Friday, 7 February 2014

How robust is a CIC's asset lock and why should it matter?

A true asset lock comes from members not regulators

This week, Civil Society ran a piece highlighting Social Enterprise UK's concern about how well CIC asset locks were protected. Nice one, SEUK! This is a subject I have blogged about previously and one which I feel too few people concern themselves with but equally goes to the heart of what makes some* "social enterprises" different from a business that is trading in a field that is socially beneficial or that has a strong sense of social responsibility.  I thought it was time to look at this again.  I don't have all the answers.  I don't even have all the questions but I want to flag some up.

The issue of how the assets are controlled in the future (which is why you have the asset lock) is partly about ownership but also about mission or purpose.  As a group of founders, you want to know that the value you put into the business by virtue of working for nothing/low wages in the early years, or freely giving your intellectual property will be used for the same purpose to which you gave it.  You effectively give a gift to a community or a cause, not to the future owners of the business so they can realise the value of the asset and pocket it.  This motivation equally applies to some funders - particularly those providing funds to purchase assets rather than fund activities.

CICs are not the only form of legal structure that provide a statutory asset lock - Registered Charities (which may be unincorporated associations or often Companies Limited by Guarantee) , Charitable Incorporated Organisations, and some Community Benefit Societies have a statutory asset lock.  It is only Registered Charities which have particularly engaged regulation - which can often itself become a problem but that's another story.  Other legal forms such as Co-operative Society and Company Limited by Guarantee can have a "members asset lock" (common ownership) which has no regulator paying particular attention to it and can be removed by the membership.

Whilst I support calls for asset locks to be properly enforced, I also think that over-reliance upon legally recognised asset locks gives false belief. It provides a "false positive" providing external supporters or stakeholders an easy answer to the question "Is the money that I have given for community or social benefit safe from being used for person gain?".

As I outlined in my piece "Why Asset Locks Matter" back in May 2012, within a CIC reinvested profits and other cash assets can be legitimately used to pursue the objects of the organisation - arguably that is what they are there for, not just to sit in the bank achieving no good.  Now, that can include spending money on delivery of services (by staff or contractors) that achieve those stated objects or have the intention to, regardless of actual outcome - because none of us has a reliable, working, crystal ball to predict the future.  This is a good thing.  Having the freedom to spend the organisation's money in pursuit of declared community benefit allows for the development of creative and sustainable solutions to problems.

 Money can in this way be shifted from the balance sheet (assets, which are protected on winding up) onto the profit & loss as losses.  This opens up the possibility that an organisation could spend money under the guise of pursuing the objects which is really payment to persons or organisations for services they have not really delivered (which would be fraud) or at a premium price (which is not fraud but definitely questionable) or that produce no real social gain but provide some income (there is no accounting for people being rubbish at their job).  This possibility increases where the only people involved in making or scrutinising the decisions are the ones that stand to gain from the dodgy practice.  The regulator would not necessarily notice this or be able to prove it either way - social enterprises make losses as well as profits,and sometimes this investment in products/services produces profits in the long term with a reasonable or good return on investment.

So how could you stop this?  Well, firstly, you need scrutiny of what is going on at the time, not months after.  And how do you get that scrutiny?  Well, it would be reasonable to suggest the involvement in management and governance of people who have no stake in payments made to deliver the service, which is the Charity Trustee model of governance.  Equally it is reasonable - and in my view preferable - to suggest the involvement of all (or as many as possible) of those people who are directly affected by the successful delivery of the service such as the beneficiaries or service users and staff whose long term employment relies upon it, which is the Co-operative approach - stakeholder governance.  By widening the group of people who can hold the Directors to account we create more accountability and, as in the Emperor's New Clothes fable, the likelihood of a dissenting voice spotting something is awry increases.

Without internal scrutiny, openness and accountability, by the time a regulator gets to find out about potential wrongdoing it is likely to have been going on for some time before anyone external noticed.
So, is the answer to rely on the regulator, or should we be striving to have better governance, wider & more open membership to provide a true lock on the assets?  I believe it is.  The larger the membership and the more engaged that membership, the stronger your asset lock is in real world, as well as purely legal, terms.

So I'll finish by suggesting that if you really need or want an asset lock, consider for whose benefit that asset lock is put in place, and make sure they own it!

*For others it may be inclusive ownership and governance that makes the difference.  Not all social enterprises have to have asset locks, do they?