Sweet charity?

A significant proportion of English not-for-profit arts and cultural organisations have charitable status, but in recent years doubts have been expressed about this dominant constitutional model. We believe that the operating model of an organisation should be driven by its mission and objectives. For some organisations, significant assets are held in trust over the long term, for the public’s benefit. For some, mainly smaller, operations, whose main assets are the individuals involved, a different model may be more suitable. For each organisation the circumstances will be different and there are a number of alternative structures available¹.

There are advantages to having charitable status, including public perception of value, a sense of continuity and financial benefits. Critics of the model claim that it often results in poor governance and undermines entrepreneurialism.

GOVERNANCE

Charities are led by groups of volunteer trustees (the board) which have responsibility for running the organisation and making decisions in its interests. This system provides an additional layer of knowledge, expertise and responsibility; and balances support and accountability. Despite this benevolent framework, there is evidence that governance malfunctions can undermine – and in some cases critically weaken – organisations. This damage may take the form of incompatibility between senior board figures and senior management, failure to achieve shared values and aspirations or a lack of clarity around executive and non-executive roles.

But are these problems caused primarily by the characteristics of the charitable model? Many charities are excellently and effectively run whilst many non charitable organisations are dysfunctional. There does not seem to be evidence that poor governance is a direct function of a constitutional structure. Rather, we suggest that it arises largely from clashes within organisations (for example, when non-executive directors from a commercial field try to import inappropriate values to a charitable company), and/or individuals and institutions pursuing inappropriate attitudes and behaviour. Changing an organisation’s constitutional structure will not necessarily address these issues.

ENTREPRENEURIALISM

Innovation is fundamental to the success and relevance of cultural organisations. Commentators² have argued that the charitable model is “inherently too conservative and risk averse” for the mixed economy model that cultural organisations need. Much of this seems to rest on myths such as “charities can’t make a profit or have reserves: they can’t borrow or invest”. None of these are true – although charities are subject to certain restrictions on what they are permitted to do and how they may expend their resources.

Many charities across the voluntary sector deal with the challenge of those restrictions by setting up a wholly owned trading company to run aspects of their business (for example, catering concessions, or the commercial exploitation of the charity’s intellectual property). This approach makes it possible for the trading profits to be transferred to the charity and used for charitable purposes without incurring tax. It thus provides charities with a mechanism for growing their income base through entrepreneurial activity. In certain circumstances, the new Community Interest Company (CIC) model can also offer advantages. The Watershed Media Arts Centre in Bristol, for instance, operates a group of three companies. The first two – a charitable trust and a trading subsidiary – operate in the traditional way; the third is a CIC with share capital. The CIC is allowed to expend its profits on community benefit or, to a limited extent, distribute them to its shareholders (which may include employees). It also has the attraction of enabling transparent joint ventures. While this option may have limited transferability, it does exist as a mechanism for facilitating entrepreneurial activity.

Need for change?

This paper has not assumed that all cultural organisations should inevitably have – or aspire to have – charitable status. It has, instead, considered whether the charitable model presents any fundamental impediments to arts organisations’ effectiveness. We have found that the majority of well-governed cultural organisations generally regard their charitable objectives, the ensuing sense of public responsibility and the role of the board as sources of strength rather than of hindrance. Given that, we do not believe that the charitable model is, of itself, the principal source of conservatism or malfunction that some allege. Rather, we would suggest the problems of governance that exist in the cultural sector tend to stem from incongruent values, dysfunctional organisational culture and incompatible personalities. These challenges will not be resolved by amending constitutional structures; they need other approaches – not least changing the mind-set and behaviours of some who work and govern within them.