Why the ‘centre stage’ effect matters in the minimum payout ratio debate
The argument that UK trusts and foundations should be mandated to have a minimum payout ratio on grants could be about to rear its head again
Did you know that when you order wine in a restaurant you are being manipulated into choosing one that is more profitable for the owner?
This is down to a finding in psychology called the ‘centre stage’ effect where, given a range of three or more choices, people consistently choose the one in the middle, even when the options are objectively neutral.
Restaurants often take advantage of this phenomenon with wine menus, where wine is priced such that the one most likely to be chosen, ie the ‘middle’ one, has a higher profit margin.
Why am I telling you this?
Well, rumours have it that the argument that UK trusts and foundations should be mandated to have a minimum payout ratio on grants, similar to requirements in the US, Canada and Australia, is about to rear its head again.
I am, personally, not a fan of this idea.
To begin with, UK tax rules and the charitable regulatory environment is very different to countries that mandate payouts.
In UK charity law, charities are required to spend the money they get in furtherance of their charitable objects and that includes grant-makers. Any money not used in this way, but kept in reserve, has to be justified.
It’s also an important principle of charity regulation that trustees are trusted (the clue is in the name!) to be responsible and act in the interests of their beneficiaries and the charity in the long term.
We don’t, in general, legislate exactly how they are supposed to do that. And if it becomes clear that they may not be acting in the interests of beneficiaries, then the Charity Commission has the power to intervene.
I also wonder what problem this is supposed to solve? If it’s to release funding into a hard-pressed sector it’s missing the mark.
The biggest threat to funding in our sector is the crisis is in state funding. In fact, according to the Association of Charitable Foundations, latest analysis shows grant funding collectively has been growing.
Furthermore, trusts and foundations only make up 10 per cent of all the money into the sector, so even on a good day they cannot possibly fill the hole created by reduced funding from the state.
For me, the more important question is: should a failing state be subsidised by charities?
But the underlying consequence for me is the centre stage effect.
I suspect that a mandatory minimum payout would be subconsciously perceived as a target – thereby potentially encouraging trusts to spend less rather than more.
If there is a mandatory minimum, it makes it easier for those who are hoarding to make the argument that they had met the minimum spend required by law.
And grantmakers would be forced to invest and/or spend in a way that ensured they could meet the annual target, which could well be a disincentive for longer-term funding the sector sorely needs.
I don’t think we want our trusts and foundations to go for the grant equivalent of the middle-priced wine – surely we want to give them the flexibility to spend what they can afford in response to need?
This article was originally published on the Third Sector website. Take a look here.
