This week we published the second Good Merger Index, providing an unprecedented overview of not-for-profit merger activity in 2014/5.
We have added a section on housing associations this year as well as charities, which shows a fascinating gulf between the regulatory approaches of the Charity Commission and the housing sector’s own regulator, the Homes and Communities Agency (HCA).
Let’s start with the Charity Commission whose role in a merger is primarily to assess any object changes – it has no powers of consent. Even after the event there is no obligation for a charity to record its merger. The Commission does keep a register but this is voluntary and its principal purpose is to help pledged legacies to find their way to the new entity after an organisation has been dissolved. In practice it includes many deals which are registered years after completion and internal restructures (which we wouldn’t recognise as mergers).
The HCA, however, has a very different approach and vets each deal by requiring Associations to prepare a business case for approval. It will occasionally put the brakes on mergers that it judges are not robust. The business case must include a survey of tenants ensuring housing mergers have a much higher level of beneficiary participation than charity mergers (where consultations tend to be limited to Membership bodies). The HCA may also act pre-emptively and seek potential takeover partners for associations who are in financial difficulties.
Julian Ashby, the Chair of the HCA Regulation Committee, is outspoken on the subject of mergers as a tool to improve efficiencies and collaborative working. He has warned the housing sector that some mergers are still "driven more by retirement dates than by commercial or social logic" (the latter is true of charities too) and he has advocated for a ‘merger code’ to govern takeovers.
Why does all this matter?
Our study found that the overall level of consolidation in 2014-15 was surprisingly low – with 129 charities or 0.08% of well over 160,000 charities joining forces.
There are many reasons why charities don’t merge – some justified around implementation risks and merger costs, and others less so, such as Boards who want to preserve personal positions and organisational identities. Yet proactive regulation is almost certainly necessary to address some of the structural concerns of the sector and create an environment where Trustees put beneficiaries first.
While the HCA is not immune to criticism itself – I’ve heard ‘overbearing’ and ‘under-resourced’ mentioned by housing executives – I believe they are moving in the right direction by advocating for more mergers and stimulating better ones through their vetting process.
By contrast what guidance the Charity Commission does give is woefully inadequate. In their latest trustee guidelines we found the word "merger" mentioned once in 40 pages. They don’t even recommend it as either something that Trustees "should" let alone "must" explore.
The appointment of Paula Sussex as chief executive of the Charity Commission last year signalled a potential shift towards a more active regulator. I really do hope that she’s able to give the Commission more teeth as greater scrutiny will be a defence against the winds buffering the sector. In the case of mergers our regulator can draw on some simple lessons from its housing cousin – and the survival of many charitable services may come to depend on it.
Richard Litchfield is chief executive of Eastside Primetimers