Watershed: an MMM3 case study www.missionmodelsmoney.org.

uk

Watershed
a Governance Case Study for

Mission, Models, Money

Catalysing a more sustainable arts and cultural sector

Case study focus: UNDERSTANDING & APPLYING APPROPRIATE CORPORATE STRUCTURES

Arts and cultural organisations are increasingly encouraged to diversify their income streams and
become less reliant on grant funding, but can our traditional corporate structures enable this?

As well as its charitable Arts Trust and Trading Company structures, Watershed is in the process of
setting up a Community Interest Company (CIC) which will allow them to operate at the interface of
public and private sectors working to develop creative and financial capital. This case study outlines
Watershed's reasons for developing a CIC, and its wider implications as a potential new model for the
cultural sector.

MMM would like to thank Dick Penny, Watershed’s Managing Director, and Sara Robinson, freelance
arts consultant, for their contributions to produce this case study.

Background information:

Vision Watershed aims to be a cultural exchange which promotes engagement,

enjoyment, diversity and participation in film, media arts and the creative
economy.

Group Structure Explained below

Age 24 years (founded in 1982
Turnover £2.8m 15% revenue funded, 85% earned and contributed
Staff 65 FTE
Watershed Arts • A chair plus 10 members, two of whom are Bristol Council nominees.
Trust’ board: the • Their ages range from 30 to 76 and have all served from 4 - 8 years.
headlines • All are users of Watershed but not all are Bristol residents.
• Professional expertise includes Higher Education arts, media and culture,
financial management/accountancy, legal, media industry, MP.
• Meet 6 x a year. Agenda involves a mix of business plan/financial
monitoring, current business and forward strategy.
• There is one finance sub-committee, others as required for specific projects.
Watershed: an MMM3 case study www.missionmodelsmoney.org.uk

Positioning:
Watershed is more than just an arts cinema. It is a cultural centre, a creative business broker, a social net
worker, a research and innovation facility, a café/bar, and a cultural tourist attraction (from the DCMS
Creative Economy Programme Working Party report).

'Watershed was an awkward beast from the off, the original 1982 vision – Britain’s first Media & Communications
Centre – was designed to straddle arts and commercial worlds. It was not conceived in response to arts policy or
funding programmes. The current success of Watershed has its foundation in the original vision but its genesis in
very real (potentially terminal) organisational and financial crisis in the late 1990s. The crisis created the
environment for a new strategic focus and new support from the arts funding system. As the new networked
approach began to work the organisation increasingly responded to opportunities in the creative technology space
and an entrepreneurial culture evolved. However Watershed found its ability to invest in this new area constrained
by the potential impact on the traditional charity business model and out of step with its traditional arts system
stakeholders.' (From an article in AP, 2006)

Solution:
The key challenge for Watershed is how to surf the breaking wave of innovation while maintaining a
stable arts offer in an increasingly complex business model. Their solution is to evolve the business
model and operate through a group of companies designed to meet the needs of the distinct business
areas.

Watershed is in the process of adding a Community Interest Company, iShed CIC Ltd, to their
Charitable and Trading arms. The new CIC structure will allow Watershed to attract and accept
investment from individuals and companies and create a social enterprise which can respond to demand
for creative/commercial initiatives which sits uneasily within their current Trust and Trading structure.
It will enable joint venture projects (eg with Hewlett Packard Labs - see below) and through establishing
a creative venture capital fund, will input flexible and early seed investment itself in new ideas with
uncertain outcomes.

New Group Structure:

Watershed Arts Trust Ltd: Company Limited by Guarantee. Registered charity. Film and media arts
venue and on-line at dShed.net
Mission: To be a leading international film and media arts centre connecting local and global audiences, learners,
talent, cultures and ideas.

Watershed Trading Company Ltd: Company limited by shares, for profit subsidiary. Venue catering &
conferences/ events. Generates profits for the Arts Trust.
Mission: To be the most welcoming and inclusive Bristol city venue for social, business and creative meetings
generating a financial contribution for Watershed development.

iShed CIC Ltd: New venture to be set up as a community interest Company. Creative Economy cultural
broker. Research & Development in Creative Technology. Cross sector catalytic networks. Financially
self sustaining. Profits will not automatically be distributed to the Arts Trust; they will be retained as a
creative venture fund. The Arts Trust benefits through expansion of creative activity.
Mission: To build a cultural brokerage which connects organizations, knowledge and research through
collaborations across the media, arts and technology sectors.
Watershed: an MMM3 case study www.missionmodelsmoney.org.uk

Community Interest Company:

CICs present a unique opportunity for entrepreneurial arts and cultural organisations to use a legal form
which makes clear and protects their public interest aims but does not require them to give up their
business to a voluntary board as charitable status would. CIC’s can pay their directors as long as the
remuneration is not excessive.

CIC's are subject to a 'community interest test' and an asset lock, which ensure that the company is
established for community purposes rather than private gain. The community interest test is broader
than charitable activity, allowing some degree of private benefit and making the CIC particularly
suitable for those who wish to work within the familiar limited company structure but outside the
constraints of charity status. It also allows for the possibility of equity finance. A Community Interest
Company:

• is a limited company that is able to make profits, which are reinvested in to the company for the
identified community, or transferred to other CIC's and charities or to a limited extent, paid as
dividends
• will be more lightly regulated than charities but will not have the benefit of charitable status,
such as tax breaks
• can access loans from specialist lenders such as Futurebuilders and bonds or grants aimed at
social enterprises
• is able to raise money from outside investors to support their social purpose, but the return that
investors can receive is limited
• if it is 'wound up', cannot distribute assets to the shareholders other than return of original
investment
• cannot be a charity, nor can a charity be a CIC, though each can convert to the other.

A charity may set up and own a CIC as a trading subsidiary or social enterprise. Such as CIC can
undertake a range of activities which can be both charitable and non-charitable provided they meet the
CICs community interest purpose, as set out in its Memorandum of Association. The fact that CICs are
protected from assets being transferred to private hands should reassure statutory and other funders,
who are becoming more comfortable with the idea of this new legal form. Esmee Fairbairn for example
were one of the first charitable funders to fund a CIC and the Big Lottery Fund has just announced its
intention to do the same. A charity could also use the CIC structure for joint ventures with commercial
and non-charitable partners allowing them access to loans and bonds.

Why a CIC for Watershed?

Watershed have always been keen on innovation. Watershed's online showcase for digital creativity,
dShed.net was established to provide a platform for artists and media producers in the South West
region and beyond and to act as a focus for distribution, discussion and learning about online creativity.
Over the past two years it has been expanding to encompass a brokerage role between the private,
public and voluntary sectors. This is typified by the 'SE3D' project:

Hewlett Packard Labs were developing an experimental utility computing Maya® Rendering Service and
approached Watershed to source UK animators to test the service in the production of their own 3D shorts.
Participants received Maya® licenses and a programme of workshops, public events and industry mentoring.
Watershed: an MMM3 case study www.missionmodelsmoney.org.uk

Throughout this 18 month initiative, Watershed became the translators between the animators and HP Labs and
the award winning films are showcased on www.dshed.net/se3d

The issue is that charitable structures, stakeholder expectations and the need to contain risk are
potentially compromised by the range of SE3D outcomes, which are valued differently by each partner.
HP Labs' ultimate aim is commercial, the animators gain skills and profile, and Watershed develops new
activity whilst also delivering on their educational objectives. There is also a shared gain because
together they evolve the creative economy for Bristol and the wider region. However, such cross-cutting
initiatives don't fit neatly within the standard charitable legal requirements of an arts-based Trust. In
order to exploit the potential of this work, Watershed need to expand their legal structures. They are
therefore in the process of developing Creative Economy cultural broker, iShed CIC Ltd which will
undertake research and development in creative technology, and facilitate cross sector catalytic
networks. The new legal structure should free up restrictive processes and enable interactive
partnerships between commercial businesses, creatives and the public sector to flourish.

Dick Penny argues that it is impossible to become entrepreneurial without investing in risk. The CIC
regulatory framework will allow Watershed to draw down public sector funding whilst also developing
joint venture projects, possibly enticing investment from individuals and companies and establishing a
creative venture capital fund to invest in new, potentially risky digital initiatives. Watershed can then
play a leading role in the development of a knowledge economy by leveraging its arts pedigree to create
outcomes which are educational, social and commercial.

Implications for governance

This venture is a relatively new concept within the subsidised cultural sector. The language is difficult to
navigate, the idea is tricky to articulate and since the idea was first discussed in 2001, Watershed’s board
members have been both nervous and excited about taking it forward. They accept that the business is
diversifying and are keen to find a way of simplifying both the arts proposition and the brokerage
proposition so they can sit side by side and feed one another.
Their aim is to create an entity that is linked to the Arts Trust but with distinct aims. An initial advisory
group for the CIC has been set up which includes one member of the Arts Trust board. The advisory
group's focus is on clarifying key objectives and defining the community of interest. They envisage that
when the CIC board comes into being it will require very active members with the right skills for the
jobs (which may or may not include Arts Trust board members) who may be in time be paid, though
these questions are far from being answered as yet.

Watershed is one of a handful of cultural organisations developing a CIC to sit alongside their Trust and
Trading arms. To date, 'it's been a hard slog, but it's precisely this grey area that excites us.' They are
keen to share their findings as the process unfolds.

Short and long term outcomes:

• Watershed operates with only 15% revenue funding from public sector grants. The CIC should
enable them to diversify their income base further and increase their earned income by
continuing their entrance into new markets, develop long term relationships and joint ventures
with investors and other stakeholders;
• this cross-cutting public/private initiative has already developed their profile and recognition
exponentially, including being chosen as a DCMS Creative Economy Programme case study;
Watershed: an MMM3 case study www.missionmodelsmoney.org.uk

• the development of a creative venture fund to invest in new work;

• the board and staff's ability to think 'outside the box' with regard to both the expanding business
ideas and the legal structures, gives Watershed a highly competitive advantage.

Key learning points:

• Watershed inspires us to reconsider the corporate structures/legal frameworks under which our
organisations traditionally sit – is the dominant paradigm of the charity, company ltd by
guarantee enabling or restricting our development?
• The CIC model has interesting implications for the cultural sector to 'leverage its arts pedigree' in
the development of innovative, social/commercial ventures and potentially open up new income
streams.
• Arts and cultural organisations have often been effective at developing networks and bringing
very different players to the table. The Watershed's vision to build and earn from 'cross-catalytic
networks' (within an creative context), could be a model ripe for duplication.

Further resources:
More information about CIC's: http://www.cicregulator.gov.uk/faq.shtml

Bates, Wells and Braithewaite is the leading solicitors firm specialising in social enterprises and the arts.
See www.bateswells.co.uk or obtain their guide to legal forms 'Keeping it Legal' from the Social
Enterprise Coalition www.socialenterprise.org.uk

All Ways Learning are undertaking research into the legal structures chosen by arts organisations and
how well they serve their needs http://www.allwayslearning.org.uk/research/governance/

Watershed/HP Labs project www.dshed.net/se3d Further Watershed case studies

http://www.watershed.co.uk > News > Reports