Donor power

How do charities spend their money?
January 20, 1996

Like rich tourists in some third world bazaar, we are surrounded by begging bowls and outstretched hands. The tin-rattlers in the street, the raffle-ticket sellers in the office, the begging letter in the mail-we cannot escape.

The clamour is getting louder. There are more charities than ever before; 178,609 were registered at the end of 1994. But voluntary donations are not rising. In fact they slipped by ?339m in 1993. The national lottery will make matters worse, although no one yet knows by how much.

Charity is in competition with charity, pushing and shoving to get our money. So how do we, the donors, respond to the pleas? We act irrationally, dropping our small change into any tin that is rattled under our nose. We are intensely cautious when we spend money, but don't seem to care a fig when we give it away.

Why? Those of us giving to assuage a conscience would probably rather just assume that the full value of our gift has been credited to a worthy cause-investigation could only devalue its moral worth if it showed the charity to be inefficient. Alternatively, we may just feel it would be unseemly to challenge charities as though they were commercial companies.

uncovering overheads

Even if donors got over these hang ups and wanted to act more like discerning consumers, they would find it difficult to get the information they need. In particular, there is no easy way of telling which charities provide the best "value for money." While many are highly effective in advertising the neediness of their cause, few can claim much transparency in reporting on their own activities-how efficiently and effectively they spend their income.

As a reporter on the BBC's current affairs programme Here and Now, I have spent the last few weeks challenging dozens of charities. The question was, I thought, a simple one. How much of last year's spending went on "the cause" and how much went on "overheads"? The reply from most was quite shocking. It wasn't that the proportion they spent on overheads was high. It was that they had never worked it out.

Most charities appear more interested in their income than in how much of it reaches the cause. The charity bible, The Henderson Top 2,000 Charities, publishes a financial breakdown for each of its entries but draws no distinction between charitable expenditure and other operating costs. The Charity Commission's public-access computer system provides each charity's income, but not its charitable expenditure.

There are exceptions. The Imperial Cancer Research Fund, for instance, clearly stated on recent appeal letters that "almost 90 pence in the pound donated" would go to the cause. "We say it," they told me, "because it is donor's money, not ours, and they should know what happens to it."

As a measure of "efficiency" or "value for money," such unadorned percentage figures are imperfect. For charities to operate effectively, they must spend money on fundraising and administration. There will be times when a charity wishes to expand its fundraising capacity, move offices or buy a new computer system, all of which may push up its overheads in the short term. Indeed, the view of the Charity Commission is that a charity which spends too little is as worrying as one which spends too much.

Moreover, charities argue that the distinction between spending on the cause and spending on overheads may be difficult to draw at all, let alone with consistency. For some charities, such as the Samaritans, money spent on "overheads" such as rent and telephone bills, is money spent on the cause.

But none of this can be an argument for not providing basic information to donors. And it cannot be an argument for charities not doing their sums, since analysis of their spending must be central to judging the success of the whole enterprise: equivalent to a commercial firm calculating its profits.

The problem is partly that charities are still subject to weak requirements on the standards of their disclosure. Despite rafts of new legislation and guidance heralded as a victory for "donor power," charity collectors are obliged to tell you virtually nothing about how your money will be spent.

required disclosure

First, the 1992 Charities Act draws a distinction between fundraisers employed by a charity and "professional" fundraisers employed by a commercial company. The professionals must, if asked, reveal how much their organisation takes out of the donation to cover its overheads. A charity's own fundraisers do not. Why should a donor's rights be dependent on the contractual details of the tin-rattler?

The situation is anomolous. For example, Actionaid, the anti-poverty charity, has its own in-house telephone fundraising division staffed by Actionaid employees. If they ring someone up collecting money for Actionaid, they are under no legal obligation to say how much of the donation will go on the charity's running costs. However, the same telephone operators also hire out their services to other charities, calling themselves the National Telephone Team. When collecting for others they do have to say how much of your gift will go on overheads.

The government's chief charity commissioner, Richard Fries, refuses to concede any problem here, doubting "whether donors want that degree of involvement when it comes to spontaneous giving." In any event, he adds, thanks to the 1992 and 1993 Charities Acts, donors can now demand to see a charity's accounts.

It's true. We can all, in theory, visit the Charity Commission offices in London, Taunton or Liverpool, whichever is handier, on 48 hours notice, and then review the accounts of almost any registered charity we wish. But if, like me, you want to compare hundreds of charities to see which offer the best and worst targetting of cash, the system cannot cope.

There is a further problem with the rules on disclosure. A loophole in the law means that some administration and fundraising costs may be hidden in separate, abbreviated accounts lodged at Companies House. Although it is "recommended practice" to include the details of the charity's commercial or "trading" activities in consolidated accounts, there is no requirement for the charity to reveal them. These activities can, in some cases, represent the bulk of the charity's fundraising effort. For example, The Hedley Roberts Trust, which provides holidays for sick children, filed accounts with the Charity Commission showing 1993 overheads amounting to 53 pence in the pound. When you consolidate those accounts with the figures from the charity's trading arm, the true proportion spent on overheads was 78 pence in the pound.

Fortunately, I found what I thought was a short cut. The Charities Aid Foundation (CAF), a trade body for charities, publishes figures each year which do break down the amounts charities spend on the cause and on overheads. The latest statistics are a bit out of date (1993) and they only cover the top 500 British fundraising charities. But most of the figures have been confirmed by the charities concerned and, at least, they appear to provide a snapshot of how successful our biggest charities have been at getting help to their respective causes.

official statistics

Alas, any donor hoping to use the CAF tables as an easy guide to the performance of charities will be disappointed. Double-checking the statistics with the individual charities concerned, many of them became defensive. One animal charity agreed the figures, then threatened legal action if I published them. I was finally told that their accountants had reviewed the published figures and identified "?170,000 currently allocated to 'overheads' which... should be regarded as expenditure on the cause."

Others said the figures were "wrong" or "reflected only part of the organisation's activities" or that "mistakes" had been made transferring figures from the accounts. The published figures may be flawed, but as few charities were able to provide reliable alternative statistics, they are usually all we have.

Help may be at hand. The National Council of Voluntary Organisations and the Central Statistical Office are carrying out a survey (due in June 1996) which will attempt to determine the true level of charitable giving and of overheads among charities.

But in the meantime some estimates (see tables p.82) can be made. At one end of the spectrum, Save the Children told me that in 1993, 8 pence in every pound they spent had gone on overheads, (it has risen slightly since then). At the other, PHAB Ltd-a charity which supports clubs for disabled children in England-confirmed that 60 pence in every pound had been spent on fundraising and administration costs.

PHAB Ltd occupy tatty offices down a back alley in Croydon. Whatever they spend their money on, it isn't swanky headquarters. I was introduced to company secretary Peter Gooch who complained that income was under threat from the national lottery. But what about spending? The problem there seemed to be closer to home-upstairs, in fact.

On the first floor was a large room with about ten staff going through the yellow pages and ringing companies at random. They were trying to convince employers to sell PHAB raffle-tickets in the workplace. But telesales, as it is called, is a notoriously inefficient way of raising money. "Why not use cheaper methods of raising money?" I asked. "Have you got any bright ideas?" He replied resignedly: "We've tried everything."

Is there a point at which the cost of raising money makes the operation untenable? Can one justify spending, say, 99 pence to raise ?1 if the penny left over goes to a cause which would otherwise remain unsupported? PHAB's view is just that. It might cost a lot to raise the money, but if they stopped, some disabled people would not get helped.

The problem with this view is that, since there is a limited pot of money available for all charities, if PHAB takes your pound and spends 40 pence of it helping a disabled child, it follows that Save the Children, say, cannot have 92 pence of it for its child-centred projects. Furthermore, inefficient charities might, in fact, siphon support from more efficient ones by employing aggressive but expensive fundraising policies.

The charity commission

The Charity Commission, in the middle of its reforms, is trying to address the problem. Chief commissioner Richard Fries told me that overheads of 30 pence in the pound would be "very much on the high side" and that under new monitoring provisions included in the 1993 Charities Act, the commission would be able to spot difficulties in this area. A computer is being installed to trawl through the tens of thousands of charity accounts submitted each year, with a "trigger" system for alerting staff to discrepancies or exceptional levels of administration and fundraising costs.

This may help the Charities Commission to weed out the most egregiously inefficient, but it will do nothing to help donors decide which charity to support-especially as the Charity Commission only rarely reveals details of charities where they have discovered more serious problems.

Last year the commissioners investigated 297 charities where they found "significant cause for concern": 195 were maladministered, 51 were guilty of fundraising abuse, 43 were involved with "deliberate malpractice," five with improper political activities and three were involved in tax abuse. Which charities were they? The names of all but a handful are secret because the commission argues that publication is "not in the public interest."

This is indicative of the aims and limitations of the Charities Commission. Look, for example, at the services it offers. In 1993 it set up the Charity Services Unit (CSU) and the Advisory Committee on Trusteeship to help charity trustees. The CSU goes round the country offering advice, support and information. There is a series of videos for charity staff to watch. A free newspaper entitled Charity Commission News is mailed to every registered charity. All good stuff. But there is nothing similar for donors.

As a donor, if you ring up the Charity Commission to ask, for example, whether the local cat sanctuary is a suitable recipient for your legacy, no one will advise you. It will probably be suggested that you get the accounts. But the annual report won't tell you whether the commission has investigated the sanctuary and found "deliberate malpractice" or "fundraising abuse." Nor will it necessarily show how much money the sanctuary spent on overheads.

Donors are in the dark. Even large charities and trusts making grants to other charities must rely to some extent on instinct when deciding who should get their money. The BBC's Children In Need Appeal gives away more than ?20m a year to small charities but receives no advice or information from the Charity Commission as to whether any of the potential recipients have question marks against performance. Instead, the BBC has to employ its own researchers to check out applicants. Each year it discovers 15 or so organisations which are, in their words, either "very odd indeed" or "decidedly dodgy." The only organisation which does get potential recipients vetted by the commission is the National Lottery Charities Board.

The point is that the Charity Commission does not exist to provide a service to donors, it exists to protect and regulate charities. Or as Richard Fries puts it: "the commission's role is to provide both support and oversight of the charitable sector." We should not be surprised if, at the end of what is supposed to be a revolution in the way charities are run, donors wonder what all the fuss was about.