At a recent conference in London on charity trusteeship, attendees were asked whether they believed the charity sector was beset with similar problems to those which afflicted banks and caused such problems during the past two years. Sixty percent said yes.
This finding, though unscientific and unrepresentative, suggests a concern with how the sector is governed. That could be interpreted as meaning that charity governance leaves something to be desired, or that regulation is too lax, or both.
The financial crisis has highlighted the problems that can come from poor governance, soft-touch regulation, and systemic risk. The last is one of the revelations from the financial crisis and has so far received no attention in the world of charities. It represents the risk of system-wide problems as opposed to those that affect individual institutions only, and it is far more serious.
A classic formula to prevent bank failures used to be making an organisation ‘too big to fail’. Alongside this is now the idea of being ‘too connected to fail’, a formula that could be applied to Lehman Brothers, AIG and others. Organisations which do not themselves merit help can be so connected that their failure threatens to bring down the whole financial system.
Such systemic risk needs to be understood and analysed within the charitable sector. One such potential risk is around reputational links between charities.
In Germany last year, the local Unicef faced problems when questions were asked about its management practices. An ensuing scandal escalated and involved government ministers right up to the Chancellor, Angela Merkel. The head of Unicef stood down in February 2008, to be followed by the whole board. Almost a quarter of income and 30,000 supporters were lost.
Most striking however was the impact on other charities. A survey by the ratings agency, DZI, shows almost half reported an impact on their work, even though none were implicated.
A lesson from Unicef is that charities’ reputations can be connected, whether rationally or not. Whether or not they can be ‘too connected to fail’. it is in the interest of all to ensure good governance and high performance. This lesson needs to be fully understood and then acted upon, by regulator and charities alike.
The Charity Commission, the regulator for England and Wales, has a duty to promote public interest and trust in charities. This sits alongside its duty to regulate individual charities. It therefore has a duty to minimise ‘systemic risk’. If the Commission thought the same as the conference delegates mentioned above, it might wish to monitor such risk more closely and change its approach to regulation. The implications of this are, as yet, far from clear but they could be far reaching.
Martin Brookes is NPC’s Chief Executive.