Governance: Can charities teach banks a thing or two?

The answer is complex, but the sectors are beginning to understand and respect each other's strengths and weaknesses. Shayla Walmsley reports

May Day anti-banking protest (picture by Andrew Ciscel)
May Day anti-banking protest (picture by Andrew Ciscel)

So you agreed with Harriet Harman that banks with more women on their boards would never have got themselves and the rest of us into this fix? Then you'll like the latest plan for getting banks to see the error of their ways: run them like charities.

That was the suggestion at a recent NCVO panel discussion on what different sectors can learn from each other about governance.

And what can charities learn from the private sector? Not much, it seems. According to panel member Andrew Hind, chief executive of the Charity Commission, the voluntary sector "should effectively take the governance as well as the moral high ground".

That's because charities are better at remembering why they exist, have to demonstrate public benefit and have a head start in terms of public affection.

But the idea that charities can teach the private sector about good governance rests on two assumptions. The first is that the sectors have something in common. The second is that governance in the voluntary sector is particularly good.

There are similarities between private sector and charity boards. Dame Mary Marsh, the former chief executive of the NSPCC who now sits on the board of an HSBC subsidiary, says the relationship between chair and chief executive is equally crucial in both sectors. "If that relationship works, all sorts of other things will work," she says. "If it doesn't, all sorts of other things won't."

But Lesley-Anne Alexander, chief executive of the RNIB, contrasts the shared responsibility between executive and non-executive directors in private companies with the "not useful, sometimes even hostile" set-up between managers and trustees in charities.

"The chief executive reports to the trustees and the trustees apply scrutiny," she says. "There's not an even balance of commitment as there is in the private sector. It's more like a manager-subordinate relationship. The tone is different."

So do charities really do it better? Not according to New Philanthropy Capital.

In a report published earlier this year, the think tank claimed that although the costly failure of banks had revealed the weakness of much corporate governance, third sector governance problems remained largely unexamined. In practice, it claimed, trustees were often failing to run charities effectively and in line with their missions.

Unlike company directors, who face an inquisition in the form of shareholders at every annual general meeting, trustees often have no one to report to. In theory, they report to funders and regulators. In practice, the penalties for poor performance are few.

The result, according to the NPC report, is that "charities can get away with poor governance for relatively long periods without short-term costs".

The diversity of third sector boards is cited as another potential learning opportunity for the private sector. If this is often overstated - almost half of trustees are aged over 60 and most are middle class - there are strong arguments being made for third sector representation on corporate boards.

The fact that charities operate within multiple frameworks and are used to triple bottom-line accounting means the social impact of what they do is, in theory, never far from the top of the agenda.

For this reason, Stephen Lloyd, a partner with charity law firm Bates Wells & Braithwaite, is among those calling for boards of listed firms to include at least one non-executive director from the voluntary sector.

"It could work as a voluntary code, where companies see reaching out to a wider group of stakeholders as the sensible thing to do," he says. "Banks are used to dealing with regulators, but they're not so used to taking into account social and environmental issues and looking at the wider social impact of what they do.

"They haven't engaged with it hugely because they haven't had to. There is no financial imperative or legal requirement for them to do so."

Where there has been cross-sector directorial traffic to date, it has been largely one-way. But not for much longer, says Adrian Bagg, who was a director at drinks giant Diageo and pharmaceutical company Amersham before becoming chief executive of the Papworth Trust in 2006.

"Over the next five to 10 years, the flow will go the other way as well," he says. "But there's still an issue of scale. Few charities are of the same scale as big private companies. Even the largest charities are still relatively small if you compare them with FTSE 100 companies. Where I think you'll see the traffic is between medium-sized private companies and large-scale charities."

Despite the potential for cultural ice-breaking offered by cross-sector partnerships and personnel swaps, some of the old stereotypes still operate. The perception that the charity sector is still a hotbed of amateurism persists, but it is softening as more senior corporate managers shift sectors in mid-career.

"These are people who believe there is such a thing as society," says Mary Chadwick, a former banker who is now a charity trustee and director of third sector recruitment firm Prime Timers.

"Their skills, in terms of strategy and business planning, apply across sectors. But they also need to have empathy to succeed. We're not interested in people who want to sort out inefficient little charities. They need to approach it in a spirit of humility."

In fact, it seems, resistance is just as strong - if not stronger - on the other side. Take the claim of Debra Allcock Tyler, chief executive of the Directory of Social Change, that charities have nothing to learn from other sectors. "We're not about growth for growth's sake or waving our willies to see who has the biggest turnover," she said at the NCVO panel discussion.

One director on the panel, now in the private sector, spoke of encountering resentment in charities at having to deal with "capitalist bastards" at all.

But Chadwick says things are changing. "I've noticed that charities have become more open to the private sector," she says. "Sometimes the sectors used to have very crude ideas about each other. You used to encounter the notion in charities that they had nothing to offer high-powered managers from the private sector, who were interested only in money."

Hind's contention that the Northern Rock fiasco and the scandal over MPs' expenses were "failures of governance as much as morality" has considerable weight - more, perhaps, than his claim that "financial institutions might be in a better position had they remembered they were there to serve society".

The problem is, they aren't. As monetarist economist Milton Friedman famously pointed out, the business of business is business. And it would be very expensive business for companies to handle reporting and transparency in the way that charities do.

"Accounts are not what this debate is about," says Hind. But in a sense, they are - at least for a private sector company facing significant financial penalties for what amounts to a failure of governance.

According to Alexander, what the voluntary sector has to offer is not transparency but passion and innovation. Combine this with the private sector's respect for professionalism and "it would be a powerful and winning combination in terms of governance", she says. "No sector has a monopoly on getting it right."


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