Bob Humphreys, former chief financial officer at Oxfam - one of the largest charitable retailers in the UK – critiques the True and Fair Foundation’s latest report, particularly where it deals with charity shops.
Last week the True and Fair Foundation produced a report called Lifting the Lid, which questioned some of the practices and funding of charity shops. I would like to suggest that its conclusions are flawed.
There is undoubtedly a conversation to be had about maximizing fundraising performance, enhancing charity shop profitability, the levels of senior charity executive pay and the amounts spent on charitable activities.
However many of the comparisons used by TFF are spurious and do not bear analysis. The comparison with the commercial sector is weak – both because the figures used are not representative, and also because the operational models are so different.
The comparison with US charities is also not borne out by a closer analysis of the data – fundraising ratios are broadly dependent on the model chosen, which in turn depends on the sector which is being targeted. And executive pay is not the answer – US charities are among the highest paying in the world.
TFF also continues to suggest that governance and administration costs are in some way “bad”, rather than accepting that they are a necessary element of operational costs, and that they will tend to be higher for larger charities, for very good reasons.
There is an underlying theme that “large is bad” whereas large charities have grown up specifically to address the world’s complex needs, in responding to national and global crises that small charities cannot.
TFF unhelpfully suggests that much of the income derived by charities is somehow a ‘gift’ from government and taxpayers – there is no recognition in the report to the fact that out-sourcing to charities has become a key way in which local authorities and governments continue to deliver essential services across the country, and that this represents the bulk of charity income – only £21bn out of the total charity income of £69bn is voluntary income.
Finally, TFF appeals for more centralised control and scrutiny – setting up an independent enquiry, linking gift aid for example to percentages of charitable spend, etc. There is no evidence presented of any lack in transparency in the sector – the UK’s SORP accounting standard, apart from being one of the best in the world, has transparency and accountability at its very heart – all the figures quoted by TFF are capable of being accessed in moments from charities’ websites, or the Charity Commission.
So let’s continue to discuss these important issues, but these are complex, and we shouldn’t pretend, as TFF appears to, that if we only looked across the Atlantic to the US, or if we were to adopt more commercial approaches to running our charity shops, that this would be a silver bullet.
My thoughts are with the thousands of dedicated volunteers and staff, working hard at our larger and smaller charities, who need to know that society values their efforts, because of the huge amount of good which the money raised by their actions delivers, across the UK and the rest of the world.
Charity shops
The comparison between net bottom line revenue with Next plc’s operating margin is completely spurious. If we look at the bottom line return to beneficiaries/ shareholders, then Next’s figure shrinks to only 10.3% as per its last half year results (July 2015). If you add back the relatively small tax charge (as charities are not generally subject to corporation tax), the net margin is still below the average charity margin.
The organisation CSI, whose website contains statistics on various commercial sectors, shows an average net margin of around 7% for the US apparel retail sector, which rises only to around 11% on a pre-tax basis.
The report correctly states that the value of volunteers (and eg the impact of lower business rates) has to be taken into account in judging a charity’s effectiveness. Charities have slightly different models in running their shops – some have higher levels of paid staff, believing that this makes their teams more effective; others have lower levels, believing this is more cost-effective in total.
And it’s not clear what the comparison to the US charity “Goodwill Industries” is intended to show – it appears that their profitability is about in line with UK medians.
There is a comment on charity concentration in London and wealthier areas, but this only draws attention to the challenges faced by poorer areas subject to reductions in state support.
The business rates issue is also a red herring – if a local authority finds that its High Street is becoming a wasteland, and that commercial tenants are not available, then encouraging empty space to be used in a productive way is surely a reasonable (if alternative approach, and if a modest amount of business rate relief allows that to happen, then it may be the best all-round solution in the circumstances.
Trust and transparency – raises good questions about the public’s faith in charities – they are no immune to scrutiny – the question is how to sensibly pursue a transparency agenda without drawing superficial conclusions based on inappropriate comparisons.
Equally damaging is the continuing denigration of “overheads”, suggesting these are not a legitimate cost of doing business. All organisations, commercial, and charitable, have to incur costs in supporting their operations. The more complex and the more diverse, geographically and in terms of their business model, the higher those support costs are likely to be.
The transparency and accountability which TFF seeks to promote are only possible to be delivered, if an organisation has proper systems for tendering for services, paying its bills, having appropriate control structures in place, including for example internal audit
