Why you probably shouldn’t become a Community Interest Company

Imagine you have sacrificed hundreds of hours of your volunteering time to a non-profit organisation doing good work. After years of effort, often exhaustion, you discover that the directors don’t care that much about whether you succeeded in helping those people you intended to help. They care mostly about how much time they can spend at the swimming pool at their second home in Spain. Your volunteer hours have helped fund that lifestyle.

How could such a situation arise? Aren’t charities supposed to have boards of governors that keep the organisation on track? But wait, it wasn’t a charity! It was a Community Interest Company. Now, I should say that I don’t currently know of any such dramatic betrayals of people’s goodwill. But what I will argue here is that this situation arising in some CICs is bordering on inevitable, given the operating parameters of CICs. Given the weakness of regulation of the companies, almost boasted about by the CIC Regulator, it’s only a matter of time.

Why would I think that? Most people seem happy with CICs; Community Interest Companies are a success story, we are told. There are now many thousands of CICs in the UK, all having appeared within the space of ten years. This rapid rise in fact means that many people have chosen a form the long-term resilience of which has yet to be tested. It would be exciting to write an article about all the horribly failed CICs littering the social economy landscape. But I don’t know of any; I can only do a much less exciting job: pointing out what’s wrong with CICs before they start to fail. My contention is that, with the help of an FOI request to the CIC Regulator, we can see that certain types of failure are predictable. As for why we haven’t seen the failures yet, it is largely because CICs are young and in most of them the founders are still in charge.

The CIC was designed for organisations with social goals. It must operate in the ‘community interest’, which is defined in the articles of the organisation. It is also chosen over charities as an organisation that can more easily buy and sell commercially. But among the people I have asked, the main reason for opting for a CIC has been that it is easy. It is a lightweight structure, it is unencumbered by bureaucracy. It can be set up in a couple of days and can adapt quickly to changing conditions since it doesn’t have long lists of rules in its constitution. More like a standard profit-making company then, but with social objectives built in. Supposedly. More on that later.

By comparison both charities and co-operatives or community benefit societies (BenComs) have a lot more rules. Rules! How annoying! How limiting! But hang on a moment, why, if rules are so tedious, do those other organisations bother with them? The answer is that most of the rules are about accountability. In the case of a charity, the board of trustees, who must be consulted on significant matters, exist to keep the charity in line with its social aims. In co-ops and BenComs it is the membership who must constantly be consulted, and who choose who leads the organisation. Democracy certainly can be quite annoying.

By comparison a standard CIC is at the mercy of its directors, who needn’t even be many in number. That’s fine, I hear some say, I am the director, and I trust myself to make good decisions. Perhaps, but do you intend to lead the organisation forever? Even if you plan to live forever, what happens if you get ill, or leave through some other reason beyond your control? The purpose behind many accountability mechanisms is that they transcend the ideals of one particular person. They embed the ethics and goals into the DNA of the organisation, whoever may be running it at a given time. So how long do you want your organisation to last?

There is one supposed accountability mechanism in CICs: the government regulator. In theory the Office of the Regulator of Community Interest Companies has a lot of power to force CICs to stick to their aims. In practice it appears to do very little, priding itself on being a ‘light touch’ regulator. When I contacted the Regulator, they explained that in the last year they received 57 complaints, only 3 of which resulted in an intervention by the regulator. None of these 3 were related to the community benefit requirements. The Regulator has so far never wound up a CIC or stripped one of its CIC status. The Regulator has no records of intervening in a CIC on the basis of the standard paperwork submitted each year, which in part reports on the organisation’s performance under its community benefit requirement. That is to say, there appears to be no pro-active monitoring of whether CICs are operating for community benefit.

Even Social Enterprise UK, a fan of the CIC form, has raised questions over the strength of the Regulator. This accountability mechanism begins to look weak, to say the least. I’m not sure it will ever improve either. I doubt the regulator will ever be well enough funded to investigate what is going on in tens of thousands of organisations. We should not look for accountability in the CIC regulator.

Let’s move on to another question, a special case of the accountability problem: what profits can be made from a CIC, often presented as a non-profit structure? There is a CIC limited by shares that is allowed to make a profit. Previously there was a dividend cap of 20% of share value in any given year. This was considered by the government to be ‘inhibiting investment’ so in 2014 they removed the cap. Say that again? Annual 20% profits inhibiting investment?

Let’s leave that aside. In fact the majority of CICs are limited by guarantee and are more genuinely non-profit in form. There are, however, a couple of massive catches. The directors of a CIC can pay themselves whatever they can argue could reasonably be seen as necessary, as long as they are still fulfilling their social objectives. As determined by the aforementioned ‘light touch’ regulator. A CIC with a turnover of some millions a year could in theory pay the directors a million a year, if they could argue that without the salary they couldn’t retain the talent they need. Is it still a non-profit? This raises the aforementioned scenario of people putting in hundreds of volunteer hours for a supposed non-profit while the directors are buying holiday homes in the Mediterranean.

The second problem is that nobody is paying any attention to who CICs contract out work to. If a CIC pays huge ‘management fees’ or overpays on a cleaning contract to a company that happens to be owned by, say, the partner of a director, any money in the organisation can very easily be siphoned out to profit-making enterprises. In a charity the board and regulator would keep a sharp eye on this type of activity; the CIC regulator barely seems to glance at the paperwork.

You, the current director, might not abuse your position so, but can you be so sure of your successors? We only need to look at Housing Associations for a case study in organisational mission drift, in part driven by the high salaries CEOs have been able to pay themselves.

A word too on putting an informal democratic structure on top of an undemocratic CIC: I’m told that the Centre for Alternative Technology in Wales acted for years like a co-operative, and those involved assumed that’s what it was. But it never took a co-operative legal form, so when it ran into trouble, new leadership bulldozed aside the democracy people had assumed was one of the core values of the organisation. CAT is at least a charity, but the lesson is that informal structures can be dispensed with any time the CIC directors get tired of them.

But surely there must be a right situation for a CIC? Perhaps. A CIC could be right for an organisation that is mostly a trading organisation and is for a short-term project which won’t exist for long. If the project is intended to run long-term, I don’t believe the CIC is a reliable form. It is at the mercy of the leadership that follows you, if not your own leadership. The CIC Regulator is not the safety net you need. For most people it would be worth choosing an organisational type that seems more ‘difficult’ in the short term, but will almost certainly be more sustainable and accountable in the long run.

For existing successful CICs, why would they bother to change if they are doing well as they are? Let’s remember they are still young organisations. Do we want to wait twenty years to see the emergence of accountability and mission-drift problems that are, I am suggesting, rather predictable? Mission-drift that the Regulator will never pick up on unless someone reports it?

There are a few ways to mitigate the risks here. The best option for many would be to convert into a co-operative CIC. Co-ops UK offers one set of model rules for this, and the Somerset Rules can also convert a CIC into a multi-stakeholder co-op. It will cost time and money, it is true, to change the rules, but it will surely not be as painful as the organisation going off track in a few years’ time after the founders have retired.

The second best option is to add democratic rules to the CIC. It is a benefit of CICs that they are very flexible. The CIC Regulator offers model rules of a participatory organisation of large membership, though it is still very much director-controlled. It is theoretically possible to set up a more democratic membership structure without being a co-operative. While this method may miss out on embedding some of the checks and balances that co-ops have developed over the years, it could make the organisation more accountable. But remember, rules that can be added can be taken away. Only co-ops and their cousins, community benefit societies, lock democracy in permamently.

Finally, if actual democracy seems too great a task, it is at least possible to simply install more directors onto the CIC board, preferably those affected by what the organisation does, and so establish a strong democratic culture among the CIC directors. It’s not a perfect fix, but increased collective decision-making will mitigate the problems of a top-down culture reliant on the goodwill of two or three people.

For those who haven’t started their organisation yet, this is a plea to consider that a sustainable organisation is an accountable one, and democracy is one of the best ways to ensure accountability. Thankfully others, in the form of the co-operative movement, have already paved the way for us.