International In-house Counsel Journal Vol.13, No. 53, Autumn 2020, 1

Diversifying Charity Business Models: The Changing Role of Legal Counsel at the Intersection of Charity and Social Enterprise

SIMON MILLER General Counsel, Save the Children Australia SOPHIE COLEMAN Senior Legal Counsel, Save the Children Australia GRACE WILLIAMSON Legal Counsel, Save the Children Australia

When we first thought about drafting this article, in a world prior to the Covid-19 pandemic, charities were already facing dramatic organisational challenges. New players and technologies had disrupted the sector, traditional funding streams were in decline and the competition for funding was ever increasing. At the same time, entrenched inequality and protracted humanitarian crises were driving demand on charities to an all-time high. Since then, the Covid-19 pandemic has created new operating challenges for charities – as it has for almost all sectors – and has also brought to bear the urgent need for charities to reckon with the pre-existing changes to the political, social and financial context which have been eroding the viability of many traditional forms of charitable operations. Save the Children Australia has undertaken a range of transformative changes to the way it conducts its business in recent years to diversify sources of income, grow its program reach and create platforms for innovation. These changes have also shepherded in a sharper commercial mindset which, thus far, has contributed to the organisation’s durability and capacity to continue to respond to humanitarian need during the Covid-19 pandemic. Organisational transformation generates new opportunities as well as challenges for legal counsel. The skillset required of the traditional not-for-profit legal practitioner has been broadened to one which must also bridge the divide with the commercial sector. This article provides a perspective from Save the Children Australia’s in-house counsel on navigating the legal aspects of the new landscape for charities. Changing operating context for charities Traditionally, charities like Save the Children have relied on revenue from membership fees, donations and legacies and government and philanthropic grants for the delivery of social programs. However, in recent years there has been a dramatic shift in the funding environment which has placed pressure on the financial sustainability of many charities. New mechanisms for peer to peer giving and greater opportunity to engage directly with beneficiaries at a grass-roots level using innovative technology, are appealing to donors who are increasingly savvy about where their support is directed. These new entrants may have the advantage of being more agile and responsive than longstanding charities with significant existing infrastructure and workforce. Further, neo-liberal models of government service delivery have created opportunities for new market entrants, including for-profit service delivery companies competing with and squeezing out traditional charities. Increasing competition with for-profit providers is in

International In-house Counsel Journal ISSN 1754-0607 print/ISSN 1754-0607 online

2 Simon Miller, Sophie Coleman, Grace Williamson many circumstances also coupled with diminished levels of overall government funding being made available for social programs. For example, significant cuts to Australia’s foreign aid budget in recent years have been implemented in parallel with the growth of powerful for-profit private contractors which now dominate the delivery of Australia’s foreign aid program, and have an obligation to deliver returns to shareholders. Approximately one-quarter of Australia’s total aid spending was outsourced to for-profit private firms in 2016/2017, sparking concern about the commodification of the aid program.1 The pressure has been exacerbated since the onset of Covid-19, with charitable donation revenue projected to decline by 20% or more in Australia.2 Competition to attract the charitable or social impact dollar has never been hotter. At their best charities implement effective and compassionate social programs. They are institutions that can inspire and give practical incarnation to deep human longings to provide assistance to those in need. Many charities like Save the Children Australia also bear witness and speak out against injustice. Longstanding charities cannot afford to stand on the sidelines and risk the loss of their unique contribution to society. To remain viable and competitive (including with for-profit service providers), charities need to be creative, open to new business models and work more closely with new players. What has Save the Children Australia done to adapt and diversify To adapt to the changing operating context, Save the Children Australia has diversified its business model and operations. This has involved: the acquisition of charities with compatible benevolent programs focussed on children in need to expand its program reach; the acquisition and creation of new social enterprises to generate income and social impact; exploring innovative funding streams including establishing an impact investment fund; and, working with new donors and funding bodies. Leveraging its experience, strong reputation and existing operational footprint, Save the Children Australia endeavours to create a platform of trust that brings a range of actors old and new together to increase charitable impact and enhance sustainability. A summary of key transactions and initiatives is set out below: Benevolent program expansion • Acquisition of Good Beginnings Australia (2015): The acquisition of this charity enabled Save the Children Australia to expand its early childhood education and other services in more than 150 locations in Australia. The acquisition also generated significant financial savings which have been reinvested in programming. • Acquisition of Hands on Learning Australia (2017): The acquisition of educational not-for-profit Hands on Learning Australia enabled a rapid scale up of programs to prevent disengaged children from dropping out of school and re-engage them in education.

1 https://www.theguardian.com/australia-news/2019/jul/04/palladium-aid-sector-concerned-about-rise-of- private-contractor-employing-julie-bishop; 2 Equity Economics, How To Ease Rising Disadvantage And Meet Growing Demand For Services? Policy Options From The Charity Sector Following Covid-19, Paul Ramsay Foundation, July 2020 https://paulramsayfoundation.org.au/wp-content/uploads/2020/07/Equity-Economics-How-to-Ease-Rising...pdf

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Social enterprises (wholly owned) • Established Centre for Evidence and Implementation (CEI) (2015): A wholly owned subsidiary established in 2015, CEI uses evidence to strengthen programs, policy and practices that improve the lives of children and families. It operates through a fee-for-service consultancy model. It now has subsidiary entities incorporated in Singapore and the United Kingdom. CEI’s partners include governments, philanthropists, NGOs and UN agencies. • Acquisition of Child Wise (2018): Child Wise provides fee-for-service child safeguarding training, advisory services and child safe accreditation. Its activities are strongly aligned with and complimentary to Save the Children’s mission. • Expansion of retail op shop portfolio (2019): Save the Children Australia expanded its retail network through the acquisition of 17 retail stores from a prominent Australian charity. The retail network which sells second-hand clothes and goods generates a critical stream of unrestricted income to support Save the Children Australia’s charitable activities and operating costs. • Acquisition of Library for All (2020): Library for All (LFA) develops education technology assets with local communities. The Covid-19 pandemic has highlighted the need to find ways for children to continue their education remotely during times of emergency and access to e-learning is critical to this. Children in poorer countries are at an even greater disadvantage in the current scenario, which makes scaling up innovations like LFA so important. • Establishing back office support services hub (2020): Save the Children Australia has commenced offering back office support services to not-for- profits. Leveraging its existing systems and capabilities, Save the Children Australia has capability to provide services such as IT, human resources and finance support. An opportunity exists to reduce duplication of effort and administrative costs across the sector through consolidation of back-office support services. A service fee will be charged with profit generated available for use by Save the Children Australia. Surplus funds generated by each of these entities is applied to Save the Children Australia’s charitable purposes. For-profit social enterprises (jointly owned) • Established Inclusiv Ventures Pty Ltd (2018): Inclusiv Ventures is a for- profit company registered with the Australian Securities and Investment Commission. Inclusiv Ventures shares are 50% held by Save the Children Australia and 50% by two private individuals who are the executive directors of the enterprise. Inclusiv Ventures was established to act as an intermediary brokering social programs between the private sector, NGOs and government and multilateral donors such as the UN. • Acquisition of controlling interest in Inclusiv Education Pty Ltd (2020): Inclusiv Education is a for-profit company registered with the Australian Securities and Investment Commission. The company is an education technology service delivery business focused on low and middle-income countries as well as humanitarian contexts.

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Profit generated by these entities is distributed to shareholders including Save the Children Australia. Innovative financing • Save the Children Australia Impact Investment Fund (2020) (Fund):3 Equity has been raised from wholesale investors who have acquired units in the Fund. The objective of the Fund is to generate capital returns for investors and to create social impact by making investments in enterprises that are working to improve the lives of vulnerable children and their families. Impact investing provides flexible financing to meet the needs of social organisations or projects that may not have access to traditional capital markets. The expectation that capital will be repaid as well as a financial return to investors differentiates impact investing from traditional philanthropy and grant making. Through Save the Children Australia’s network of programs and partners, the Fund will be able to access a pipeline of entrepreneurs and enterprises working on the social problems aligned with Save the Children’s mission. The Fund intends to leverage the strength of Save the Children Australia’s existing global platform, networks and capabilities. Working with new donors and funding bodies • United Nations Green Climate Fund (GCF) (2019):4 Save the Children Australia is the only non-environmental NGO accredited by the UN Green Climate Fund. The accreditation, more than 2 years in the making, allows Save the Children (understanding the disproportionate effects of climate change on children) to partner with governments in countries hardest hit by climate change and apply for funding from the USD$10 billion fund.

• Global Program for Education (2019):5 Save the Children Australia has commenced programming with the Global Program for Education (GPE) in the Pacific. Currently this work is undertaken in conjunction with Save the Children UK, which is accredited by GPE. At the date of publication, Save the Children Australia is in the final stages of becoming accredited in its own right. GPE is the largest global fund solely dedicated to transforming education in lower-income countries. GPE programs support governments in lower- income countries to advance teaching and learning and scale solutions for the world’s poorest and hardest-to-reach girls and boys. The ability to access funds from a broader range of multilateral bodies and institutional donors is significant not only for the large volume of funding that flows through them, but also because it diversifies the sources of official development assistance (ODA) that Save the Children Australia can access beyond a reliance on direct bilateral funding from the Australian Government’s overseas aid program.

3 Australian Financial Review, 29 September 2020, https://www.afr.com/wealth/investing/qbe-to-anchor-save-the-children-s-social-impact-investment-fund- 20200928-p5601l 4 Save the Children Australia media release 14 November 2019: https://www.savethechildren.org.au/media/media-releases/green-climate-fund-accreditation; https://www.greenclimate.fund/ae/sca 5 https://www.globalpartnership.org/

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Insights for legal counsel As the complexity of charity business models increases, there is a corresponding uplift in the transactional workload for legal advisors. The boundaries of what constitutes charitable activity are being tested and expanded with the meshing of for-profit social enterprise and private capital investment with traditional charitable activities. Careful structuring advice is critical to ensure that charity status is preserved. Ongoing vigilance and discernment is also required to identify and manage conflicts that might arise between commercial imperatives and charitable purposes in this evolving space. Advising during a period of transition and growth has required an even mix of building new skill sets (e.g. merger and acquisition skills in a charity context), discernment to ensure that the integrity of existing operations and charitable legal status is preserved, and that the compliance obligations that flow with increased scale and new institutional donors are met. Lastly and firstly - Leadership While often radical in their pursuit of just causes, long-standing charities tend to be conservative in their structuring and business affairs. There is good reason for charities to be cautious. Reputation and trust are the primary assets of such organisations and hard won over time. A risk averse approach may be viewed as the most appropriate setting to protect these hard-won assets. For the most part, traditional charities lean toward conforming with an orthodoxy of practice that sits comfortably with historic concepts of charitable action defined by precedent under charity law. However, charities cannot let a fixation on not taking a wrong step become the default setting in all circumstances. Save the Children Australia’s board and executive team have demonstrated leadership in their willingness to take on a degree of risk that comes with forging a new path. It may be trite to state, but leadership from the board and executive team has been the most critical element in the organisation’s ability to diversify. This leadership and risk appetite has framed the context in which legal counsel has been able to advise. Comfort with unknown In his recent book, New York Times columnist Thomas L. Friedman suggested that in an age of accelerated change it was no longer enough to just think of solutions that are inside the box or outside the box. Friedman posits that the pace of change necessitates thinking “without a box”.6 Thinking without a box can be particularly confronting for charities as it not only requires consideration of whether the organisation has the capability to deliver through a new modality, but whether the new modality will be recognised as a permitted activity under charity law. When Save the Children Australia made a decision to engage directly with the growing impact investment market, we found that the existing “commercial” impact funds were dominated by actors from traditional financial and banking houses and that very few of these existing funds were channelling investments to the sort of high social impact ventures Save the Children Australia is focussed on. While there are examples of funds which focus on high social impact ventures, they tend to operate on more of a philanthropic or grant type basis, where the funding entity/investor does not expect or receive any return on the capital they have contributed.

6 Thomas L. Friedman, Thank You For Being Late: An Optimist's Guide to Thriving in the Age of Accelerations, Penguin Books, 20017, pg 14. 6 Simon Miller, Sophie Coleman, Grace Williamson

Save the Children Australia’s impact fund stands out as it is a commercial fund (i.e. set up to provide returns to investors) which is situated and run entirely within Save the Children Australia’s charitable group structure. When we started on that journey there was no box for a charity with aspiration to provide a full spectrum commercial offering of this nature. At the outset it was not clear that we would be able to find a suitable position from which to locate the endeavour within the regulatory environment traditionally occupied by financial services organisations. The legal structuring phase of the project (described in more detail below) felt a bit like driving in the dark with the headlights on. For both in- house and external counsel, advice on next steps could only be given a short distance ahead – or as far as the short reach of the headlights – as the novelty of the approach meant there was no mapped path. Save the Children Australia worked closely with the charity law and financial markets teams of our external advisors to establish the Fund. Much time and creativity from internal and external counsel went into the fundamental legal structuring questions, such as: • whether an Australian financial services licence (AFSL) would be required; • whether Save the Children Australia could rely on a special instrument created by the Australian Securities and Investment Commission (ASIC)7 as a basis upon which to run the Fund without an AFSL. This instrument had not been used by a charity for this type of investment activity before; • where to place the Fund within Save the Children Australia’s corporate structure, considering its charitable purposes and status under Australian taxation law as a public benevolent institution, which had to be retained; • if the Fund were to be housed in a new subsidiary, what kind of company the new subsidiary ought to be; • an appropriate charitable purpose for the subsidiary that would allow the Fund to invest in the types of enterprises Save the Children Australia wished to invest in; and • whether the Australian Charities and Not for Profits Commission (ACNC) and ASIC would be supportive of a charity conducting these types of investment activities. Save the Children Australia carried a significant risk that the project could collapse up until the new subsidiary’s charity status was confirmed by the ACNC and the Identification Statement approved by ASIC. Once the structure was determined, in-house legal counsel oversaw establishment of an anti-money laundering and counter terrorism finance program. You make your own luck (mostly) There is a bit of self-congratulation on the part of the authors in the picture painted above about the formation of our impact fund. Even though we knew it would be a challenge and were up for it, we had not anticipated the level of technical complexity or the volume of legal work involved in setting up a first time fund outside of a traditional environment. The reality is that the opportunity would not have been realised without the end to end pro bono legal support we received on the project. In short, notwithstanding bold intentions, we would not have had available resources to pursue the project to fruition without this generous professional advisory support.8

7 ASIC Instrument 2016/813. 8 Herbert Smith Freehills advises Save the Children Australia on the launch of its ground-breaking social impact investment fund, 10 February 2020, https://www.herbertsmithfreehills.com/news/herbert-smith-freehills-advises-save-the-children-australia-on-the- launch-of-its-ground

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Mission first – but with an open mind to method The possible modalities for benefiting the lives of vulnerable children have been expanded, but we need to remain vigilant not to stray beyond the charitable mission. In the first instance, each proposal must be interrogated to ensure that it, firstly: benefits vulnerable children; and secondly: fits with the organisation’s legal charitable purposes. Bringing hybrid model social enterprises into the organisation has pushed us to ask questions about whether a traditional grant based or philanthropic program will lead to the best impact for children or whether a market-based approach or a mix of both is the answer. Not all value is in the new and the shiny. Some of the most effective counsel we have provided is assisting colleagues to identify simpler pathways using traditional programming approaches, peeling away unnecessary complexity in the operating structures that may have built up over time and become accepted ways of working. In his book, which describes the epoch changing advances in technology over the last 20 years and what it means for the global economy, our politics and the environment, Friedman poignantly surmises that he was: “Struck by how many of the best solutions for helping people build resilience and propulsion in this age of acceleration are things that you cannot download but have to upload the old fashioned way – one human to another human.”9 Expanding the toolkit of ways to achieve charitable impact is undoubtedly a positive thing, yet in each case we still need to exercise discernment in selecting the right tool for the job, many of which are already in the kit bag. Trust and relationships While we generally describe them as “mergers” in the not-for-profit sector, the transactions that Save the Children Australia has completed could more accurately be described as “trust-based acquisitions”. In these transactions no financial benefit is pocketed by any private interest. The focus is on transferring stewardship of the organisation’s mission to a new custodian. Trust between the parties is the critical currency to reaching a final agreement. In practice, this may manifest in a more open tone and approach to delivery of advice as compared to the cut and thrust of a pure commercial transaction. Charity acquisitions almost always benefit from a process that centres around communication, collaboration and understanding, which is critical to providing comfort to transaction partners that their values proposition will be preserved during and after the acquisition. Concluding observations As charities increasingly look to adapt and diversify their business models they should be alert to the investment in legal resource that is required to execute changes and to navigate the increasing complexity of their operations. Legal counsel should also have a breadth of expertise, including in areas not traditionally associated with charities, as their remit expands. ***

9 Friedman, 2017, pg 490

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Simon Miller is General Counsel for Save the Children Australia. Simon has worked as a commercial advisor in international law firms in London and for over a decade as a legal advisor for World Vision and Save the Children. Simon holds a Masters of Public and International Law from the University of Melbourne. Sophie Coleman is a senior lawyer with Save the Children Australia. Sophie holds a Bachelor of Arts and Laws from Monash University, and a Master of Business Administration from the University of Melbourne. In 2011, Sophie co-founded Create Impact, a charity working with remote communities in Ethiopia on education, health and water projects. Sophie is also a board member of Aardvark Music, a charity that helps vulnerable young people to expand their identity and wellbeing though music. Grace Williamson is Legal Counsel at Save the Children Australia. Grace is currently undertaking a Master of Public and International Law at the University of Melbourne and holds a BA/LLB (Distinction) from the University of Western Australia. Prior to Save the Children, Grace practiced commercial law at Linklaters in London where she worked in the dispute resolution team. Grace also ran pro bono matters for a London community legal centre and female education charity Camfed International, and volunteered at Redress, a human rights law organisation. Save the Children was founded in 1919 and is one of the world’s leading independent organisations for children. In Australia and all around the world, Save the Children works to build a better world for and with children, to protect children from harm and help them access quality education and health services. Save the Children Australia is one of 28 members of the Save the Children Association, a non-profit Swiss Association. Collectively the members of the Save the Children Association had a combined annual revenue of over USD$2.2billion in 2019.10 .

10 https://www.savethechildren.net/about-us/accountability