Syllabus A1

Charities - Examiners Article

Distinguishing Features of a Charity

They are one type of not‑for‑profit organisation, but with several additional distinguishing features:

  1. they exist entirely to benefit defined groups in society

  2. as their purposes are philanthropic, they can usually avail themselves of favourable tax treatment, and for this reason have to be registered with a regulator

  3. their activities are restricted or limited by a regulator

  4. they rely on the financial support of the public or businesses (or both) in order to achieve their objectives

  5. in order to be financially viable, they rely heavily on voluntary (unpaid) managers and workers.

Corporate form

Charities differ widely in respect of their size, objectives and activities. 

For example, Oxfam is a federal international organisation comprising 13 different bodies across all continents, while many thousands of charities are local organisations managed and staffed entirely by volunteers. 

Unsurprisingly, most of the constituent organisations within Oxfam operate as limited companies, while local charities would find this form inappropriate and prefer to be established as associations.

A charity is not forbidden from engaging in commercial activities provided that these activities fully serve the objectives of the charity. 

For example, charities such as the British Heart Foundation, the British Red Cross, and Age Concern all raise funds by operating chains of retail shops. These shops are profitable businesses, but if a company is formed to operate the shops, the company would be expected to formally covenant its entire annual profits to the charity.

Charities with high value non-current assets, such as real estate, usually vest the ownership of such assets to independent guardian trustees, whose role is to ensure that the assets are deployed in a manner that reflects the objectives of the charity.

The guardian trustees are empowered to lease land, subject to the provisions of the lease satisfying requirements laid down by the Charity Commission.

Formation, constitution and objectives

Charities are always formed with specific philanthropic purposes in mind. 

These purposes may be expanded or varied over time, provided the underlying purpose remains. relieve the famine in Greece brought about by the Allied blockade. Oxfam now provides famine relief on a worldwide basis.

The governing constitution of a charity is normally set down in its rules, which expand on the purposes of the business. Quite often, the constitution dictates what the organisation cannot do, as well as what it can do. 

Charities plan and control their activities with reference to measures of effectiveness, economy and efficiency. 

They often publish their performance outcomes in order to convince the giving public that the good causes that they support ultimately benefit from charitable activities.

Management

Most charities are managed by a Council, made up entirely of volunteers. 

These are broadly equivalent to non-executive directors in limited companies. It is the responsibility of the Council to chart the medium to long-term strategy of the charity and to ensure that objectives are met.

Objectives may change over time due to changes in the external environment in which the charity operates. Barnardos is a childrens’ charity that was originally founded as Doctor Barnado’s Homes, to provide for orphans who could not rely on family support. 

The development of welfare services after World War II and the increasing willingness of families to adopt and foster children resulted in less reliance on the provision of residential homes for children but greater reliance on other support services. 

As a result, the Barnardos charity had to change the way in which it looked at maximising the welfare of orphaned children.
Local charities are dependent on the support of a more limited population and therefore have to consider whether their supporters will continue to provide the finance necessary to operate continuously. 

For example, a local charity supporting disabled sports could be profoundly affected by the development of facilities funded by central or local government.

Every charity is confronted by distinctive strategic and operational risks, of which the Council must take account in developing and implementing its plans. International aid charities are vulnerable to country risk and currency risk, so plans have to take account of local conditions in countries whose populations they serve. 

Many such countries may, of course, be inherently unstable politically. Operational risk for charities arises from the high dependence on volunteer workers, including the extent to which they can rely on continued support, as well as problems of internal control.

For example, many charities staff their shops with the help of unpaid retired people, but there is some debate as to whether future generations of retired people will be as willing to do this for nothing. 

As many charities have to contain operating expenses in order to ensure that their objectives can be met, it is often difficult or impossible for them to employ full-time or part-time paid staff to replace volunteer workers. 

Risks also arise from the social environment, particularly in times of recession, when members of the public may be less disposed to give to benefit others as their discretionary household income is reduced. 

There is some evidence of ‘charity fatigue’ in the UK. This arises when the public feel pressurised by so many different competing charities that they feel ill disposed to give anything to anyone at all.