How to talk about the True and Fair Foundation report

I’ve already argued in my last blog post that ‘A Hornet’s Nest’ by the somewhat misnamed True and Fair Foundation is the worst report I have seen in 20 years. I continue to believe that this will hurt the reputation of the True and Fair Foundation more than charities as a whole, but in the short term, all charities are likely to be faced by people who think that this stuff is actually true.

At the root of the problem is that charity accounts just aren’t the same as company accounts. I explained this to Ms Miller prior to publication – (see our exchange) – but she published anyway. So, here’s five things you could say if you find yourself in a conversation about this report or your own charity’s expenditure and the confused idea that we are not spending our income on charitable activities:

1) The gift that stops on giving.

Big gifts get reported when they’re given, even if they’re meant to last forever. One of the most obvious things to point out here is that charity accounts report ‘total incoming resources’, which includes income that donors want spent in future years. So when The Racing Foundation (criticised in the report), got an endowment from the sale of the the Tote, it reported this windfall all in one year’s accounts. Big gifts like legacies are meant to last years, sometimes even perpetuity as a permanent endowment, but Miller’s ratio would mean they had to spend them all immediately. Just imagine telling the users of endowed hospitals like Barts, Guys’ or St Thomas’s that we couldn’t now build their equivalent because of the Miller ratio.

2) No more village halls. Or lifeboats.

When charities spend money on buildings and capital equipment, it’s not classed as charitable expenditure. But it’s still charitable. One of the reasons that some charities spend a low percentage of their income on charitable expenditure is because they are putting money to one side to spend on a ‘capital item’, such as a new building. Such spending is reported elsewhere in the accounts, but this requires someone to look at them. Anyway, the report criticises The RNLI for spending only £122m of its £190m income on charitable expenditure. But the RNLI spent an extra £65m buying new lifeboats. So, under the Miller ratio, no more lifeboats.

3) Kids Company is great!

Staying on the same line of argument, charities also choose not to spend money so that they can put it away for a rainy day as reserves. Many aren’t lucky enough to be able to do this, but for those with a moral duty to serve a particular group, or commitments such as salary costs, the need to keep money aside for these commitments is vital. Indeed, we’ve spent much of the summer decrying one particular charity for spending all of its income on current charitable expenditure: Kids Company. In 2013 it spent more than 90% of its income on charitable work, a great success story under the Miller ratio.

4) Lots of charities are now social enterprises.

Some of the biggest ‘misunderstanding’ came from an inability – or unwillingness – to understand that charities are now social enterprises, trading and applying the surplus for public benefit. There is no little irony here that after being told for years to be more businesslike, charities are now being criticised for adopting the tools of enterprise, namely trading. Lisa Clavering helpfully quoted Dan Pallotta on this below my last blog:

This is what happens when we confuse morality with frugality. We’ve all been taught that the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we’re missing the most important piece of information, which is: What is the actual size of these pies?

Who cares if the bake sale only has five percent overhead if it’s tiny? What if the bake sale only netted 71 dollars for charity because it made no investment in its scale and the professional fundraising enterprise netted 71 million dollars because it did? Now which pie would we prefer, and which pie do we think people who are hungry would prefer?

5) Don’t ask how low the overhead is, ask how big the impact is.

Dan Pallotta again, who rightly points out that if donors really want to make a difference, they should ask charities to talk about their impact. How do they make a difference? What’s the link between your intervention and the outcomes you see? How do you know it’s your work that is leading to that change? Is someone else’s intervention making a bigger difference? These are the important questions. Not a ratio that, from all I know and can see, is about as much evidence of charity efficiency as the bumps on someone’s head are evidence of their intelligence. Just as with the latter theory, Miller’s pseudoscience ratio belongs in the Victorian era.