Our understanding of philanthropy is changing from “giving money away” to “making social investments”. But this admirable shift is leading some donors mistakenly to focus on how charities spend donations, instead of understanding whether the organisations they support are making a difference.
When investors evaluate for-profit companies, they ultimately need to answer one question: how much money will the company make? The non-profit equivalent, the charity’s “profit”, is the impact charities have on their chosen cause. Better living conditions, improved education and a cleaner environment are examples of impact. While these outcomes can be difficult to evaluate, they are the only true measures of whether a charity is a good investment.
Unfortunately, many donors focus on easily measured financial data instead of doing the hard work of trying to understand the impact. Nowhere is this more apparent than at the non-profit evaluator Charity Navigator, which rates charities based on a set of financial ratios. These metrics attempt to convey how financially efficient a charity is, but shed no light on what, if any, social benefit it is generating. Even the claim of measuring efficiency is suspect, since the metrics do not distinguish between wasteful overheads and such worthwhile expenses as good employees and strong technology.
Charity Navigator is well-intentioned, but its ratings ignore the impact of a charity’s programmes. The group’s website states “ …we do not currently evaluate the quality of the programmes and services a charity provides”.
Albert Einstein is said to have had a sign in his office that read: “Not everything that counts can be counted, and not everything that can be counted counts.” Non-profit impact experts Heather McLeod Grant and Leslie R. Crutchfield demonstrated this well in a recent article in the Stanford Social Innovation Review: “When we looked at traditional measures of non-profit efficiency, many [high-impact charities] didn’t score well, because they don’t adhere to misleading metrics such as overhead ratios.” Charity Navigator rates Habitat for Humanity International’s “efficiency” as “Meets or nearly meets industry standards but underperforms most charities in its Cause”. But Grant and Crutchfield call Habitat a high-impact non-profit enterprise that built 275,000 homes in 90 countries to house 1m low-income individuals. Those results explain why donors support Habitat.
Looking beyond financial statements takes some work. Try calling your local community foundation. Part of the service they provide is helping donors decide where to give. Call a private foundation that supports the organisation you are considering. Large private foundations have staff who evaluate charities. If you see a foundation listed as a donor to the one you are researching, look up its contact information at foundationcenter.org and ask them why it made the grant. Consider hiring a philanthropy consultant such as Geneva Global, Rockefeller Philanthropy Advisors, The Philanthropic Initiative, or Arabella Philanthropic Investment Advisors.
While non-profit research that focuses on impact is rarely available online, an interesting start-up called GiveWell.net is launching in December. Founded by two ex-hedge fund employees, GiveWell.net is committed to making all its research freely available. The board of directors includes Lucy Bernholz, a consultant to the Bill & Melinda Gates Foundation.
Expert advice is valuable, but just as important is the research you do on your own. If you are considering giving to a charity, even one you have supported for a long time, give them a call and ask why they think what they do makes a difference. If they respond by telling you how important the cause is, gently steer them back to answering the question. It can be hard to measure impact, so ask what outcomes they track to determine if they are doing a good job. If other non-profits work on the same cause, ask them the same questions. The website GreatNonprofits.org is building what it describes as a “Zagat Guide”, where donors, employees and those served by charities can write reviews.
But the most important thing to realise is that some charities are far better at pursuing their mission than others. You would not buy a stock without knowing how profitable the company is, and you should not donate without knowing what kind of impact a charity is having. When you analyse those you support, the joy you get from your philanthropy will grow as your impact becomes clear.
Get alerts on Markets when a new story is published