Worried about your charity? Why WE Charity’s practice is atypical

Posted on August 30, 2021 in Inclusion Policy Context

Source: — Authors:

ThePhilanthropist.ca – 2021/08 

When the WE Charity controversy exploded during the height of the COVID-19 pandemic, many wondered whether the scandal would taint the entire charitable sector and put a damper on potential donors’ and volunteers’ enthusiasm.

It has been reported that Canadians’ trust in charities has dropped 6% since May 2020, and there is concern that this drop may be connected to WE Charity – which would be unfortunate for a sector already struggling during the pandemic.

A report published by Statistics Canada in 2015 notes that in 2013, 44% of Canadians aged 15 and older (12.7 million people) did volunteer work, and a remarkable 82% of Canadians made donations to a charitable or non-profit organization. If you are one of them, please be aware that WE Charity’s practice is highly atypical: most community-based charities are simply not set up to conduct “WE-like” practices.

During COVID-19, according to Imagine Canada, Canadian charities have lost billions in revenue and faced massive layoffs and drastic disruptions in services – while demand for services has surged. This is a time when charities and non-profits need Canadians’ support, not negative speculation because of an unrepresentative controversy.

 Why is WE Charity’s practice atypical?

There are multiple questionable components of the WE controversy that make it difficult to immediately pinpoint the nature of the problem. The sizeable payments to various family members of Prime Minister Justin Trudeau – to his mother, brother, and wife – raise questions about WE Charity’s financial accountability and ethical practices. The federal government entering into an agreement that entailed a WE-connected organization being paid tens of millions of dollars to administer the near-billion-dollar Canada Student Service Grant without a transparent tender process raises questions of administrative accountability. Also, a larger question looms: whether a charity should conduct certain activities with politicians and their close family members. In this instance, former federal finance minister Bill Morneau and his family took trips to Kenya and Ecuador that were paid for by an affiliate of WE Charity. (Morneau later repaid the trip expenses.) A careful analysis of each component of these events can help in understanding why WE Charity’s practice is atypical compared to other Canadian charities. In that analysis, one can also find lessons for future accountable and ethical conduct of charities.

WE Charity did not pay the fees to the Trudeau family or the expenses for Morneau’s trips

First, perhaps unknown to many, it was not WE Charity that paid the Trudeau family or Morneau’s expenses. Rather, it was a profitable social enterprise – ME to WE, a separate entity – that paid. Most charities do not have a wealthy “other” to make payments on their behalf.

According to CBC News, the profitable business sponsor of WE Charity called ME to WE paid honoraria to Trudeau’s mother, Margaret, in the amount of about $250,000 for speaking at 28 events. Trudeau’s brother, Alexandre, was paid approximately $32,000. ME to WE is a social enterprise, an organization that seeks to achieve social, cultural, or environmental aims through the sale of goods and services or other commercial activity.

The ME to WE website asserts that the organization sells products, such as coffee from Kenyan co-operatives; organizes trips to partnering communities in places such as Kenya, Ecuador, and Tanzania; provides leadership training to youth; and maintains a “speakers bureau.” The website also states that while ME to WE, in accordance with its charter, must donate at least 50% of its annual profits to WE Charity, it often donates more than 90%. On the basis of that description, ME to WE appears to be a successful, engaging, and exemplary social enterprise.

Legally, WE Charity cannot be accused of any wrongdoing because it was a separate entity – ME to WE – that paid the fees to the Trudeaus. As a profitable business, ME to WE paying speaker fees or expenses does not seem terribly wrong either. It is only when you consider that ME to WE’s payment has some causal relationship with WE Charity’s being awarded a major government contract that things become concerning.

“The loophole here is the lack of regulation and monitoring of businesses or social enterprises tied to charities.

The loophole here is the lack of regulation and monitoring of businesses or social enterprises tied to charities. Business carried on within a registered charity is subject to special rules and limits, but where it is carried on through another entity those rules may not apply. There is a legal test to determine if two corporations are related, but this does not always capture situations where there are ties between the entities. If a business or social enterprise is legally separate from the charity, it is not subject to charity regulation; rather, it is subject to the more modest regulation that any for-profit firm faces. So the issue is not charities per se.

In this case, the setup of WE Charity and ME to WE is interesting. ME to WE’s website states that the two organizations are “fully separate and legally distinct entities.” If they are legally separate, in reality they appear to be closely tied – especially financially. Your local community charity cannot easily set up or find a business willing to contribute 50% to 90% of its annual profits to support the charity’s work. When it can do so (and the situation is not caught by the charity rules), the question becomes what oversight ought to be in place to ensure there is no abuse.

“The WE Charity controversy has raised new questions about complex corporate structures and opacity in the charitable sector.  Yves Savoie

Yves Savoie, a prominent charity sector leader, has observed that the “WE Charity controversy has raised new questions about complex corporate structures and opacity in the charitable sector.” In a report released in June 2021, Questions of Conflict of Interest and Lobbying in Relation to Pandemic Spending, the Standing Committee on Access to Information, Privacy and Ethics noted that it couldn’t get a clear picture of the financial or ownership structure of the WE group over the 10 months of its study. Canada’s social enterprise regulation and legislation needs to keep pace with the reality of how these organizations are being set up. The WE controversy demonstrates that a lack of oversight of complex social enterprise structures puts a charity’s beneficiaries, donors, staff, and volunteers’ interests at risk, because in this case, it was the public’s trust in WE Charity that was damaged – ME to WE survived the controversy. When governments contract with such complex organizations, taxpayers’ dollars are put at risk as well.

WE Charity was “awarded” a service contract, not a grant

There has been some confusion in the media about the type of funding that WE Charity was getting. WE Charity was not awarded a “grant”; it was asked to administer a program called the Canada Student Service Grant. In much of the reporting and commentary, the size of the program (potentially more than $900 million) and the amount paid to the WE entity for administering the program (around 5% of the actual spending on the program) was confused. This led to a public perception that WE Charity was awarded a massive “grant” – essentially a huge pile of cash from the government.

The federal government allocated a budget of $900 million for the Student Service Grant program, out of which WE Charity Foundation was allocated $43.53 million to administer the program. The amounts allocated were the upper limits for the initiative and were to be used only if the program achieved full capacity, which doesn’t usually happen with these types of initiatives.

In the normal course, Canadian federal government contracts do not go to charities without a competitive tendering process

The practice of a tendering process, which often starts with the government sending out a “request for proposals,” is a norm in the non-profit world and familiar to all non-profit grant applicants. Not without controversy, the competitive process that often requires non-profit organizations to compete against each other was introduced in the late 1980s and the early 1990s in the belief that the “managed competition” can bring about cost savings, enhanced service, and higher standards of financial accountability.

According to Bardish Chagger, the federal minister of youth, this process wasn’t followed in choosing WE as the organization to administer the government’s youth employment program. WE was recommended by Employment and Social Development Canada, and all it took was to set up an agreement between WE and the government. There was no competitive process because of “the scope and scale of the program” and the “urgent need to deliver this new program.” Therefore, WE’s exemption from the tendering process is exceptional and atypical. It would likely take another pandemic for a charity to be offered such treatment, although it’s fair to ask whether even a pandemic can justify such exemption for a $900-million program. An expedited tendering process, for example, might be more appropriate than having no process at all. For its part, the Standing Committee on Access to Information, Privacy and Ethics recommended that the “Government of Canada establish a mandatory competitive process to select recipients for contribution agreements valued above a predetermined threshold.”

In practice, government contracts are strictly earmarked, down to every penny

When a non-profit organization is awarded a government service grant or contract, it typically executes an agreement – sometimes called a “service accountability agreement,” because the utmost concern is accountability. Since the money transferred consists of tax dollars, every penny is strictly earmarked for some purpose. The emphasis on accountability is so great, critics often point out that one negative consequence is that charities are not treated as equal partners. For example, the agreement may stipulate that the government can terminate the funding without cause. It is common to hear non-profit executives complain about the challenges and difficulties they face in complying with public sector accounting standards and practices.

In short, your typical community charity will not be able to easily misspend government funding since the agreement and other performance-related mechanisms are usually in place to prevent corruption or inadvertent diversion of resources from their intended purpose.

Non-profit income sources and the governing board typically limit lavish spending

If a charity needs to pay celebrity-level speakers’ fees, where does the money come from? A typical Canadian charity or non-profit generally has three pots of money. One pot is from various government grants, one pot is donations, and the third is income earned from conducting business-like activities (such as a YMCA’s café or the fees a church earns from renting out its hall for events). Government grant money is carefully guarded. Donations are sometimes designated for a particular purpose, but they are often received without any legal requirement that they be spent in a specific way. That said, earned income and the donation categories may have less external monitoring for financial accountability, and organizations have more discretion on how to spend such money. The safeguard for this money is the governing board of the charity itself.

Charities and non-profits are governed by boards. In practice, the executive director (ED) of a charity can have significant influence over the board because of the ED’s longer tenure and expertise of running the organization on a daily basis. Even where that is the case, it is the board that is responsible for authorizing the organization’s budget and for precluding any unreasonable spending. Most groups simply aren’t in a position to pay exorbitant fees to engage famous speakers. It is difficult to imagine a board undertaking this kind of spending unless members were convinced that there was a reasonable prospect that the expenses could be recouped through the event. Moreover, an organization may also take a significant ethical or public relations risk by paying large amounts in fees or expenses that seem more justified by “celebrity” or “insider status” than by the value the speaker brings to the event. A board is always obligated to act in the best interests of the organization.

Owing to the decision-making structure and origin of the funds paid for fees and expenses in the WE controversy, these safeguards – as least as they apply to the board of WE Charity – may not have been applicable.

Charitable organizations are usually not “founder-driven”

In her remarks to the federal finance committee in July 2020, former WE board chair Michelle Douglas said, “WE is a founder-led organization, and Marc and Craig Kielburger hold significant power in the organization.” This is quite unusual. It is more common for a founder or founders to lead start-up or smaller organizations than large charities like WE, or for them to remain involved with the organization within a limited capacity. As Owen Charters, CEO of BGC Canada, notes, it is the social entrepreneur’s vision and ambition that lead to the creation of start-up charities, so it is often the case that the board defers to the founder’s knowledge when making decisions. The WE case reveals the potential risk that comes with such practice.

“WE is a founder-led organization, and Marc and Craig Kielburger hold significant power in the organization.  Michelle Douglas

The roles and functions of boards vary widely among charitable and non-profit organizations. Paramount in all boards, however, is that directors exercise their fiduciary responsibilities. Among other things, this requires that the board engage in financial oversight and be concerned with legal compliance. These responsibilities do not rest with the executive director, executive leadership, or others. The “executives” should not rise above the board. In the best practice of board governance, there is no formal role called “founder” (in an executive capacity or otherwise), and those who established the organization should not have outsized influence.

In Douglas’s remarks to the finance committee, she stated that, during the COVID-19 pandemic, WE’s executive team dismissed hundreds of employees. The board was concerned that such action was carried out “without strong evidence.” One factor that contributed to their apprehension was the executive team’s failure to provide the necessary financial reports or data for the board to perform its oversight duty. Douglas resigned because she could not discharge her governance duties. From her account, the founders of WE, Craig and Marc Kielburger, seemed to play a role of “super-executives,” whose power was above the board.

Indeed, according to Douglas, on March 25, 2020, Craig Kielburger asked her to resign as board chair. The best practice of board governance demands that the board is responsible for hiring, firing, and assessing the executive director. Directors are then answerable to the organization’s membership. In WE’s case, these relationships appear to have been somewhat askew, with the founders having inordinate power over the board chair.

The WE case warns of the risk of having “super-executives” who rise above the board.

Although most charities are not founder-driven, the WE case still warns of the risk of having “super-executives” who rise above the board. If a board does not function appropriately, the charity’s fate can be determined by just one or a few individuals, and the charity will not be protected by its board – a risky management practice for an organization. This may lead to a situation where directors are prevented from fulfilling their fiduciary responsibilities.

Since charities enjoy significant tax privileges, public perception that a charity is largely controlled by an individual or its founders may weaken support for charitable tax incentives. More broadly, it potentially weakens public trust in charities.

By law, charities are prohibited from partisan political activities

In Canada, an organization can register as a charity only if its mission can fulfill one or more of four charitable purposes: the relief of poverty, the advancement of education, the advancement of religion, and other purposes that benefit the community. It has been debated whether a charity can engage in political activities. The most recent publication from the Canada Revenue Agency (2019) confirms that charities are prohibited from participating in partisan political activities such as supporting a political candidate; however, charities are permitted to fully engage in non-partisan political activities. A possible consequence of engaging in partisan activities is the revocation of the charitable status.

Although WE Charity’s association with WE to ME’s engagement of the prime minister’s family members as speakers was problematic in terms of public perception, it was not in violation of the rules that govern registered charities’ political activities. Aside from direct dealings with the invitees being managed through the social enterprise (ME to WE), the appearances themselves were not partisan.

On May 13, 2021, federal ethics commissioner Mario Dion found that Prime Minister Justin Trudeau and his family’s engagement did not constitute a conflict of interest but that Morneau had broken ethics laws and was in a conflict of interest, serving as a warning to all decision-makers and politicians to avoid conflicts of interest. Several recommendations were given in the Standing Committee’s report.

The lesson for charities is to be aware of conflict-of-interest legislation. If you invite politicians as speakers or provide benefits to them, and anticipate that your charity is likely to obtain government funding or contracts down the road, you need to be very cautious that your interaction with the politician is not likely to constitute a conflict of interest and has received the appropriate vetting and approval. Although the onus is on the public office holder to avoid a conflict of interest, charities should be knowledgeable about the rules and will want to manage their dealings so they don’t put themselves in a position where future government funding is at risk.

Similarly, if your organization anticipates obtaining government funding or having a regular interaction with the government, registering under lobbying legislation is prudent – even where your organization might not be required to register based on a technical reading of the statute.

In the end, although many media outlets referred to the “WE Charity scandal,” a careful reading reveals that it is not a controversy of WE Charity alone: it is a controversy for both WE Charity and ME to WE. ME to WE is not in the spotlight at all, perhaps because the controversy is apt to be of more interest when presented as a “scandal” about a charity. Because members of the public have entrusted their donations to charities, and because charities enjoy significant preferential tax treatment, they are particularly vulnerable to negative media stories. Without ME to WE and its unique ties to WE Charity, however, the payments and benefits to the politicians would not have been possible.

There is some urgency to update the regulations and oversight of charities that conduct business activities, particularly those using social enterprise arms rather than doing this work within the charity.

The WE controversy also offers a number of lessons. There is some urgency to update the regulations and oversight of charities that conduct business activities, particularly those using social enterprise arms rather than doing this work within the charity. It also reveals the importance of appropriate board governance practices. Finally, it warns charities to be cautious where their conduct may trigger conflict-of-interest legislation or bring to light their practices under lobbying legislation.

Being ethical is a broader concept than being legal: an activity that is legal is not necessarily also ethical. Although WE’s dealings with federal politicians were the subject of intense scrutiny, there is no obvious illegal activity from WE Charity itself based on the known facts. But WE Charity took a serious hit to its reputation as an outcome. Trust is easy to break and nearly impossible to regain. This controversy warns all charity workers to uphold the highest ethical principles in all their conduct. For charities that engage in business or business-like activities, it should also be acknowledged this is an area subject to complex rules and should be approached with caution.

Worried about your charity? Why WE Charity’s practice is atypical

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