Merger myths
Ian Oakley-Smith throws down the gauntlet to trustees: ‘why should your charity remain independent?’
By common consent, the recession will continue to impact charities well into 2011 and possibly for some time after that. In particular, many charities rely to some extent upon statutory sources of income and as a consequence are anxious as to the scale of the impact of future public spending cuts.1
Effects of income reduction
For some charities, reduced income will lead to a reduction in services; for others, it may threaten their very existence, either because they cannot afford to administer a basic level of support, or because trustees consider that an insufficient percentage of income is being spent on direct charitable purposes.
In any event, charities should already be looking at what can be done to make more of their available money. Once they exhaust the possibility for internal efficiency savings, they should look at other organisations – many of which will be in a similar position – in order to consider how their collective position might be enhanced by working together more closely or by merging.2
Such collaboration or merger has been advocated by many commentators for some time. However, whilst some charities have embraced this opportunity to think broadly about how to thrive in the current environment, many charities are, in reality, not doing much more than talking about the possibility of collaboration or merger.
The risk is that this apparent inaction will result in some charities being ill-prepared to respond to reductions in income, which in turn will result for some in more desperate solutions or even failure.
What stops charities considering collaboration or merger as a solution?
This article seeks to examine why charities seem reluctant to progress open discussions, even to the extent of simply establishing what options might exist. Many of the factors which inhibit such discussions may fall into the category of ‘convenient excuses’ to preserve personal vested interests, rather than genuine reasons. This may sound harsh and is not meant to be overly critical. It is, however, a reality in some cases and all trustees need to be challenged on this issue.
Loss of independence in decision making
Independence or freedom in decision making is often cited as the reason why most charities are fearful of partnering with other organisations. This is, of course, very important to individuals when the alternative is money being spent in a materially different manner to that desired by them. However, such independence can also be desirable to the individuals themselves as it can enhance their own feelings of involvement and wellbeing, which may not necessarily be to the benefit of beneficiaries.
Trustees should ask themselves whether the loss of independence would in fact result in undesirable consequences for beneficiaries or whether the time has come to pass the decision making on to equally competent individuals and sacrifice their independence for the greater good.3
Maintaining a lasting legacy/dilution of a brand
Charities often cite the desire to maintain a lasting legacy or to maintain the power of a brand as a reason to retain independence. However, there may be a number of ways of achieving such a legacy or brand recognition without the need for a separate charity, governance structure, management and the costs which go with that.
Trustees should explore whether another charity with an existing infrastructure might, for example, operate a restricted fund, perhaps using a separate brand or identity. Certain individuals could even be included on a sub-committee to manage the fund if it is large enough to warrant this. It should be possible to maintain a legacy whilst embracing the potential benefits of collaboration or merger. The use of separate brands within the same legal entity is common in the private sector and could be embraced to a greater extent in the voluntary sector.4
Responsiveness to the needs of a local community
Many small, local charities fear being ‘subsumed’ by a larger, faceless charity. Again, this is an understandable fear, but should be explored with an open mind.
Such smaller charities often get by with inadequate management skills and can be vulnerable in the event that income falls. Trustees should explore whether a larger charity might provide a ‘safe haven’ and more robust back office services, but on terms which allow retained autonomy at a local level.
Reduction in fundraising capacity
Some charities fear that, by combining forces with other charities, they will be limiting their opportunities to approach funders, for example they will only have one ‘bite of the cherry’ instead of several. This may, however, be an irrational fear. In our experience, there are charities who work on the law of averages – the more applications they make, the greater the number of funders who will provide funds – rather than using quality fundraising resources to increase their conversion rates. In addition, funders/ donors may respond favourably to efforts to reduce support and administrative costs and, in addition, could be confused by a variety of requests from different sources when a clearer combined offer might be more successful.
Trustees should ask themselves whether the increased quality and clarity to be gained by collaboration or merger will in fact provide a greater level of fundraising effectiveness, which may lead to an increase in funds raised.
Costs of investigation into options
In many cases, the costs, both in terms of management time and professional fees, to explore ‘the art of the possible’ are seen by trustees as too speculative and not a good use of charity funds.
It is true that such costs can be significant. However, trustees should not allow this to deter them from at the very least understanding what options exist. Not spending money could be a convenient excuse to prevent unpalatable solutions being identified and put forward and trustees should never be criticised, within reason, for using charity funds to explore more sustainable options for their beneficiaries. Furthermore, it may be worth requesting funders to consider funding some research into what options could be explored as it might be in funders’ interests to do so.
Position of employees
Many charities can seem like ‘families’ to the employees who work there, particularly given the close nature of working together for a common cause. This can make decisions very hard to take when they involve the likelihood that some employees will lose their jobs as a result.
Trustees must ensure that they remain focused on what is the right thing to do for their beneficiaries, even if this causes difficulties for some employees. This can be a particularly difficult area, but one where trustees will need to remain strong. This can involve trustees challenging recommendations of their senior management team where personal interests could have clouded those recommendations.
The challenge to trustees
A common response from trustees to the consideration of collaboration or merger is ’what are the compelling reasons why we should consider such action?’ My view is that trustees should explore this question from the other side: ‘what are the compelling reasons why we should remain a stand-alone charity?’ We believe that trustees will have discharged their responsibilities to beneficiaries only when this question can be answered with conviction and can be clearly explained to stakeholders.
As will be seen from the above, this may involve trustees having to challenge received wisdom and to challenge their senior management team. They may feel the need to speak to trustees of other charities personally in order to satisfy themselves that all reasonable options are at least being considered. None of this is easy and it is often not what trustees thought they were signing up for; however, we find ourselves in unprecedented times and it is the needs of the beneficiaries – not the trustees or staff – which should be the primary motivation.
Trustees may, in some cases, find it helpful to utilise the experience of independent third parties in order to ‘de-personalise’ the challenge process and to provide a robust assessment of the available options. This independent challenge may come from a respected individual or organisation, in which the trustees can have confidence to find a solution which prioritises the needs of beneficiaries and is achievable.
Whilst the solution may not be to everyone’s liking, at least trustees can be satisfied that a robust and defensible process was undertaken and that they have appropriately discharged their obligations.5
1. See ‘Commissioning intelligence’ by Clarissa Dann in Caritas, issue 33 August 2010, page 20 on statutory funding
2. See also Charles Scott’s case study of Age UK in Caritas, issue 33, August 2010, page 29
3. See also,’ Mergers: civilising the barbarian?’ by Clarissa Dann in Caritas, issue 1, December 2007
4. See Sir Christopher Kelly’s comments on the NSPCC and Childline on page 37 of this issue
5. A useful practical summary of the legal steps involved can be found in ‘Merger due diligence’, by Alana Lowe-Petraske and Rosamund McCarthy in Caritas, issue 20, July 2009, page 29.
Author: Ian Oakley-Smith
Ian Oakley-Smith is director of business recovery services and a member the charities team at PriceWaterhouse Coopers LLP.
He is a chartered accountant and licensed insolvency practitioner, specialising in the non-profit sector.
Ian is also a member of the ICAEW charities SIG committee.
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