Rethinking governance in the not-for-profit sector

Could social impact investing help Australian charities respond to the challenge of accessing funding in an ever-tightening sector?

Julie McDonald MAICD, CEO of The Funding Network (TFN), describes the run-up to the organisation’s first live online fundraising event in April 2020 as “the most nerve-racking week of my life”. Until then, the organisation had run in-person crowdfunding events, described as a philanthropist “shark tank”, where three small not-for-profits (NFPs) pitched to a roomful of potential donors who were, unfailingly, swept up by the atmosphere and the desire to make the world a better place.

“It’s a really effective way of getting people to come together and pool their resources with others,” says McDonald.

But as COVID-19 cut a swathe through public gatherings, this business model was turned upside down. During that first, hastily-convened online event, McDonald found herself hovering over a laptop, hoping fervently that her hand-picked technology wouldn’t fail and that her team’s rehearsals would pay off.

She was relieved — and elated — when the virtual nature of the event only served to stoke the collective spirit of giving.

“[During an in-person event] no-one in the room is going to put their hands up in the middle of the pitch and say, ‘Oh, you’re so brave. You’re amazing’,” she says. “Whereas all of this is happening in the chat while [the NFPs] are pitching, so there is much higher energy almost by the time pledging starts, which has been phenomenal.”

Exception to the rule

TFN actually raised 32 per cent more in 2020 than it did in 2019, further piquing the interest of larger charities who are partnering with it to forge new donor relationships. Yet what stands out most about TFN’s experience is how it bucks the trend.

Elsewhere, the past year has been a testing time for many charities, given the impact of COVID-19. The collapse of traditional fundraising activities, the withdrawal of two-thirds of volunteers due to social distancing requirements, the hike in costs and dramatically increased demand for services due to the economic, mental health and other impacts of the pandemic, has created the perfect storm.

According to Australian Taxation Office figures, about 12,000 charities and 320,000 charity workers are receiving JobKeeper, raising question marks about the longer-term sustainability of these organisations after the wage subsidy was withdrawn at the end of March.

Susan Pascoe AM FAICD is chair of both the Australian Council for International Development (ACFID), and the Community Director’s Council (advisory arm of the Institute of Community Directors Australia), as well as a director of Mercy Health. She says that while the sector is not uniform, it’s likely that smaller, community-based entities may struggle. “Just like the discussion of zombie businesses that have been kept afloat through JobKeeper, I think there probably are zombie charities, and we won’t know really until JobKeeper is finished,” says Pascoe.

Taken for Granted? — a report released by Social Ventures Australia (SVA) in August 2020 — also warned of “dire consequences” for the sector. The report predicted that by September 2021, one in seven charities were at risk of becoming unviable, 44 per cent would be making an operating loss and 170,000 people currently employed by charities were at risk of becoming unemployed. “The economic consequences of job losses on this scale would be dramatic, especially in an ongoing recession,” the report states.

Building pressure

But even before the COVID-19 crisis, the NFP sector was under the pump. The 2019–20 bushfires disrupted planned fundraising activities and redirected the flow of donations. People gave generously to charities involved in bushfire recovery — with an estimated $457m raised — while charities with different missions received less, points out David Crosbie, CEO of the Community Council for Australia.

“We tend to give more when there’s a crisis” he says. “Australia’s history of giving is… a bit like, ‘Pass the hat around when someone’s down on their luck’. We’re not as good at regular giving, which… enables you to plan and invest in the organisation and staff, because you know you’re going to get a certain amount of income.”

But other forces were already reshaping the sector before the bushfire catastrophes. For example, due to organisational demands for greater accountability, gone are the heady days of gala balls where executives would turn up with limitless expense accounts and spend up big, says John Dennis, past chair and current director of Variety — the Children’s Charity NSW/ACT.

“The ability of a charity to raise $1m–$2m at a black tie ball is pretty limited now compared to what it was like during the 1980s and ’90s,” he adds.

An ageing donor demographic also means that traditional fundraising events such as the Variety Bash — billed as “an adventure with mates driving 30-year-old-plus cars through regional parts of Australia” — is failing to attract younger donors, says Variety’s current chair Dr Greg Levenston.

The sector has further been buffeted by a more pervasive decline in giving. In the wake of the global financial crisis, the level of individual philanthropic giving as a percentage of income dropped by 20 per cent and has still not recovered, says Crosbie. Meanwhile, a four per cent annual growth in the number of registered charities means more organisations are chasing fewer available dollars.

What this means is an “arms race”, says Crosbie, where charities are forced to commit increasing amounts of resources as they try to maintain the same level of individual donations and government funding. “I know one charity who spent $400,000 putting together a tender for a government contract they didn’t get,” he says. “They felt they had to do that because of the competition for those kinds of government contracts.”

Cut to the bone

So, as COVID-19 unleashed its destructive force on the sector, charities were already operating on thin margins. Financial reserves are also limited and charities face constraints on how they are used.

For many directors, balancing the sustainability of the organisation with the needs of beneficiaries in the current environment is a delicate tightrope act, says the Hon Dr Gary Johns, Australian Charities and Not for Profits Commission (ACNC) commissioner.

“From my point of view, I say to directors, there is no correct answer there,” he says. “The answer is, you’ve thought about it and you keep your charitable purpose in mind. We do appreciate that you have to think through the viability of your charity versus the needs of your beneficiaries — and 2020 was the year when you really had to work that out.”

In today’s tough, competitive environment, some have proposed that charities consider teaming up with partners and competitors. For example, under former mergers and acquisitions lawyer Paul Ronalds, the Save the Children fund, of which he is CEO, has supplemented or taken over seven other enterprises with related missions since 2013.

Pascoe acknowledges that while “there are too many charities doing the same thing”, there are practical difficulties associated with putting the brakes on people’s desire to make a difference. During her time as inaugural ACNC commissioner (2011–17), Pascoe claims to have had “virtually no success” encouraging people intent on memorialising a deceased loved one to join forces with, say, the Cancer Council, even if that meant a named fund within the larger entity. “People… had fire in their bellies, and wanted to do their own thing, so it’s a difficult and complex environment.”

Crosbie says charity mergers undertaken for financial reasons are unlikely to be successful, but those undertaken with a view to expanding service delivery can multiply their individual impacts.

Johns also noted that there is no evidence so far that more charities are merging in the current environment, but suggests that some have temporarily closed, putting their services and programs into “hibernation”.

Social impact investing

Some newer thinking is also emerging, which has the potential to change the environment in the long term. Social impact investments — generating positive social impacts alongside financial returns — offer alternative ways to tackle complex and intractable social challenges that governments and charities are ill-equipped to handle on their own. These issues include social and affordable housing, Indigenous disadvantage, aged care, and education.

Despite some local examples, the federal government’s Social Impact Investing (SII) Taskforce — established via the 2019–20 budget — described the Australian market as a “cottage industry”, with significant untapped potential. The taskforce expert panel was chaired by Paul Ramsay Foundation chair and Social Ventures Australia founding CEO Michael Traill. Deputy chair was Amanda Miller, co-founder of Impact Generation Partners.

Although it presented its final report to the government in November last year, at the time of writing, this report is not publicly available, as it remains under consideration by the government, according to a spokesperson for the Department of the Prime Minister and Cabinet. Yet the interim report by the taskforce flagged a huge appetite among funders, including foundations, family offices, high net worth individuals and a small but growing number of institutions, which are prepared to accept a below conventional risk return for positive social impact.

The report notes a growth in managed impact investments in Australia from around $1.2b in mid-2015 to $5.8b at the end of 2017 — a fraction of the estimated US$502b in impact investing assets globally, at the end of 2018. It references survey data from 2016, which indicates that, on average, active impact investors in Australia sought to increase their holdings of impact investments threefold over the following five years — an $18b demand.

The report acknowledges that government has a role, albeit limited, to play in supporting efficient and effective impact investing markets. It has looked to developments in the UK, such as the establishment of Big Society Capital, a financial institution working in SII. Since 2012, Big Society Capital has made more than 90 investments into fund managers and social banks, which in turn make money available to social enterprises and charities. In addition to its expected role as a regulator of the SII market, the taskforce also proposes governments participate in the market as a purchaser of social outcomes. “Increasingly, governments are exploring outcomes-based payments as an alternative to grant funding for organisations to deliver social services,” the report states. “Governments can also support social enterprise through procurement policy.”

Also identified through the taskforce’s report was the need for more early-stage funding to support the market gap of social entrepreneurs’ access to support and capital.

Ray of light

In the meantime, the need remains for existing entities to do more with less. For many, this means a shift towards emerging technologies and platforms.

As little as three years ago, only 34 per cent of charities had an online presence, according to the ACNC’s The Australian Charities Report 2018.

The pandemic necessitated a “substantial digital uplift” by the sector, according to the Pulse of the For-Purpose Sector Report, released in November last year by the Centre for Social Impact in conjunction with the University of NSW, University of WA and Swinburne University of Technology. In the wake of the pandemic, 81 per cent of respondents moved to at least partial online service delivery and 60 per cent to fully online. Some NFPs have even leveraged their digital assets to create new income streams. For example, the Orange Sky Australia laundry and shower service for homeless people now sells the volunteer management software that it built to solve its scheduling headaches.

For TFN’s McDonald, forced adaptation brought unexpected benefits. Pitch coaching is a program that, for a fee, helps NFPs hone their storytelling skills. “Having successfully done virtual [events] we realised we can actually do our pitch coaching virtually,” she says. As one virtual offering among many potential others, it allows TFN to keep costs down, scale its impact and build capacity in others.

“That would never have been on our minds a year, or a year and a half ago,” says McDonald.

Three growing forms of social impact investing

1. Payment by Results (PBR)

How it works A commissioning body pays a service provider to deliver specified outcomes. One way to do this is through social impact bonds, where investors cover upfront service delivery costs while expecting an ROI when outcomes are achieved.

How many/how much There are 13 social impact bonds and PBR contracts in Australia with an upfront investment ranging from around $5m to $14m.

Example The Hutt Street Centre’s Aspire social bond program aims to improve outcomes for 600 participants in justice, health and homelessness service usage.

2. Small to medium social enterprises

How it works An organisation led by a social or environmental mission which may be either a NFP or for-profit entity. Small to medium social enterprises have less than $10m in annual turnover.

How many/how much There are about 20,000 small to medium social enterprises in Australia.

Example The Vanguard Laundry Service based in Toowoomba, Queensland, employs people with a lived experience of mental illness to transition from long-term unemployment to stable employment.

3. Large-scale social enterprise and impact investments

How it works Social enterprises that have at least $10m in annual turnover. Other large-scale investments include social impact investment funds and investments into social and affordable housing.

How many/how muchThere are very few examples of large social enterprises in Australia, and even fewer with considerable scale. Of 189 social enterprises surveyed, just six had an annual turnover above $50m.

ExampleGoodstart was created through a consortium, which included the Benevolent Society, Mission Australia, the Brotherhood of St Laurence and Social Ventures Australia. They raised $95m to acquire 678 childcare centres via bank debt, government loans, subordinated notes and private investment.

Source: Social Impact Investing Taskforce Interim Report, December 2019