What will be the impact of the WE Charity scandal on the Canadian charity sector?
A longform article by charity sector lawyer Mark Blumberg on the We Charity, its governance and for-profit activities
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law.
TORONTO – The WE Charity scandal has now been going on for over 2 months. A few weeks ago the Minister of Finance resigned and parliament was prorogued. Some will say this has nothing to do with WE Charity. I will leave it up to others to draw their own conclusions. On the bright side, and there are not many bright sides here, we have a new finance minister in Chrystia Freeland, the first female finance minister in Canadian history.
Many including myself, had thought that the WE Charity scandal would last only days but it has gone on longer than we could have initially imagined. As we have written about elsewhere there are essentially three interrelated stories — the poorly conceived Canada Student Service Grant (CSSG) program, the questionable and conflicted government decision-making, and the choice of WE Charity to implement the program (actually WE Charity Foundation).
I have received over the last few weeks many calls and emails from clients trying to understand how the WE Charity scandal is going to impact numerous areas of their operations. So it appears that charities at least are painfully aware of how sometimes things that they did not do and they have no control over can, in fact, have a tremendous impact on their organization. This article is prepared in part to help charities understand how WE Charity was quite unique but not completely unique such that its indiscretions will not affect the reputation of the charity sector and because WE Charity did ‘something’ does not mean it is right or wrong for another charity necessarily.
I must admit I am very confused as to the Liberal government’s strategy. Despite the hundreds of articles, thousands of pages of documents just released, tens of thousands of social media posts there continues more questions about this scandal than answers. The traditional strategy of making it hard for people to find out information will result in the fire being put out through lack of oxygen is obviously not working in this case. It has not worked since the first week. Some quite rightly could say that we have so many other issues to deal with, not just COVID, and this scandal is taking up quite a bit of space, especially for those interested in the charity sector and government but it will not go away unless the public is satisfied that they actually understand what is going on. You can blame the Conservatives, the NDP, the media and the public for the story continuing but I think that it is also the Liberals and WE Charity that are prolonging the story by failing to provide relevant information.
The WE Charity scandal could have significant and lasting effects on the non-profit and charity sector and it is by no means clear at this point what those changes will be. It may take years, in some cases, to see the impact. There could be some positive, there also could be some very negative implications.
The biggest concern for the charity sector is that the WE Charity scandal will hurt the reputation of the sector, undercut donations and government funding. If I was a fundraiser, I would be particularly concerned about this — there are enough impediments to fundraising without this scandal.
Will Canadians trust charities less because of the WE Charity scandal? Will they think that the problems of WE Charity are reflective of the broader charity sector and trust the sector less? It is hard to know. As we noted above WE Charity is unique. But then again, many charities are unique. The bigger question is it “uniquely unique”? This will be difficult to answer but I will try in this article.
While WE Charity is unique, the problem that is confusing to some is that there are elements or parts of elements in what WE Charity has been doing that may be acceptable and done in other charities but there is scrutiny of WE Charity in light of the CSSG and the fallout for the way that they are specifically conducting their activities, such as:
- using multiple corporations
- having employees
- compensation of senior staff
- working with youth and students
- reporting and transparency
- lobbying of government officials
- partisan activities
- conducting international activities in multiple countries
- social enterprise and business activities
- receiving government funding
- owning real estate
- having controversial programs such as voluntourism
- corporate sponsorships
- having a “founder” or “co-founders”
- having board members for long periods of time
I will discuss each of these points below.
At the moment there is a lot more information needed on the details of the WE Charity and its operations. Many former employees who want to speak out, apparently are silenced by non-disclosure clauses and the disclosure from the Federal government has been slow and sometimes misleading. WE Charity seems to answer almost all questions given to them but sometimes those answers seemingly have little relationship to the questions. In addition very basic documents like the financial statements for all the for-profit WE entities, which is not currently legally required to be disclosed, has not been disclosed and therefore there will always be lots of nagging questions around WE’s operations. After all, how can you understand the WE organization when the different entities are often lumped together and you are only entitled legally to have information on about 1/2 of those entities!
For charities that are worried about the public thinking that all charities are like WE Charity, your lives are made more difficult by WE Charity often saying that what they are doing is similar to other charities. But here are some tentative thoughts (some might even be talking points) for charities about why WE Charity is really unique and why certain things done by WE do not appear to be straightforward or the “normal” way charities operate. Of course cumulatively when you look at all the issues raised with the whole WE organization it is also very concerning, as opposed to each independent issue by itself. This does not mean that everything WE organization did was problematic — they may have done some good things and I am sure that there are some people who benefitted from their programming over 25 years. However, the negatives raised by various groups are significant and the key issue in this article is how much will the public think WE Charity is similar to other charities.
It also does not help that the knowledge of both the sector, politicians and the public on charity compliance issues, and what charities are or not allowed to do, is shallow and often, there is more misinformation than information. The lack of knowledge makes it easy for public relations people to argue that a charity’s behaviour was appropriate when it was not and the Finance Committee’s shallow knowledge of charity law means that they don’t challenge some of these assertions.
Using Multiple Corporations
If you believe the supporters of WE Charity, many charities are doing exactly what WE Charity did in terms of having multiple corporations and it is not really a big problem here. The Kielburgers in fact admitted in testimony that the structure was probably a little too complex. WE Charity is correct that some charities have multiple entities — for-profits, non-profits and charities and sometimes more than one of each that work together. However, for a Canadian charity of their size, I have never seen anything like this. As well, there is a difference between having a “for-profit” in a group that is wholly owned by a charity and a for-profit that is owned by two or three private individuals and has a close relationship to the charity that benefits to some extent the for-profit. There is a difference between having multiple corporations with transparency about each corporation and clarity as to how they work together versus having so many corporations that the chair of the charity for 10 years cannot even say how many there are and it is very difficult for many smart people including investigative journalists to understand where one begins and one ends. This is not the first time that there have been questions about charities and non-charitable corporations — remember Kevin Donovan’s coverage of ORNGE air ambulance service which was a charity and that had a non-profit as well. So yes, it often makes sense to have multiple corporations but it is important that there is adequate separation between them, that there is transparency about their role, that the public can easily tell them apart and it is clear that the charity is not in any way unduly providing a private benefiting to a non-charity. CRA has recently revoked a number of charities where there was lack of separation between the registered charity and non-charity. Here is a short article by Yves Savoie about the corporate web.
Some Canadians have the stereotype of charities being small and all-volunteer organizations. Many in fact are that. The public sometimes does not realize that hospitals, universities, large social service agencies are also charities and yes they have employees. So about half of all Canadian charities have employees and there is nothing wrong with paying reasonable salaries. The issue of charities and employment is important and complicated and probably deserves a lot more attention as it involves over 2 million Canadians who are employees of charities and about $147 billion of the $261 billion in expenditures is spent on employees.
There are allegations in the media that some WE Charity employees worked long hours at low salaries and were not paid overtime. There are allegations from many former WE Charity employees that there were problems in the work culture or there was a toxic work environment. There are also allegations that some BIPOC employees were not treated well and there was some bullying by some staff people. There is a difference between having employees and adhering to minimum employment standards versus having employees and having them work overtime (without compensation) such that they are earning in some cases less than minimum wage. Problems with human resources in charities is not new and unfortunately rarely receives the attention that it should. Perhaps the WE Charity scandal will be added impetus for organizations to think carefully about their employees and their work environment and make improvements that are long overdue.
Compensation of senior staff
Charities have to retain some very talented people and compensation is not simple. We wrote about appropriate charity compensation over ten years ago. There were lots of questions around how much did the Kielburgers earn from the charity. This is clearly the wrong question as my understanding was that they did not receive a salary from the charity, but instead from a for-profit affiliate (ME To WE) that received significant payments and had close ties to WE Charity. If you pay an employee through a registered charity there is some basic disclosure in the T3010 which lists the top 10 employees and their pay bands. Even if the Kielburgers received a salary from the for-profit corporations (I have seen it reported that it was $125,000 each annually) that hardly gives you a good idea of their real compensation.
When you look at someone who is both a shareholder and employee of a company, like any small business, their ultimate “compensation” is not just salary but also an increase in the value of their shares of the company which is based on the assets of the company. The more the company is worth when it is ultimately sold, the more the shareholders will gain. We will probably never know, therefore, how much the Kielburgers earned from their involvement with WE Charity and whether or not it is an appropriate amount. There is some latitude given by CRA on the topic of compensation but realize that the public, the media and more importantly your donors may have their own perspectives on what is appropriate and that is not even always fair. Compensation of employees is one of the most important governance decisions for a charity, and in some cases, compensation is the largest expenditure of the charity during the year. Charities should review their employment and compensation practices. A lot of the problems here is that there is so little transparency and therefore are so many wild theories that can then flourish. Another reason why transparency is important.
Working with youth and students
School boards have an obligation to educate students and they try to provide all-round education which can be more than just in class work. Generally, schools are careful about the partners that they are involved with. There will be more written in the future about the school system and WE Charity, but clearly there are roles for charities to play to assist schools in a completely appropriate way to educate children and give children an opportunity to thrive. When should administrators and teachers accept free trips from for-profit companies? Could this put them in a conflict of interest when they are then encouraging thousands of students to take very expensive trips organized by that for-profit? Certainly the issue of came up with the CSSG with teachers being potentially paid to recruit and virtually supervise students doing volunteer activities.
There is a difference between educating children as is done in many schools and trying to indoctrinate children into buying products and selling products to the public that may benefit for-profit companies owned by private individuals and their corporate and other sponsors and friends. Needless to say, there are many great charities that can and have worked effectively with school boards and hopefully this saga will not turn schools off dealing with charities. But it would not be shocking that school board reevaluate their policies and perhaps make it even more difficult for charities to operate in schools and work with students.
Reporting and Transparency
Charities should be transparent about their operations, activities, structure, partnerships, etc. Transparency does not mean putting up large amounts of information on the charity — it means putting up relevant information for different stakeholders, ensuring your T3010 is accurate, filing financials if you are a soliciting corporation under the CNCA, and providing ongoing transparency through your website and social media. In other words, providing your stakeholders with real information on the operations and structure of the charity and its related entities. It also can mean having frank conversations with stakeholders about plans and mistakes that have been made.
There are legal requirements around transparency with which registered charities must absolutely comply (i.e. filings financials as a soliciting corporation under the CNCA and filing your T3010 Registered Charity Information Return). However, these are only very basic requirements and the minimum standards that a charity should meet. WE Charity filed that they were a “non-soliciting” corporation for about 5 years and, therefore, they did not need to file their financial statements! They just fixed that “clerical error” a few weeks ago.
The We Charity scandal has definitely made the issue of transparency of charities front and centre. Legally speaking there is no requirement for charities to disclose affiliated for-profits that they don’t own. The public, therefore, has no idea how much money was made by WE Charity’s for-profit arm over the last ten years, what assets it has, etc. One glimmer of hope that I had from watching Canadian parliamentarians trying to obtain basic information about WE Charity is that perhaps more effort will be made to increase transparency in the charity sector. When you look at other countries, such as England and the US, and what they require charities to disclose, then Canada fails miserably. We have a whole directory on transparency in the charity sector.
Charities can learn that organizations should first and foremost focus on mandatory legal filings before investing in other communications and transparency such as websites, social media etc. If you cannot get the mandatory legal filings done you might need to change staff or obtain external assistance. But filing inaccurate forms or not doing filings at all is not an option. Calling yourself a transparent charity does not make your charity transparent! We regularly assist clients with understanding what filings they need to do, how their filings may not be accurate and how to improve transparency. For some organizations these can be quite simple and straightforward — but for others, it is more complicated. Almost all charities can be more transparent than they are now.
Lobbying of government officials
In light of the tremendous amount of funds granted by governments and the importance of decisions made by government affecting the beneficiaries of charities, it makes sense that Canadian charities are involved with lobbying government on all levels.
Recently it came to light that WE Charity had not registered under the Federal Lobbying Act, a comprehensive piece of legislation that is intended to increase transparency regarding the government’s dealings with outside entities. If a charity “communicates with a public officer holder” asking for funds, that will probably constitute lobbying. “Communication”, for purposes of the Lobbying Act, can involve verbal or written communication or a written contact with a public office holder. If a charity spends over 1/5 of a full-time employee over any month (a “significant part of duties” or the “20% rule”) then a charity must register under the Lobbying Act. This is the equivalent of, for example, 4 days in a month totalling all staff time on lobbying. Another way of looking at it is this: if a charity spends about 40 hours or more in a month on lobbying then it will probably have to register under the Lobbying Act.
If a charity meets the 20% rule, then a senior officer of the charity must register by filing a return no later than two (2) months after the requirement to register arises under the Lobbying Act. The maximum fine for failure to do so is approximately $200,000 and/or imprisonment for a term of up to two (2) years. WE Charity recently filed almost 2 years’ worth of lobbyist registration information.
Interestingly, the WE Charity Foundation Funding Agreement signed in May 2020 contained the following provision: “7.1 The Recipient declares that any person who has been lobbying on its behalf to obtain the contribution that is the subject of this Agreement was in compliance with the provisions of the Lobbying Act (R.S.C., 1985, c. 44 (4th Supp.)), as amended from time to time, at the time the lobbying occurred and that any such person to whom the aforementioned act applies has received, or will receive, no payment, directly or indirectly, from the Recipient that is in whole or in part contingent on obtaining this Agreement.”
There is a difference between doing a small amount of lobbying versus a large amount of lobbying and if you meet the criteria for registration then you must register. I hope that charities don’t shy away from dealing with government because of worries about lobbyist registration. I also hope that government does not shy away from meeting with charities because of concerns about the adequacy of charity registrations under the lobbyist registration system. Now is a great time for charities to review their interactions with different levels of government and to see whether registration is required at any of the levels. Otherwise, you might find your charity frozen out of meetings and communications when you most need to be communicating with government.
As you know in December 2018 the Income Tax Act was changed to allow Canadian registered charities to conduct unlimited public policy dialogue and development activities (PPDDA) connected to the stated purpose of the charity, as long as they are not directly or indirectly partisan. PPDDAs are similar to what we used to describe as allowable non-partisan political activities.
The old and new rules preclude any partisan activities. Although many candidates and others appeared at WE Days from different parties there are some questions about some of the material produced by WE Charity including a glowing commercial featuring Justin Trudeau and whether it was in fact directly or indirectly supporting a candidate or political party. There are also stories about WE Charity employees being encouraged to attend partisan events put on by candidates. The WE Charity scandal is a reminder to charities that although it may seem like a good idea to do something that is glowingly positive towards a particular party or candidate or very helpful in their re-election campaign, this can come back to haunt the charity and the sector. It is better that charities carefully avoid any behaviour that would appear to indicate that they are supporting or opposing one political party or another.
One of my concerns, when the changes were proposed in 2018, was that if charities could conduct unlimited non-partisan political activities that they would not have to conduct any charitable activities at all. Eventually the organization might morph into becoming a “political” organization or may inch into partisan activities because they are doing so much political activities and not necessarily carefully reviewing their activities in terms of these fine partisan/non-partisan distinctions which some people don’t accept anyway. I would not be surprised if there are some clarifications in the future about charities and how much political activity they can conduct. Hopefully, this will happen before the reputation of the sector is irreversibly harmed. By the way, don’t think that the charity sector losing its reputation is bad for everyone — there are certain special interests — whether they be for-profit companies wanting business from government that charities typically do or others who support agendas that are hostile to the public that would not at all be upset if the charity sector was less trusted and listened to by the public. (Here is an additional perspective on this topic from Adam Parachin.)
Conducting international activities in multiple countries
International activities are some of the most important activities conducted by Canadian charities. With increasing needs at home and the WE Charity scandal there could be pressure on (and fewer donations to) charities conducting activities abroad. This is very worrying to me. To make it worse, it looks like some international development organizations during COVID-19 are pushing aggressively for less accountability and transparency when Canadian charities carry out foreign activities. They argue that the rules for foreign activities impose too much of a burden on charities. This came across to me as being shocking and tone-deaf. There was a brief discussion in the WE Charity scandal about transfers of property in Kenya from charities to for-profits, and on a separate matter, whether there was some sort of misuse of funds in Kenya by some people. Maybe we will hear more about this in the future but it did not inspire confidence in their foreign operations.
There were some concerns expressed about WE Charity operating in so many different countries and if this was more “donor” led rather than beneficiary led. WE Charity will not be the only charity that has to deal with those discussions and criticisms and some Canadian charities frequently change their priorities or focus based on funder or donor sentiments. The foreign activity piece got little attention but as we know the WE Charity scandal is not over yet.
Charities should review the appropriateness of their foreign activities, their legal compliance in connection with those foreign activities, in order to determine whether any other systems should be implemented to improve oversight, mitigate risk and increase impact. It is not just WE Charity that has been rocked by allegations of different sorts, but a number of prominent global international development organizations have had scandals in the last couple of years that were extremely costly to them.
I recently wrote how it is surprising to me that so many people who have spent decades in the international development community can be completely oblivious to some of the misdeeds of international development organizations. I can rattle off 5 or 10 names of charities that have been revoked for cause, not small charities, but in some cases, charities spending tens of millions of dollars per year (allegedly completely inappropriately) and these veterans of the international development sector have never even heard of these organizations. As these charities were revoked CRA can disclose the detailed reasons for the revocations. This information is then public. It has always mystified me how some very intelligent people within the charity sector can know every detail of a topic but not know anything about these bad actors. As someone from Finance once said to me to helpfully explain ‘some people are paid a lot to not notice’. If you live in a world where international development organizations only do good and wonderful work then I can understand loosening or eliminating rules. I don’t think we live in that world and ignoring the harm caused by a “few” bad apples can result in a lot of victims and a loss of trust by the public in international development organizations, their governance and oversight. If I was on the fundraising side of international development and humanitarian assistance I would be following the WE Charity scandal carefully and hoping that it does not have a very negative impact on fundraising for international philanthropy in the future.
Social enterprise and business activities
Using business activities to make the world a better place has probably been around since business was first developed. Yes, it is not a new concept and not all business activities make the world a better place. However, there are limits to the extent that a Canadian registered charity can carry on business activities. After all, at a certain point, if you are doing unlimited business activities it really is not a charity, just a nice business. The rules allowing charities to conduct business activities are called “related business rules” and essentially charities can conduct lucrative related business within the charity as long as they are “related” to the objects of the charity or carried out 90% or more by volunteers. Related business activities are not only about charities making money but often, more importantly, providing jobs to certain people who may otherwise be unemployed or carrying out activities that can be very beneficial to society but may not be charitable.
Marc Kielburger in his testimony said that charities cannot make a profit. This is not accurate. He was arguing the rules meant that they needed to set up a separate for-profit corporation to do the voluntourism and sales of bracelets etc. As noted above, when charities have for-profit arms they are usually owned by the charity so any increase in value of the shares can benefit the charity. Charities often have very profitable related businesses — for which I might add, by the way, they pay no income taxes on that profit. Have you ever parked at a hospital parking lot in downtown Toronto? Do you think the hospital that owns that parking lot is breaking even or losing money! While there are some advocates for allowing charities to conduct almost unlimited business activities I don’t think that ultimately that will either be in the best interest of charity beneficiaries or the sector. Because the term “social enterprise” can mean so many different things to different people it probably should be retired or sparingly used. There are different rules for for-profits, non-profits and charities conducting business activities and often people confuse those rules. Charities should understand the related business rules and whether their business operations are compliant with those rules. Often changes can easily be made to bring them into compliance. Hopefully, the WE Charity scandal will not cause charities to avoid conducting business activities or the public to get angry at charities for conducting those business activities.
Receiving government funding
A big part of the WE Charity scandal was the WE Charity Foundation receiving a funding agreement for over $543 million to implement the CSSG program. This has highlighted the issue of government grants and contributions to charities. Some were upset that WE Charity received the funds because they did not like the details of the CSSG program (which cannot really be pinned on WE Charity) but others were concerned that WE Charity seemed to have little capacity to actually implement the program especially the supervision of volunteers after terminating so many employees and having almost no presence in Quebec. This was a sole-sourced contract and some might believe that Mr. Morneau might have encouraged it — after all his office and WE Charity were “besties”.
The charity sector really relies on government funds, mostly from provincial governments, but also at the Federal and municipal levels. As we have noted in our Blumbergs’ Charity Sector Snapshot 2017 “Government revenue totaled $184 Billion including from the federal government ($9 Billion), provincial governments ($165.4 Billion) and municipal/regional governments ($9.3 Billion).” This is over 2/3 of the revenue of the charity sector.
For those who have been watching government procurement, there really has not been anything like this. WE Charity, with annual revenue of $65 million receiving a $543 million grant to undertake a program over 3 months. If this grant was annualized revenue it would be the equivalent of them receiving $2 billion in a year! What is also amazing is that apparently to prepare the proposal, WE Charity only spent a “handful” of hours. I cry when I think of the time, before COVID, over weeks or months that many charities have to spend to even get a few hundred thousand dollars from government.
Many government departments have extensive processes for grantmaking or procurement and some of them I would argue are unnecessarily complicated or too burdensome. This was on the other extreme — the CSSG grant was more like “Grants Gone Wild”. Governments need to have appropriate mechanisms to vet charities and their work and hopefully, governments across Canada will not tighten up the application and grant-making process inappropriately as a result of the WE Charity scandal. When governments provide contracts to charities in the future, it will not only be based on the “capacity” of the charity to implement the project, but also on the public’s perception of the appropriateness of the contract.
There is a delicate balance between the charity sector and government when it comes to implementing programs. Sometimes it is quite clear that government is better able to implement a program and sometimes it is the charity sector. Usually, when there is an inappropriate diversion of funds from a government program, or what could be a government program, it is a right-wing government that is trying to reduce government “bureaucracies” involvement in society! Trudeau made the statement that “The WE Charities are evaluated by our public service as being the best and only organization able to deliver on the scale that we need to make sure that young people have service opportunities this summer …”. This statement alone was viewed by some in the sector as being very insulting to many organizations that regularly manage volunteers across the country. It was also viewed as insulting to the public service who has managed the summer grants program as well as a number of recent COVID programs that are a lot bigger in size and complexity. There is a happy medium and I certainly hope that programs that should be run by government are not outsourced to charities that have questionable capacity and programs that should be run by charities should not be cut back because this one government made a terrible decision, which admittedly they quickly backtracked on by cancelling the CSSG program.
Owning real estate
There is nothing wrong with charities owning real estate. While most Canadian charities don’t own real estate — some small charities operate out of one of their volunteer’s home, others rent space or receive it for free, and some own real estate. It depends in part on the needs of the charity and probably more so the limited resources of many charities. Owning real estate, in the long run, can save charities funds for renting, also there can be appreciation in the value of the real estate and in hard times the real estate can be borrowed against or sold if necessary to maintain the organization’s activities. Canadian charities own about $255 billion worth of real estate. It would not be surprising that Alberta Health Services owns about $10 billion in real estate, U of T has about $5 billion in real estate, UBC and the Toronto District School Boards have each about $4 billion in real estate.
WE Charity apparently had over $43 million in real estate in downtown Toronto – one large building and many smaller houses/offices. This was a lightning rod for criticism. Was it that they owned real estate or how they owned the real estate? While 22,000 charities own real estate of some sort, over 10,000 charities have real estate valued at over $1 million and over 640 charities had real estate which was worth more than the $43 million of real estate held by WE Charity.
The main issue was that WE Charity has held itself out in the past as first and foremost an international development and poverty alleviation charity. In the old days, they said “Free the Children has two main purposes: To free children from poverty, exploitation and abuse. To give children a voice, leadership training, and opportunities to take action on issues which affect them from a local to an international level.”
In 2018 WE Charity says on its T3010s that it spent $19.5m on foreign activities. Is it appropriate for an international development charity of the size of WE Charity to hold $43m in real estate? People will differ in their views but, just to give you some examples of what others are doing: World Vision Canada in 2018 spent $362 million on foreign activities and only had $18m in real estate. Oxfam-Quebec spent $32 million on foreign activities and had $1.9 million in real estate. Clearly to conduct foreign activities at the scale that WE Charity was doing does not require that much real estate and the argument can be made that the push to buy real estate could have gotten in the way of supporting beneficiaries in other countries (or even those in Canada). Directors should balance the interest of long-term sustainability, including the need for real estate and reserves, with that of assisting the beneficiaries of the charity who are ostensibly the reason people are donating to your charity. I have dealt with many international development charities over the last 20 years and when I see the lengths some of them go to save money (sometimes extreme and perhaps penny smart and pound foolish) I can imagine why some might resent the huge amounts spent by WE Charity on real estate in Toronto.
Some of the media and public were concerned that funds raised by the public was used to purchase this real estate. WE Charity says that is not accurate and only funds from certain large donors were used to purchase real estate. Practically, if a large individual donor is receiving 60 or 70% tax benefit when they donate to charity then taxpayers are still footing a large part of the bill when a charity buys real estate using funds from private individual donors.
Certainly, in many cases, it makes sense for charities to own real estate but some charities could find themselves being criticized if the real estate does not seem to fit with the mission or is no longer necessary to be held and could be deployed in better ways to support the charity’s beneficiaries. Many charities are regularly reviewing their policies and approaches to real estate and hopefully the public’s criticisms of this one charity’s real estate holdings will not negatively affect the discussion around charities having real estate when necessary, reasonable and proportionate. With COVID many charities have had to already rethink their relationship with real estate (such as having staff work from home) and hopefully the scrutiny on WE Charity will force charities to make sometimes difficult decisions more quickly.
Having controversial programs such as voluntourism
Canadian charities undertake a huge variety of programs and they are not all equally understood or appreciated by the public. While providing basic medical care to children is probably universally accepted other activities, such as proselytizing by some religious groups helping the poor and conversion therapy against LGBTQ people, have received a lot of scrutiny and criticism. A concern covered by the media (which applies to many organizations) is that ME to We, the for-profit affiliate of WE, does voluntourism and makes a large amount of money sending Canadian high school students and others to developing world countries on expensive short term trips to do work that some would argue could be better done by local people.
Many charities carry out some sort of mission trips or voluntourism and depending on how they are conducted — the cost, the benefits to the public etc can be different. No question that many charities will be looking at the recent discussions and thinking about some of their own programs. The problem with some charities is they assume that whatever they are doing is beneficial to the public and if they did more of that program it is just more beneficial. There is an interesting project from Boston called “Do no harm” which challenges these assumptions. Every charity should start by considering that their interventions could in some cases be causing more harm than good and try carefully to have more public benefit than detriment. I certainly hope that the public does not think that most of the work of charities is controversial or questionable but if they do this will be very problematic for the charity sector.
Corporations make donations to charities. Some of them are anonymous or without much fanfare. Corporations also enter into sponsorship arrangements — they are essentially giving funds to the charity to obtain advertising or positive exposure. These are not donations as the corporation is typically receiving more of an “advantage” than they are providing in funds. This scandal has shown us that if a charity faces major issues that become public knowledge it may find its corporate partners making a quick exit. These ‘partnerships’ are not really partnerships per se but are a form of sponsorship and advertising, and major brands have very limited tolerance for negative publicity.
The corporate partnership angle received little attention. The partnerships that were most discussed were those by media organizations with WE. The Globe and Mails refused to cancel their partnership and are letting it expire at the end of August 2020. Will this make corporations more reticent to work with charities? I don’t think so but I do think they really need to do better due diligence on their “partners”. After all, many of the issues involving WE Charity were known for many years in the sector. I think that some major corporations have been and will be asking hard questions over the next months about how they could have supported WE Charity and how can they avoid this happening again, and that is a positive development. On the other hand, if corporations are more reticent to sponsor charities it could result in a decline in revenue for charities.
Having a “founder” or “co-founders”
Many organizations were created originally by a founder or “co-founders”. Often it is the initiative of one or two or a few people that gets an organization going. It is not that different in the business world. Sometimes the continued involvement of a founder beyond the first few years can be very positive or it can be quite negative. There have been lots of fights between founders and others within the organizations they created and in some cases, the founders were right and in other cases, I would argue the founders had overstayed their involvement. Many founders will establish an organization and at a certain point hand over control of the organization to others to continue the work. As groups grow, they require different strengths and talents in their leadership. It is very unlikely that one or two people will have all of those skills necessary for an organization over decades.
In this case, two brothers founded the organization and 25 years later they are still seemingly having a lot of involvement and exercising significant control over the organization, although there are other people with titles such as Executive Director etc. It is still not clear why almost all of the board suddenly resigned in March and April of 2020. Was there a conflict between the founders and the board? WE Charity says that the board turnover was part of a long-planned process.
There is a lesson here for founders — not that you should not found an organization, but at a certain point it is a good idea to “let go” or really let others run the organization — or your organization and all the work you put in over decades may be hurt or destroyed. As well your reputation can suffer significantly. There is no magic time when a founder has overstayed their stay — but hopefully everyone will recognize when the time comes and act on it.
It also raises a serious question around charities that spend a lot of time talking about their founders and the “birth” story rather than focusing on the beneficiaries and their work. I admit that many people like to hear these stories and fundraisers often like to tell interesting stories. A focus on founders or other leaders can be an indication that the organization is overly reliant on those leaders. In some cases, a founder dies or is caught up in a scandal and the organization quickly implodes. Those organizations that make it beyond the founders presumably have significant internal strengths outside of the founders and in some cases, they even become stronger after the departure of the founders.
In this case, it appears from a review of the articles and by-law of WE Charity that WE Charity had two classes of membership and the “Founding Members” were able to exercise significant control over the organization because they could replace the board at any time. Whether that was a problem here, or not, is not yet clear. Funders (whether foundations or governments etc) often don’t know that much about how charities, who are very different from them, run or should run and hopefully we will not be seeing more ill-considered governance suggestions like charities should all have open and large memberships in response to the WE Charity scandal. We have recently prepared a course on membership entitled “Membership of Non-Profits and Charities in Canada: Who has control over your organization?” and there is no one size fits all — we discuss 6 different models of membership which can be useful in different scenarios and there are pros and cons of each.
Having board members for long periods of time
There were a number of articles discussing long service of directors on the WE Charity board. The Chair had apparently been on the board for 14 years and been chair for the last 10 years. Other board members had also served on the board for a very long time.
In my article Top Tips for Serving as a Director of a Canadian Registered Charity I discuss one of the most difficult issues facing a board member namely knowing when it is time to leave.
Generally, one leaves when your term is up. Sometimes it is best to leave earlier. If you cannot make meetings you should definitely leave. Making the meetings is really the minimum – in some cases if you cannot read the material and prepare for the meeting you might not be positively contributing even if you show up. If your life changes dramatically and you cannot commit to the organization in the way you had it might be time to leave. If you are going to have an ongoing conflict of interest you should seriously think about leaving. Board service is a very important volunteer contribution but it is not a prison sentence. If you are often having emotionally charged arguments with other board members and you are alone or in a small minority it may be time to leave gracefully and either find another role in the organization or find another organization that wants your skills, connections and views.
The topic of term limits for directors can sometimes be a sensitive issue and there are many arguments both for and against them. What I find most interesting is how many times someone is adamantly in favour of term limits and when their own service on the board is going to be ended by term limits the corporation is coming to us for advice on how to remove the term limits or adjust them to allow this very ‘valuable’ director to remain on the board. It usually starts with the chair or other senior officers on the board being able to stay for another term so not 6 years but 9 years. Then a few later that does not work anymore so there is a new by-law and the term limits start over! Not a great way to govern an organization and clearly term limits are a weak and partial solution at best.
Fundamentally the term limit discussion is a luxury as many organizations have tremendous trouble finding skilled and capable board members at all.
We usually recommend to groups not to place term limits in their By-laws as often times imposing term limits results in forcing valued board members to step down while the organization would have liked to retain them on the board for their knowledge, experience, continuity in leadership, etc. Term limits in By-laws can be a blunt tool that can eliminate valuable directors. On the other hand, term limits can also have a purpose, such as refreshing the board, facilitating board succession planning, etc. In our experience, they usually don’t accomplish the latter purposes and in fact, we are often asked to amend the by-laws many years later to allow for exceptions which undercuts the whole notion of having term limits. Organizations instead should have regular elections, a careful review of each board member each year or two as to whether they are still contributing to the organization and organizations should not wait 6 years for a director’s second three-year term to be up but remove the director if they are no longer contributing to the organization. I am worried that the WE Charity scandal will result in simplistic ideas about governance — ‘if only WE Charity had term limits none of this would have happened’!
Clearly with each of the areas above context is important but sometimes those details are lost. It doesn’t help that the main self-proclaimed umbrella organization for the ‘voluntary sector’ has largely been silent during the whole WE Charity scandal. [It] also does not help that said umbrella organization was apparently involved in the disastrous CSSG program and wanted to receive funding as part of the program to evaluate the program.
One commentator noted that on the plus side none of the leaders of the charity sector came to the defence of WE Charity. I guess if the standard we aspire to as a sector when a major event happens affecting the sector and its reputation, is to have silence — then we are real winners as a sector.
As the WE Charity scandal happened at the same time as COVID it might be hard to disaggregate their impacts or to tell whether in some cases certain changes were caused by one or the other. Also, the WE Charity scandal is by no means over so it may develop in different directions. While I think some days that it is possible that the WE Charity scandal will have limited impact, that is perhaps wishful thinking on my part! Charities need to contemplate both the impact of COVID and the WE Charity scandal and how it can impact their operations. Failure to carefully consider these two events can undermine the ability of a charity to respond to the changing environment and undercut the likelihood of success for that charity.
Some compliance problems are very easy to spot and others are more difficult. It is also a good practice for charities to conduct external, informal risk reviews on an ongoing basis in terms of compliance issues. Here is an article on that point. These informal risk reviews can help catch and fix issues as soon as possible and before they become a CRA compliance issue or public topic of discussion. Charities can learn from other Canadian charities that have had issues. One important method for achieving legal compliance is through hiring/involving the right people and continuing to educate them. It is important that charities have volunteers and staff who truly understand legal compliance requirements so that they follow them and ask the right questions. Continuing education can be very helpful in this regard as people forget the rules or there may be turnover in your organizations.
So with COVID, WE Charity and the uncertain US election season, charities should pray for the best but prepare for many things including the worst.
Mark Blumberg is a partner at the law firm of Blumberg Segal LLP in Toronto and works almost exclusively in the areas of non-profit and charity law. This article is reprinted from the original post on Canadian Charity law. The views and opinions expressed by contributing writers to Canadian Accountant are their own. Canadian Accountant and its parent company bear no responsibility for the opinions of contributing writers.