Corporate governance is just as necessary for charities as it is for their profit-making peers. CSj gets some best practice advice for charities in Hong Kong and looks at the prospects for regulatory reform in this sector.
Earlier this year, one of the largest and most shameful charity frauds was exposed in the US. The US$187 million raised by four American charity groups should have gone to aid cancer patients. Instead, it was spent on subscriptions to dating websites, meals at Hooters and purchases at Victoria’s Secret, jet ski joy rides and cruises to the Caribbean by its founders and family members, the government said. Only 3% of the money reached cancer patients.
The list of similar incidents is as long as it is appalling. In Australia, a not-for-profit group was last year caught transferring donors’ money to terrorist group Islamic State. In the UK, the former head of counter-fraud and loss-prevention at Oxfam was jailed last year for defrauding the charity. Moreover, Greenpeace recently suffered a blow to its name after a scandal surrounding a loss of £3 million through ill-conceived currency deals.
These are not the first charity scandals and they won’t be the last, but what lessons should be drawn from them? The key lesson, no surprises here, turns out to be that charities are subject to the same key requirements that keep all organisations afloat, irrespective of their status and goals. At the top of the list are the requirements for organisations to ensure good transparency for stakeholders and accountability of their management and board. Indeed, since charities depend on support from private donors, they are heavily dependent on their ability to maintain transparency and accountability.
British research consultancy firm nfpSynergy lists weak leadership and poor governance systems as major threats to charities today. Moreover, as a result of scandals such as those described at the beginning of this article, public trust in charities has declined compared to other institutions, it says. When trust sinks, so does the willingness to donate.
A disaster waiting to happen?
So far, Hong Kong has been relatively spared from major scandals and public trust is relatively stable, according to industry experts. But respondents to this article stress that, to avoid future undesirable incidents, Hong Kong should improve its regulatory framework for charities and increase the awareness of the need for good governance in this sector.
‘The overall environment for charities in Hong Kong is well balanced and disciplined. We have good practices and there have been very few fraud cases here’, says Linda To, Executive Director, HER Fund – a local women’s empowerment group established a decade ago. ‘But that does not mean regulation and accountability is not needed’.
Hong Kong is undeniably a charitable place. You won’t get very far on the streets before being tapped for charitable donations by volunteers. According to a report by private bank Coutts, a total of 120 donations worth US$1 million or more were identified in Hong Kong in 2013, an increase of 15% compared to the previous year. The two largest ones came from the Li Ka Shing Foundation. In total, the donations amounted to more than HK$7 billion (US$935 million). Coutt’s Director Mark Evans believes the amount to just be ‘the tip of the iceberg’ since many donations are made very privately.
Today, more than 8,000 organisations are registered as charities with the Inland Revenue Department. A few thousand more, which have not registered for tax-exempt status or have opted out from the list, are believed to operate here. Every year some 400 new charities are set up. However, with so many groups seeking funds, it can be tough for both institutes and private individuals to figure out which causes to support – and who to trust.
‘Charity is the biggest business in the world in terms of money but has no unified regulations’, says Mohan Datwani FCIS FCS(PE), HKICS Senior Director and Head of Technical & Research. ‘One should be worried if one’s money doesn’t go to the stated objectives, or is spent on overhead expenses and administration. So when moms and pops choose to donate to charity A, B or C, they really should have some transparency and understanding. This is why charities need good governance’.
Faced with a growing number of charities and a growing sense of the inadequacy of the current regulatory regime relating to them, the Law Reform Commission has for years been looking into the possibility of enacting a ‘charities law’.
Bernard Chan, Chairman of the Law Reform Commission’s Charity Subcommittee, and Chairperson of the Hong Kong Council of Social Service (HKCSS), believes that most charities in Hong Kong generally have strong governance, and that boards or executive committees are often composed of professionals, experienced volunteers or government officials.
‘However, in order to meet public expectations, charities should work more on accountability and transparency’, he says. ‘No doubt, transparency and accountability are the key values in the operation of charities’.
Charities can be incorporated as companies, trusts or societies. A charity set up as an incorporated company is required to file an annual return with the Companies Registry which covers the basic facts. Charities with tax-exempt status are subject to periodic review; incorporated companies must submit audited accounts while unincorporated organisations just have to present self-certified accounts. The list of charities exempted from tax under Section 88 of the Inland Revenue Ordinance (Cap 112) is not a conclusive list of all the charities in Hong Kong and it is not compulsory for charities to have their names placed on this list.
In December 2013, the Law Reform Commission published a report proposing that all charitable organisations that solicit cash or its equivalent from the public, or have sought tax exemption, should be required to register as a charity. It put forward 18 recommendations with the aim of improving the transparency and accountability of charities and thus provide better safeguards to the public.
The recommendations included a specifically formulated reporting standard; a statutory definition of ‘charitable purpose’; disclosure of certain documents including financial statements and reports of activities for tax-exempt charities; and further educational initiatives to broaden knowledge and awareness of this sector. The Law Reform Commission said the changes could be implemented by amending existing legislation, rather than through the creation of a new charity law.
However, during a public consultation exercise it became clear that this is a controversial topic and many of the Law Reform Commission’s recommendations were criticised. As a response, it backed down from a number of recommendations, principally the proposal for a centralised ‘Charity Commission’.
At the moment, charities have to go through various bodies – including the Social Welfare Department, the Food and Environmental Hygiene Department, the Home Affairs Bureau, the Television and Entertainment Licensing Authority, etc – to apply for permits and licences. The Charity Commission would have been a ‘one-stop shop’ for such applications. It would also have been given extensive powers, including the power to vet and register charities, monitor charities’ compliance with legal obligations, approve fundraising activities, promote good governance, investigate misconduct and take action where necessary.
The suggestion for a Charity Commission was removed from the Law Reform Commission’s final report due to the ‘apparent lack of general consensus among the public’. Many religious groups – some with underground activities in Mainland China – feared the creation of the watchdog would undermine religious freedom. At the same time, the trust in the Hong Kong government is low; only one in five is satisfied with its performance, according to a recent poll.
‘I have no idea about the intention of the government, but if there is no specific, clear scope, and roles or responsibilities of the proposed Charity Commission, it could be threatening to the autonomy and freedom of expression and the participation of civil society’, says Linda To. ‘There are a lot of controversial issues in the Law Reform Commission’s report and the NGO sector has raised many concerns regarding those issues, such as the definition of ‘charitable purpose’, the roles and responsibilities of the Charity Commission and whether the commission’s power would be too big, overruling the autonomy of civil organisations’.
Even judging by the habitually glacial pace of law reform in Hong Kong, the progress on charity regulatory reform has been slow. Over two years after the Law Reform Commission’s proposals, the government has still not given a response or taken any action, according to Bernard Chan.
‘Since there is no consensus on the charity law, the authorities have put it on hold’, he says. ‘Many had also opposed the idea of a centralised authority, fearing it could be used to suppress criticism of the government or undermine religious freedom’.
There are two recommendations that should be prioritised, Chan believes. First, a standardisation of applications for fundraising permits. Secondly, a register of all charities that are active in Hong Kong. ‘Compiling a register would be much faster than setting up a watchdog, and it would help increase the transparency of charities and public confidence in them’, he says.
In the meantime, his advice to the public when donating money to charities is to read their annual and service reports to understand their objectives and how they implement them. The public should not look solely at a charity’s finances, as they won’t tell you the whole picture, he points out. He adds that by doing some homework, donors will realise what their donations can and cannot do, and where their time and efforts can best be spent. ‘You will understand more about the value of the charity’s work beyond monetary terms,’ he says. HKCSS, which represents more than 400 charities, also manages an initiative called WiseGiving, which aims to inform the public about the work of charities.
Later this year, the Independent Commission Against Corruption (ICAC) will issue new revisions to its code of conduct for NGOs in Hong Kong, according to a spokesperson (see the ICAC’s Best Practice Checklist: Governance and Internal Control in Non-Governmental Organisations). The ICAC also encourages charities to use its Best Practice Checklist: Management of Charities and Fund-raising Activities. Both guides are available on the ICAC website: www.icac.org.hk.
Mohan Datwani suggests that Hong Kong should introduce a regulatory framework similar to the one in the UK, where a charity law covers the rules and standards relating to the setting up and operation of charities, and a Charity Commission registers and regulates charities to ensure that the public can support charities with confidence.
‘The UK has been through the issues relating to charities. If Hong Kong wishes to consider better governance for charities, UK laws and practices appear to be a good benchmark. After all, Hong Kong and UK law converge on matters like trust concepts’.
His advice for company secretaries working for charities is first and foremost to be mindful of the public trust imposed upon charities. ‘What you need to consider in terms of governance is not simple. You need to consider not just how to help the charity run its business, but also the public good which it is to achieve and provide guidance to achieve such public good. This is in addition to the compliance requirements like the business review requirements, etc’, he says.
Linda To suggests that simply passing a law stating that all registered charities have to submit their audited financial reports and annual work reports to the Inland Revenue Department for monitoring would lead to better regulations. This would be similar to the requirement that applies to for-profits to send their annual returns to the Companies Registry annually, and it would mean that charities guilty of violating requirements could have their status revoked, she points out.
A survival issue
The debate – or lack if it – in Hong Kong about how best to regulate charities comes in the context of an increasingly difficult environment for charities worldwide. The UK saw a 10% drop in trust levels for charities in 2014, compared to the year before. Only 56% of people trust charities ‘quite a lot’ or ‘a great deal’, research consultancy nfpSynergy says.
‘Our research shows that trust in charities is highly volatile and can never be taken for granted’, the pollster’s director Joe Saxton said. ‘The good news is that there are ways that every charity can reassure people that a donation is well spent. It’s clear that the role of the Charity Commission is absolutely central in building trust in charities’.
The Association of Chief Executives of Voluntary Organisations (Acevo) in the UK shows evidence of a significant rise in demand for help on governance issues. In 2012/2013, it saw a sizeable increase in calls to its ‘Governance Helpline’ service, and a 40% rise in calls to its ‘CEO in Crisis’ helpline for charity chief executives in need of support.
‘Charities operate in a fast-changing world, and the last few years have seen major shifts that have put increasing pressure on governance standards’, Alex Massey, a senior policy officer at Acevo, wrote in an article carried by the Guardian. ‘The economic downturn has had an impact on all sources of income, whether private or public; at the same time, many charities have begun to explore new areas of activity, from commercial partnerships to public service delivery’.
‘All these changes have created new risks, challenges and opportunities’, he added, ‘and it is crucial that boards, together with management teams, have the capability to lead their organisations through the minefield’.
On the same note, the consulting firm Grant Thornton in the UK has found that governance is more important than ever to enable charities to respond to emerging risks and deliver on their objectives. Its annual report on the top 100 charities looked at the risks affecting charities and how they are disclosing and managing these risks. Over 55% identified a cut in funding, whether in the form of donations, grants or government contracts, as a key risk, yet few charities gave insight in their annual reports as to how they plan to address this risk.
And even if the UK law system might be a good benchmark, it’s far from flawless, according to David Craig, the author of The Great Charity Scandal. A 2013 parliamentary inquiry into the charity sector found there were so many charities – almost 200,000 in total – that the Charity Commission was struggling to ensure that registered charities were genuine, rather than tax avoidance schemes or political campaigning groups, he said.
‘Many charities have become hungry monsters, needing ever more of our money to feed their own ambitions. And while registered charities claim that almost 90p in every pound donated is spent on “charitable activities”, many spend at least half their income on management, strategy development, campaigning and fundraising – not what most of us would consider “good causes”,’ he wrote in an opinion piece.
Perhaps the lack of known fraud cases in Hong Kong is actually indicative of the low standards of transparency in the charity sector – we just don’t see it. In Australia, a new national charity regulator was set up in December 2012. Over the last two years, the Australian Charities and Not-for-Profits Commission has received over 1,300 complaints against Australian charities. The most common complaints from the public include financial mismanagement or fraud, lack of transparency or accountability, and charitable resources being used inappropriately. Possibly, without the new regulator, these cases might have gone unnoticed.