Undertaking a balanced approach to considering charity mergers
We all know that times are very tough for the charity sector. Funding has been reduced year on year, and the sector has been hit by waves of bad publicity about poor fundraising practices and the mismanagement of charity funds, which has had a devastating impact on public trust and confidence, and has detrimentally affected charitable giving.
At the same time, the legal and regulatory framework has been evolving and changing constantly, with charities expected to meet ever more onerous reporting and other regulatory requirements.
The impact of funding gaps within the public sector is felt particularly acutely for local charities, where local communities are facing very serious issues, such as rapidly increasing homelessness and lack of provision for social care. Demands on local charities are on the rise, but according to the Local Charity & Community Group Sustainability Report 2016 less than half of local charities are confident that they will have the finances to sustain their activities for the next five years.
Merger solution
In this demanding climate, we are seeing an increasing number of charities considering mergers as a solution to the pressures faced. There has also been a general shift within the sector to encourage charities to work together more, to pause and reflect - on the external environment, on whether or not the charity remains relevant, and on whether or not the charity’s activities remain the best way to achieve the charitable purposes for which the charity was originally formed.
So, it seems there is some pressure on long established charities to evolve and adapt.
The report of the House of Lords Select Committee on Charities, entitled Stronger charities for a stronger society (published on 26 March 2017), highlighted the issue of charities duplicating work and competing with each other within the same policy space.
The draft new Charity Governance Code (not finalised at the date of writing) recommends that boards of charities should regularly undertake or oversee strategic reviews and, as part of that exercise, “consider partnership working, merger or dissolution if other organisations are seen to be fulfilling similar charitable purposes more effectively”.
A merger might appear to be an ideal solution to issues of under-resourcing, under-funding and increasing demand. However, it is important to remember that the concept of “charity” in the UK is, ultimately, about people. Charitable causes are, in essence, the issues that we care about, the issues that we want to change, and the issues about which we are passionate.
Turning inwards
As people feel the increasing strain of austerity, local communities tend to turn inwards. Issues that are close to home become more of a priority, and it is often the local, community based charities which most closely align with the passions of people in any given community. Additionally, as public trust and confidence in the sector is damaged, donors tend to want increased transparency as to how their donations are used.
Transparency on expenditure of donations is far easier for local charities to achieve, as local fundraising campaigns often lead to immediate and visible results within the communities they serve.
There is an inherent risk that, in seeking to achieve efficiencies of scale through the merger of several smaller, community based charities to service a wider community, the essence of what made those charities so important to those communities might be lost.
It is possible that people might be less likely to volunteer their time, to organise bake sales and other local events, and to donate to fundraising campaigns if they no longer feel that their passions – the things they care about – are reflected in the ethos of the charity, or if they feel that their donations will not benefit their community and relieve the issues felt most acutely and close to home.
It is therefore crucially important, before any steps are taken towards a merger, for charities to first reflect on the purposes for which they exist and the beneficiaries they exist to serve. It might be true that there is another very similar charity in the next parish or village or town, and it might be true that savings could be achieved by merging. But, does this mean it is the right decision for your charity?
The most important question for charity trustees will always be: "what is in the best interests of our charity and our beneficiaries?”. That should always be the starting point.
Expensive option
Mergers are not the only option. They can be expensive to implement, they can make people feel disenfranchised, and there are often difficulties operationally – blending the cultures of two organisations is never an easy task. The implementation of a merger usually involves a significant investment of time by senior management, which can detract from advancing the charitable mission.
In some circumstances, a merger is absolutely the right solution. But it is a significant undertaking, and therefore requires careful consideration before any formal steps are taken (including legal due diligence). If a merger is decided upon, this should be as a result of a detailed process considering all of the possible options, and should be firmly grounded in clear objectives and a rationale for why this is in the charity’s best interests.
Form should always follow function. The starting point in any decision making process should be: “what do we want to achieve?”. It is easy to become blinkered and to focus on on specific difficulties – the lack of secure income streams for the future of the charity, for example.
However, before launching into an exploration of possible solutions to specific difficulties, it is important to take a breath and look at the bigger picture. There will inevitably be a range of possible solutions, and one can only decide which option is best for your charity if you are clear about your short and long term goals.
Current activities
Once you are clear about your objectives, the next step is to look at your current activities and funding streams and consider whether any changes could be made. Are there ways in which you could diversify your sources of income, make cost savings or change your approach to more effectively advance your charity’s purposes? What are you already doing that could be improved? It can be tempting to look externally for solutions when times get tough, but internal restructuring can often be just as (and sometimes more) effective.
None of what has been said so far should be read as suggesting that collaborative working is a bad thing. It is certainly something to be explored, and there are a number of ways in which charities can work together. Arrangements can be informal and ad hoc, or more formal and set out in legally binding contracts.
Charities can set up cost sharing groups, or joint venture vehicles for the delivery of specific projects. They can also decide to formally merge, and there are a range of mechanisms to achieve this.
Even if you think that a merger is likely to be the best option for your charity, it is worth considering whether another type of collaboration might be useful as a first step. A contractual partnership to test the water as a preliminary step towards a merger might be a sensible approach, as it is far easier to dissolve a contractual collaboration than to unwind an unsuccessful merger.
Documenting arrangements
If you decide to proceed with an informal collaboration, or to work with other charities on a more ad hoc basis on specific projects and fundraising campaigns, it is not necessary to have anything in writing, but it is usually helpful to try to document what has been agreed. A non-binding Memorandum of Understanding might be beneficial, as this helps to focus the minds of all parties involved and avoid the risk of misunderstandings.
For more formal arrangements, you should consider whether or not to consult with key stakeholders and beneficiaries. The more significant the arrangements, the more likely it is that consultations will be needed (and they should always take place in the context of mergers). Charity trustees have a duty to safeguard the assets of the charity, and its brand and reputation are arguably its most important assets.
The trustees are responsible for deciding what is in the charity's best interests, and are best placed to make those decisions. However, well advised trustees will always take into account the views of key stakeholders, beneficiaries and funders in their decision-making process.
Charity trustees who avoid making decisions that are based solely on fears and concerns about financial viability or long term sustainability of the charity, and instead take the time to be clear about their goals, consider all of their options, and look internally as well as externally, will ultimately reach a decision that they can feel confident is in the best interests of the charity.
Not failure
It might be that they decide to proceed with a merger, and if that decision has been reached after careful consideration and appropriate consultations, then it should not be seen as a mark of failure. A merger that is firmly grounded in clear objectives and a rationale for why it is in the charity’s best interests is a success story.
