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A "CIC-start" for the Social Economy

New legal status not yet "alive and CIC-ing"?

alexandermurdockCommunity Interest Companies (CICs - say it like "kicks") have been possible since 2005, but only about 6,000 have been set up - by contrast there are some 175,000 Registered Charities. A large proportion of those CICs seem to be inactive.

At a seminar in Liverpool University, Alexander Murdock (from the Centre for Government & Charity Management at South Bank University) discussed why that is so. He suggested (in the light of what he saw as the drawbacks of CIC status) that it was not necessarily a bad thing.

Why CICs?

CICs don't have a single corporate status - they can be profit-making or not, can be "mutual", can be co-ops, can be limited by shares or guarantees. Apparently a CIC could even technically be a "plc".

They do have some of the advantages of fully private organisations. When compared to Registered Charities they have::

  • more ability to borrow commercial funds
  • more scope to undertake campaigning
  • no board of Trustees to potentially hamper innovation or entrepreneurial risk.

But their CIC status specifically involves an "asset lock". Like a Registered Charity, a CIC's assets have to be kept for use "by the community". They cannot be just sold off to give the Chief Executive an annual bonus.

Trading

The development of the CICs was probably intended to serve as a "cheerleader for social enterprises"  (Another word that has a very broad and undefined scope. A paragraph that would, at last, legally define exactly what a Social Enterprise is was recently taken out of a draft of the Public Services (Social Value) Bill.)

The CIC's "asset lock" can work against it, however. How can a bank lend money to a CIC on the security of a building which apparently would be difficult to sell off to repay that debt?

Whether the "asset lock" would work in those circumstances was something that even the distinguished academic and professional lawyers present at the seminar found difficult to agree on. One Liverpool charity at the meeting had set up a CIC and had experienced just this worry when trying to get business to llend money. They now plan to replace the CIC which they had established as a "trading arm" with a “company limited by guarantee”. 

Regulation

CICs don't come under the Charity Commission, but have their own Regulator, as well as having to file accounts (for example, with Companies' House). Professor Murdock showed that the CIC Regulator reporting process was not very stringent, in theory or and practice.
 
The annual return form has half-a dozen mostly open questions to complete - it doesn't even ask for a printed name under your scrawled signature, and there is no real need to say how any social objectives are being fulfilled.

A study of a national sample of the submitted reports had revealed that many had put only a couple of generalised sentences as answers to the annual return question. Many CICs had not completed all parts of the form - and there seems to be no sanction available in that case. 

It seems that much of the control of CICs must be with the process of lodging accounts at Companies House - but Companies House processes are not designed to monitor any aspects of the social or community value of what an organisation does. 

There is a worry that, with this apparently lax oversight, and in spite of the built-in "asset lock", there may be ways in which (as it was put) "value could leak out of the CIC" into the pockets of determinedly devious individuals.

Public confidence

Professor Murdock's overall conclusion seemed to be that that there is a danger that CICs could "muddy the waters" for VCF sector. The lack of effective ways to make sure they are really serving social or community objectives could potentially lead to failures (or even scandals) which might have an impact on the public image of the sector as a whole.

It was, therefore, perhaps fortunate that their intended advantages did not yet seem to have had a great deal of appeal.

Part of the 2011/2012 seminar series arranged by Liverpool University's Charity Law and Policy Unit and supported by Brabners Chaffe Solicitors.