Who would be a charity?

Whilst speaking about social finance opportunities at a charity event some years ago, a member of the audience suggested that social finance and social enterprises would be the downfall of grant funding and ultimately charities. Whilst this prediction is not proving true, it is topical.

Stone King recently hosted a Charity & Social Enterprise sector debate, on the motion ‘To be, or not to be (a registered charity)’ exploring this relationship. See our news release for the night here. Inspired by what I thought was a fascinating evening, I wanted to reflect on some of the themes from that night and also consider what it means to be a social enterprise that is also a charity.

There is no overarching definition of social enterprise under English law. Definitions exist, say for the social investment tax relief or under health and social care legislation, but, unlike for charity, there is no agreed general definition.

Stone King would define social enterprise broadly, as a venture with a social or environmental mission at its heart. However, any definition might inadvertently exclude an organisation fulfilling an important social purpose that isn’t its main focus. Equally it might sweep up an organisation whose practices (or profits) might cut awkwardly across the social good they achieve.

And whereas some of the charities we work with were founded before the end of the first millennium, the social enterprise movement (which arguably started with the expansion of owner-led cooperatives in the 19th century) is certainly much younger.

What actually is a charity?

Under the Charities Act 2011, a charity is defined, broadly, as an institution established for charitable purposes under the control of the High Court. A charitable purpose is a specific purpose either listed in the Charities Act (eg relief of poverty) and which is for the public benefit.

The development of charity law in this country has its roots in testators leaving donations for certain (normally Church) institutions as long ago as the Middle Ages. Alongside the development of trust law, charity law was about ensuring assets were held and applied for the purposes for which they were given. Trustees were stewards, required to consider advancing a charity’s objects above all else.

What is the legal definition of social enterprise?

There is no overarching definition of social enterprise under English law. Definitions exist, say for the social investment tax relief or under health and social care legislation, but, unlike for charity, there is no agreed general definition.

Stone King would define social enterprise broadly, as a venture with a social or environmental mission at its heart. However, any definition might inadvertently exclude an organisation fulfilling an important social purpose that isn’t its main focus. Equally it might sweep up an organisation whose practices (or profits) might cut awkwardly across the social good they achieve.

And whereas some of the charities we work with were founded before the end of the first millennium, the social enterprise movement (which arguably started with the expansion of owner-led cooperatives in the 19th century) is certainly much younger.

Many successful social enterprises are also charities

Being a charity works for a large number of social enterprises. Some of our clients approach us specifically because they want to register as a charity and often also to get a registered charity number. This could be for a variety of reasons – certainty around vesting property into the organisation long term, tax, the requirements of a donor (or willingness of donors generally) or the requirements of a contract. However, perhaps stronger than any of that, as Rosie Chapman cited at our recent debate, “Charities are the eyes, ears and conscience of society. They mobilise, they provide, they inspire, they advocate, and they unite” (with reference to the 2017 House of Lords Committee report ‘Stronger charities for a Stronger Society’. Charities ignite a passion and, despite some recent scandals, a trust which should be the envy of other sectors.

Charities also have a permanence. There can be fads in the social enterprise world, particularly for start-ups. For instance, in terms of legal form, CICs have remained popular for a number of years but, with concerns about how to develop a genuine secondary market in CIC’s shares, other more popular models emerged for a while amongst the start-ups we assisted. There has also been the emergence of a number of kite marks or more stringent funder requirements; some have really helped increase market recognition, but anecdotally we also understand this choice has created a lack of clarity for some.

Some charitable social enterprises also have an impressive history and have been able to reinvent themselves. I recently found out from a speaker from Kibble that this very well regarded social enterprise has 1840 roots and is one of Scotland’s oldest charities.

So, what are the tensions?

Charity law imposes a number of sometimes difficult requirements, which can seem sluggish for more enterprising charities.

For instance, they often have to jump through several legislative hurdles to dispose of real estate (particularly if it’s to a party connected to the charity), whilst there are more relaxed rules for other assets, even though they may have a higher value for some charities. The rules around public and private benefit can also lead to odd results for enterprising charities; charities must consider whether there is sufficient public benefit and only incidental private benefit in everything they do, including when they are making a social investment, but if they are making a financial investment, these concerns may pretty much be ignored. And let’s not even go there on what many social enterprises think about not paying trustees...

Furthermore, the practical operations of charities are sometimes out of date. At our debate, Precious Sithole (CEO of social enterprise Social Practice ENT) highlighted that the charity sector often lags behind public and private sectors in terms of diversity and inclusion, despite being a values-driven sector. This is in line with the current review of the Charity Governance Code highlighting that charities are still wondering how to tackle issues around diversity.

As Chris Wright (CEO of Catch22) highlighted, charity Boards can also be very risk averse. There is a specific tension between a law that has developed for trustees as custodians and stewards of assets, rather than the executive of sometimes modern innovating businesses.

Peaceful co-existence

The continued growth of social enterprise has not brought the downfall or even a decline of charities. Carrying on activities like a business, which might well include entering into contracts (despite the nervousness recently expressed by Princess Anne) or taking out finance, does not need to detract from an organisation holding its charitable objects at its heart, nor make it less of a charity.

Being a charity certainly has a significant and important place in the social enterprise world. It can have huge advantages and does not necessarily hold an organisation back, particularly if it is prepared to be bold with governance and forward thinking within a sometimes traditional framework.

At the end of our debate, 67% of the attendees voted in favour of “to be”, defending the traditional charity model. However, as we learn all the time in modern politics, such binary distinctions are unhelpful. In fact Kathy Evans, who opened the debate, stressed this point before she put forward strong arguments for the charity model.

Charity does not work for all social enterprises. However, in times when technological and political change seems plentiful, charitable status works for many and there is arguably no better legal form for doing what charity does best – putting charitable purpose and beneficiaries first.

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