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Takeovers 246Charity takeovers

Should the regulations be changed to allow dynamic charity takeovers?

Currently, charities can consider merging but the number that do that is very small (0.1% of all charities). Some 81 mergers involving 154 charities took place in the year to March 2018. Mergers often took place in situations where one of the charities was in financial trouble, and so those mergers were often a form of rescue from financial and strategic weakness. More than two thirds of the 81 mergers, 56, were takeovers, in which a smaller charity was absorbed into a larger one. Only 17 of the mergers, 21%, were “mergers of equals”. Another six involved one charity becoming a subsidiary of another.

One could speculate that the lack of mergers could be down to quality of governance above other factors. Is the sector therefore risk adverse, inefficient with lots of duplication? It seems to lack the ability of the commercial marketplace to consolidate through dynamic takeovers to correct such weaknesses.

NfpSynergy reported 10 key facts about charities in 2018:

  • There are 880,000 paid employees in the charity sector
  • There are nearly 200,000 registered charities in the UK
  • The total income of all charities combined is about £48 billion. This is higher than the Higher Education sector, and about £10 billion less than Tesco.
  • The voluntary sector contributes approximately £15.3bn to UK GVA – more than the arts or agriculture.
  • The value of formal volunteering in the UK is around £22.6bn
  • Individuals account for almost half of the sector’s total income
  • The median for the 100 highest paid positions is £185K per annum
  • Charities have over 10 regulators
  • Charities fund almost half of all medical research in the UK
  • 35% of the total voluntary sector workforce work in the social care subsector

NCVO have published a factsheet reporting on the issue of 'Are there too many charities?':

Some people think the sector would be more efficient if there were fewer charities. They believe it would be a good thing if donations weren’t spread so thinly and that it could be easier to hold a smaller number of charities to account.

There are few ‘facts’ in this area. But here are some comments ‘for’ and ‘against’ the proposition that there are too many charities.

Arguments for there being too many charities

There are hundreds of charities often working in the same area. For example, there are over 1,500 charities working on issues to do with cancer in England and Wales. Some would argue that we do need this many charities working on cancer issues.

There are a lot of average charities that are taking resources away from the best charities, creating needless competition for resources. This increases the cost of generating income and leads to less going to the frontline.

If charities were to pool their resources they could focus on those activities that have the biggest impact. This would lead to better outcomes for beneficiaries and the public.

Arguments against there being too many charities

Many charities operate in niche areas where it is important to have organisations with expertise. One big charity can’t be as focused on these issues as lots of smaller organisations. For example, There may be 1,500 charities working on issues to do with cancer, but cancer is a complex area with big differences between different types of cancer as well as between service delivery charities, research focused charities and awareness raising charities. Lots of charities working on the same issue will operate only in one local area. There is little to be gained from merging say a local wildlife charity in Devon with one in Durham.

The efficiencies to be gained from merging charities are often over-estimated. If charities are still doing all the same work, they will still have many of the costs, even if they merge. Lots of charities are very localised. You wouldn’t gain much efficiency from merging a charity say in Stockport with one in Southampton.

Setting up charities
It’s already the case that if you want to register a new charity, the Charity Commission will ask you to consider alternative options, not least because running a charity is a major responsibility. But if you prevented people setting up a charity because there was already another similar one, you’d stifle potentially innovative and exciting new organisations. Some of Britain’s best-known charities started out as kitchen-table endeavours created by a few committed people. If someone had told them they shouldn’t start because there was already a charity working in that area, we wouldn’t have Oxfam or Help for Heroes, for example.

Some variety is a good thing. It means you have some choice over which charity you donate to. Different organisations bring different strengths and perspectives. They focus on different areas.

Freedom of association
One of the core values of our country is the right for people to come together to solve issues which affect them and their communities. Placing a limit on the number of charities or putting barriers in the way of setting up charities infringes upon this right. 

It is also important to remember that in practice, charities frequently collaborate on their work. 

And charities do merge when they think it would be the best thing to do for their cause. Recent examples include Help the Aged and Age Concern and Breast Cancer Campaign and Breakthrough Breast Cancer.

Read the full article here.

The Charity Commission have introduced a minimum of £5000 income to become a charity. They also stress that one should find out if any charities are already doing what you want to do as well as considering alternative options e.g. social enterprises.

There seems to be a difference between small local charities who are not going to expand e.g. a church, a memorial charity, etc (similar to SMEs) and those that could scale as they are addressing regional or national issues and do duplicate what others are doing with attendant competition for funding and duplicate back office services e.g. finance, IT, etc.

To scale, they can either grow naturally or merge with other charities. They cannot grow by acquisition. This slows their growth and that maybe makes them less effective and delays helping more end-users. The key here is what would be best for the intended beneficiaries rather than protecting an organisation, etc.

So could there be a takeover strategy? I was talking to a leading charity lawyer many years ago and there is a way albeit somewhat 'hostile'. I will not publish the details but should this sector have the equivalent of a takeover option - a type of merger proposal that the trustees of the target charity will find hard to refuse? How can this be turned to a positive for end-users rather than making trustees defensive of 'their' organisation?

An additional option would be a charity article option that creates charities that only have say a five year lifespan. At this point, trustees must see if they could merge with another charity, close or renew for a max of say 2 years. This focuses trustees on immediate, short-term impact and reduce the number of charities over time.

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Geoff Knott, 26/10/2021

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