in place appropriate financial check. It is important however that such requirements remain proportionate to the scale of the funding in question, and recognise in particular that smaller organisations have seen the greatest relative falls in income compared to other charities, so their financial position and reserves may in general be less strong than larger charities.

While many charities are successfully adapting to the current financial climate, many of the challenges described above, particularly with respect to public sector commissioning, require government intervention. NCVO recommends that:

-          Government should systematically collect evidence on the use of payment by result contracts, so that practice may be improved. Government commissioners should be required to use the NAO’s analytical framework for decision makers when considering payment by results contracts and encourage other public bodies to do the same.

-          When developing new payment by results programmes, government should plan for funding to support voluntary sector organisations to build skills in financial planning, risk assessment and modelling of contracts. However, commissioners should also recognise that developing these skills can be a disproportionate burden on smaller voluntary organisations and that mixed funding models that include grant funding may be more appropriate.

-          The Social Value Act should be strengthened so that there is a requirement for authorities to ‘account’ for and report on social value in their commissioning. As it stands, commissioners only have to ‘consider’ social value when commissioning services. Similarly, commissioners should be required to ‘account’ for pre-procurement consultation and engagement with users and providers when looking to include social value in a contract. We also believe that the Social Value Act should be extended beyond services to good and works, and that reference to the EU procurement threshold clause should be removed.

-          The government should explore alternative ways to allow greater participation of charities and other SMEs in public service markets, including by scoping out the impact, effectiveness and efficiency of contracts that support engagement with smaller organisations so that we can build up a better picture of the contribution they make.

-          Where breaking down contracts is not feasible, the government should support the building of voluntary sector consortia. Consortia are a vital route, through collaboration, to innovation and efficiency savings but they require support to develop and previous funding streams, such as Community Right to Challenge grant fund administered by the Social Investment Business, are no longer open. We believe that government should establish a ‘consortium development grant fund’, potentially in partnership with the Big Lottery Fund, to provide seed funding for organisations seeking to establish local consortia.

-          Government should provide match funding to enable piloting of a model that upskills both commissioners and providers from a local area simultaneously, starting at the beginning of a commissioning cycle and providing support up until tenders are submitted. This would effectively combine elements of local commissioning academies and the commercial masterclasses.

Social Investment

What is the potential of social investment and social impact bonds? What are the barriers to fulfilling their potential?

Social investment is an important financial tool that can help voluntary organisations improve their sustainability and impact, where repayable finance is an appropriate option for them. NCVO works closely with key social investment stakeholders such as Big Society Capital and the Access Foundation, and supports various social investment initiatives such as the GET Informed campaign and the development of the GoodFinance website.

Smaller organisations may experience difficulty in accessing social investment due to the high cost of borrowing smaller amounts, an issue which key stakeholders are keenly aware of and are working to address, using blended finance models. Repayable finance evidently requires income to repay, and the challenges facing charities with respect to public sector commissioning trends may be acting to reduce demand as organisations are unable to access the funding streams that could enable borrowing to scale up or improve their sustainability. We are supportive of continuing work across the sector and government to improve the social investment market, although we emphasise that it should not be prioritised by government to the exclusion of other programmes addressing the challenges facing the voluntary sector.

Social impact bonds are an intriguing development in the commissioning sphere, but the evidence base is currently not sufficiently developed to establish whether they are better than traditional funding models. The key question regarding more widespread use of the model is not whether they are capable of achieving impact, but whether they do so better than other models in terms of cost-effectiveness and achieving impact.

Research being undertaken by the University of Oxford, looking at evidence from existing SIB evaluations indicates that many of the proposed benefits ascribed to the SIB model have yet to be realised in practice[25]. To take one example, the evaluation report for the Peterborough SIB found that while the programme had successfully reduced reoffending, there was “no compelling reason to believe that SIB funding on its own fosters innovation”[26]. Some of these issues may be explained by the fact that as SIBs are a form of payment by results commissioning, and as such they inherit many of the qualities of their parent model. Consequently, they also experience many of the same design and implementation challenges, as set out in a recent NAO report[27].

NCVO remains open-minded about the potential for SIBs to be an effective funding model, and has repeatedly called for more research into their efficacy, using counterfactuals built into their design and evaluation. The recently established Government Outcomes Lab will be exploring many of the challenges and barriers facing SIBs and we look forward to supporting their work where possible. However, in light of the many other challenges facing the voluntary sector, we have expressed concern that the government has focused such a considerable proportion of the Office for Civil Society’s resources on what is a relatively untested and unproven model via the Life Chances Fund.

Recommendations

Government should ensure that an appropriate range of funding models are available to the sector, re-calibrating its focus from social investment.

In particular, more work needs to be done to:

-          Support local philanthropy by match-funding donations from businesses and individuals

Building on the success of the ‘Endowment Match Challenge’, the government should continue a match-fund programme to encourage local giving via community focussed foundations.

-          Make the Small donations Scheme more accessible to small charities

Simplifying this scheme by opening it up to all charities which are registered for Gift Aid would reduce red tape and support more charities. Government should also abolish the matching requirement, which unfairly disadvantages smaller charities.

The role of the Government

What should be the role of local Government?

Evidence indicates that the majority voluntary organisations are local in terms of their scale and area of operation. For those local organisations that have a direct relationship with the state, other than HMRC or the Charity Commission, this is likely to be a local government body. The last two decades would suggest that the nature of this relationship varies somewhat: at times supportive and based on partnership to achieve common goals, at others distant or antagonistic, with voluntary organisations seen as ‘usual suspects’, illegitimate players in the democratic space.

Local government has for a number of decades funded local charities, and frequently local infrastructure bodies for the sector and volunteering. The sector receives more of its statutory income from local government than any other source: £7.4bn in 2013/14. However, the nature of the funding has shifted. First, a move away from grants to fewer, larger and more generic contracts, mostly for the delivery of services such as adult social care, which are excluding smaller, more specialist charities; and secondly a reduction in community budgets overall, in some cases ending grant funding programmes, in other cases ‘insourcing’ services that had been provided by charities. There is also evidence that local government support for local infrastructure, whether for volunteering or voluntary organisations, is on the wane, with closures in a number of areas. This will have a long term impact on the capacity of the sector to shape public services and collaborate with local authorities.

Recommendations

In an era where local government itself is under substantial financial pressure, a starting point is to work with local charities to ensure that good quality advice and support is available locally for citizens who want to start or grow charities and community groups, or get involved as volunteers and trustees. If communities are to be involved in the services that they use, which we believe they must if the twin pressures of reduced budgets and rising demand are to be met, then good quality advice and support is necessary.

Secondly, the role of local government should be to work with charities and community groups in partnership to identify local community needs and find sustainable solutions for government and the sector. Practically, this means moving beyond transactional relationships simply based on procurement exercises, instead involving the sector in strategic planning and bringing comparative strengths and assets to the table. For local government, this might be sharing community assets such as buildings or by helping organisations to access other networks and resources, whether skills, money or time.

Finally, it must the role of local government to acknowledge and support the role of charities and community groups as legitimate participants in local democracy, where the latter are accepted as having a role in representing communities alongside elected officials, and where they play a role in holding local institutions to account.

What should be the role of the Charity Commission?

NCVO has always argued that the primary role of the Charity Commission is that of the regulator of charities. As such, the Commission should focus on its statutory duties of:

-          Maintaining the register of charities accurately, in order to promote the accountability of charities to donors, beneficiaries and the general public.

-          Ensuring and promoting compliance by charity trustees with their legal obligations.

-          Taking action in any case of misuse of charity or charity funds for unlawful or improper purposes.

In carrying out this role, a key issue is the independence of the Charity Commission. As the regulator of a sector that is required by law to be outside of party politics, it is vital for the Commission itself to be independent from both government and party politics. This is necessary for its effective functioning, and for its credibility in the eyes of the general public and the charities it regulates. A charity regulator that is perceived to be political risks undermining perceptions of charities more generally.

Recommendations

The Charity Commission should continue its focus on the regulation of charities. However, in carrying out this role, it should consider a model of ‘enabling regulation’ as opposed to what is currently perceived to be ‘enforcement led regulation’. This would be based on the recognition that the best way to ensure the regulated community understands and fulfils its obligations is to provide appropriate guidance and tools. Enforcement of course remains important when deliberate abuse occurs, but our view is that a better balance can be achieved to ensure the sector is regulated effectively.

NCVO has argued that the governance of the Charity Commission is a key factor in determining its independence, and we have recommended that the current appointment process should be improved in way that distances the role of chair of the Charity Commission from executive control, by giving Parliament a greater role.[28] This could be achieved in a number of ways:

-          Giving formal control to the House of Commons, along the pattern provided by arrangements for the appointment of the Comptroller and Auditor General of the NAO.

-          Giving responsibility to a joint parliamentary committee, comprising representatives of both houses, and chaired by a cross bencher.

-          Granting Parliament with an effective power of veto.

-          Making the appointment a single non-renewable term.

-          Requiring the relevant committee to reach a unanimous decision.

How should Government (national or local) focus on its resource to deliver its civil society agenda?

It is for civil society organisations and relevant government departments to negotiate and agree how best to resource and progress their respective agendas. There are however already existing common principles on which the relationship between Government and the sector should be based and work in practice set out in the Compact.

The Compact provides a framework which helps guide the relationship between Government and the sector at every level. It recognises that Government and the sector fulfil complementary roles in the development of public policy and the delivery services, and that Government has a role in not only providing legitimacy to civil society, but also in respecting its independence in all areas of society.

What is the likely impact of greater local devolution on the charitable sector, or particular types of charity? What are the opportunities and challenges associated with local devolution?

Many charities, particularly small, local organisations, develop directly in response to local need. They are staffed and draw volunteers from the communities they serve, taking a person-centred approach and harnessing local assets. Devolution provides a crucial opportunity, particularly given the twin challenges of austerity and demand, for public services as a whole to become more like this.

Such a transformation will require devolution not just from Whitehall to town halls but onwards down to communities. Voluntary organisations can act as a conduit between local leaders and citizens, advocating on behalf of communities, convening service users and shaping public services so that they more effectively and efficiently meet local needs.

It is currently too early to say whether this opportunity will be grasped but to date communities and voluntary organisations have had very little input into either the development of devolution proposals or the implementation of agreed plans.

Without proper dialogue with civil society there is a risk that devolution will see poor commissioning practices applied at a combined authority level. In particular, we are concerned that services could be further aggregated into even larger contracts that exclude all but a handful of potential voluntary sector providers.

Recommendations

The government, led by the Office of Civil Society, should restate and demonstrate its support for the Compact principles should restate and demonstrate its support for the Compact principles as a framework for respectful collaboration between the voluntary and statutory sectors, while recognising their separation and the independence of the voluntary sector.

Central government should only agree to devolution proposals where combined authorities can demonstrate that they have engaged with citizens and civil society to develop them and have plans in place to continue this engagement as the devolution plan is implemented, committing to onward devolution down to communities.

9 September 2016