The Wall Street Journal on how NOT to be stupid with your donor dollars

Last week, there was an interesting Wall Street Journal article on giving, in time for the holidays, with the fun name Tis the season to be stupid .  Of the ten “financial mistakes” that the author, Shelly Banjo, details people often make but can avoid, the one that piqued my interest most was #7 – Fixating on Charity Ratings: 

Over the years, a number of websites, such asCharityNavigator.org and GuideStar.org, have sprung up to help donors evaluate a charity's administrative, program and fund-raising expenses. While it's important to look at the ratings, nonprofits have become experts in gaming the rating system. For instance, groups have been known to disguise fund-raising mailings as educational materials and pass fund-raising costs along as program expenses.

“Gaming the system?”  Nice phrase.  I’d bet they prefer to call it “creative accounting.”  To be fair, some nonprofit accountants are more creative than others, depending on their clients and, of course, the quality of the accountants themselves.

But what’s really going on that we're being warned about?  Is the "gaming" for some nefarious purpose, such as stealing donor funds?  Or is it to deal with a “reporting/grading” system that’s broken?  Having worked with many nonprofits for year I believe that – in most cases – it’s the latter, not the former. 

Shelly seems to understand this, too.  For example, she sees the reporting/grading system has its problems, quoting a nonprofit advisor:

"Just like in any business, donors can't ignore the necessary administrative costs nonprofits have to efficiently and effectively deliver services," says Chris Page, senior vice president of Rockefeller Philanthropy Advisors.

And she tips her hat to the executive salary issue:  

“Don't avoid giving to a charity only because a CEO makes over $100,000,” she cautions. “The median CEO salary for charities with total expenses between $3.5 million and $13.5 million is nearly $160,000, according to Charity Navigator.”

In the end, her best advice is to be thoughtful and ask questions.  I agree.  Ask and become educated.  Don’t be hung up on percentages and numbers that make no sense.  Donate wisely this holiday season!

HBS on The Hard Work of Measuring Social Impact

Professor Alnoor Ebrahim, at Harvard Business School, is teaching Performance Measurement for Effective Management of Nonprofit Organizations in June 2011.  A summary of his thoughts in two working papers has been published in The Hard Work of Measuring Social Impact, a Harvard publication.

As one might imagine, his approach is rather academic, but he does have some interesting conclusions with respect to the practicality of using metrics.  “Not everyone needs to measure (social) impact,” he says, “what you should measure is contingent on what you’re trying to achieve.” 

To start, an organization that has a more limited scope or mission can has what he calls a more “linear” approach.  “If an organization has a focused, or linear, theory of change and a tightly focused operational strategy, measuring results is much easier.”  Defining a “focused” theory of change is “one where the relationship between their actions and their impacts on society are linear and can be observed.”  The delivery of basic services, “such as food and shelter for homeless people,” for example, is linear.  “You can count the number of people being fed, sheltered, and clothed.”

Yet the more complex the problems or issues a nonprofit is taking on – or the more ambitious their “theory of change” – the harder it is to measure impact.  He illustrates by adding the goal of helping the same organization above (i.e. delivering food) reaching higher, to try to also help people to escape poverty.  This would require, as he points out, “greater access to education, health care, and employment resources,” for example.  Measuring results here are more problematic.  The bottom line?  “As you widen your scope to deal with a major social problem, the harder it becomes to measure your impact because it is tougher to isolate cause and effect.” 

The article ends on a positive note.  “Despite the ambiguity surrounding social impact metrics, nonprofits can nonetheless establish their own internal benchmarks to assess performance and determine whether they are achieving their mission.”  Ebrahim is currently working with a number of nonprofit and public organizations, such as the Acumen Fund, the Robin Hood organization, and others, to help create these metrics. 

“’It turns out that highly intelligent thoughtful people end up developing some very different approaches to measuring social performance,’ he says, ‘That suggests we might not see agreement on a common set of metrics in the social sector for a while’…”

Cool.  But what do we do in the meantime? 

We wait for news of what intelligent, thoughtful people suggest…   

Gold Medal charities

Givewell.org has new ratings, with its mission “to find outstanding charities and publish the full details of our analysis to help donors decide where to give.”  As of December 2010, they’ve identified two “Gold Medal” and eight “Silver Medal” nonprofits.  Their rating are defined as follows:

We have confidence that a Gold Medal charity is having significant and cost-effective impact on the issues it works to address.  A Gold Medal charity provides compelling answers on most of the issues we consider, for the bulk of its programming.

What characteristics do they look for?  They provide a list!

• Basic transparency: including an “on the record conversation” with staff and public disclosure of any “failed” programs
• Full transparency: with regard to fiscal issues, by country and program
• Monitoring: ongoing and systematic
• Evaluation: “rigorous” including public assessment
• Success: as defined by their evaluation process
• Promising approach: being both cost-effective and “low burden of proof”
• Funding gap: if an organization needs more funding it has made this need clear

One may choose to agree with Givewell’s approach – or not. What is impressive is the degree of thought that has gone into it.  Their “Criteria for evaluating programs” goes on for three pages (single spaced) when printed covering the above in detail, with another two pages of their cited sources.

They’ve also been clear about staking their territory and their priorities.  “Priority” programs are “for international aid: proven health interventions.”  “All of the programs we have identified as priority program (sic) are in the area of health.”  My hat is off to them for deciding health is the world’s #1 issue.  We can all argue for or against now as we like.  Do you think health is the world’s #1 issue?  

Charity Navigator's new evaluations

On Monday, November 29, 2010, the NY Times printed To Help Donors Choose, Web Site Alters How It Sizes Up Charities.   The article discusses how Charity Navigator “recently embarked on an overhaul to offer a wider, more nuanced array of information to donors who are deciding which organizations they might help.”

Charity Navigator’s site will track approx. 3 million unique visits in 2010, according to their statistics.  They, along with sites like Guidestar, are one of the largest online sites for evaluating nonprofits. 

The article states:

“there is a trend toward new ways to measure a charity’s effectiveness in delivering services or results. Over the next three years, Charity Navigator plans to add evaluations of a nonprofit’s accountability and transparency to its ratings, as well as research on its impact and research by other organizations.”

What I want to know is, how is it going to measure “accountability” and “transparency?”  And what about “impact?”  How will that be measured? 

I’d like an example, such as for an NGO that provides food relief.  Will they count how many people received the food? And what kind of quality was the food?  How it distributed?  And was there any violence in that distribution setting or was it peaceful and fair? Was there any waste in the distribution?  Is there corruption?  Or is that just the “price of doing business”? I could go on – you get the point. 

More hope, it appears, is emerging from the nonprofits themselves.  Take, for example, the Children’s Tumor Foundation:

“Some individual charities have begun offering up more of their own information in public formats, to help benefactors make these assessments. For instance, the Children’s Tumor Foundation has begun reporting on its finances using the same format as the 10-K, the annual report that public companies must file with the Securities and Exchange Commission, in the belief that it is an easier and more comprehensive way for donors to see how it operates.”

The 10K is more revealing of its operations as opposed to the newly revised 990, which nonprofits are required to file.  How revealing!

The number of articles about this topic is heating up.