Stock market investments are measured by returns, philanthropic investments by outcomes – the latter is far more complex.
As one of the most philanthropic nations, the U.S. has had a long history of charitable giving and yet, in the past few years, there has been immense discussion about the impact of those gifts. We’ve already covered how you can give strategically in a previous article, so now the question becomes “How do you know your gift is having an impact”?
With the launch of charitable giving guidance and data websites such as GuideStar, Charity Navigator and Give.org in the late nineties and early aughts, donors have a way to independently and anonymously assess a nonprofit before making a gift and to track outcomes after their gift. But with little training or time to spend on self-education, donors defaulted to the easiest measurement tool – overhead expenses. Charity Navigator receives 10 million visits to its website annually and Guidestar has 26 million annual searches on its database so we know donors still seek independent ways to measure and track progress of the organizations they support.
And yet, these three organizations began to realize the need to better educate and inform donors on measuring outcomes and in 2013, launched an open letter “to the donors of America denouncing the ‘overhead ratio’ as the sole measure of nonprofit performance”. Instead, “We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results.” They followed that up in 2014 with a second letter and a set of tools for the Nonprofit sector: “The Overhead Myth, Moving Towards an Overhead Solution”.
Donors want independent assessments: GuideStar has 26 million annual searches; Charity Navigator has 10 million visitors to its website annually.
I confess I fell into the “overhead myth” trap myself. When evaluating donor advised fund structures and sponsors a few years ago, I was initially intent on low overhead to maximize my charitable giving dollars. I was impressed and drawn to organizations such as Epic Foundation which works with donors pro bono or Schwab Charitable which charges 0.60% in administrative expenses and scales down from there. To be thorough in my analysis, I looked at my local community foundations. While the administrative fees were higher, I realized my local community foundation did more than sponsor a DAF and perform reviews on nonprofits, they spend time to partner individually with donors to seek the right charitable cause or organization. They also support local charities and critical issues impacting my community (hence the term community foundation). In their support of local charities, they offer training and advocacy for those local organizations which I realized had a ripple effect on my community.
Rather than use ‘overhead ratio’ as the sole measure of nonprofit performance, we ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results
~Art Taylor, Jacob Harold and Ken Berger, Open Letter to Donors of America “Overhead Myth”
After I climbed out of my “overhead ratio” trap, I went searching for ways to measure the impact of charitable gifts. When I read Phil Buchanan’s recent book, Giving Done Right, I appreciated that he understands the challenges of measuring impact in the first place, and has also been at the center between nonprofits and donors for a number of years. He has experienced these challenges in a “front row seat” way. He provides guidance on measuring outcomes with the understanding that the nonprofit sector isn’t like business or government, it is the social sector.
Phil points out another misguided measurement for philanthropy, “Democrats, Republicans and independents all judge their 401(k)s by the same measure: return. The higher, the better.” Yet we all know that one person’s passion for the environment might be in direct conflict with another person’s desire for economic development of a community. There is no standardized measurement for “return” in the social sector.
Giving Done Right also sites three other challenges with measuring impact of charitable giving: causality, a universal metric, and timeliness. Causality makes it difficult to measure a nonprofit’s direct impact on a particular population unless you were to perform randomized control trials which is both costly and unethical. Do you allow one population to receive services from the local food bank while controlling for an identical population to starve. I think not.
Having a universal metric for which all nonprofits are measured sounds reasonable. After all, the Financial Accounting Standards Board (FASB) has us all agree to a standard definition of cash equivalents, for example. Nonprofit entities adhere to FASB as well and even have their own advisory committee on these standards. But when it comes to measuring donor impact, that cannot be distilled down to a single metric. I’ve seen this happen in education, specifically around metrics for school performance. Two schools serving two different student populations in the same town – how can I measure both schools using the same metric for college acceptance when one school is serving a larger percentage of low income, newcomers to our country and the other is serving a larger percentage of affluent, English-as-a-first language students?
As Phil cautions in his book, don’t fall into the “big data” trend by insisting that your nonprofit create voluminous dash boards or ratios such as “cost-per-life-touched”. If we insist on “big data” for our philanthropic causes before we are even ready to talk about investing in basic infrastructure such as living wages for staff or retirement planning benefits, then we are missing the point altogether. It also takes time to measure impact, which is sometimes measured in generations rather than months. As an example, I have done work with the Department of Women in San Francisco as a nonprofit board supporter for their work on policy changes to improve gender equality in the Bay Area. They spent years working to help enact the San Francisco Paid Parental Leave Ordinance.
So what should you do so you can continue to appreciate that your charitable giving has some type of impact? Giving Done Right has three simple questions to consider:
Does your giving match your stated goals and strategies?
Do the organizations you support have evidence of progress you find compelling?
Who are the big givers supporting the same goals and strategies you support, and can you learn about their efforts and their assessment of progress?
For many, the first question can cause angst as perhaps we haven’t spent the time to create a strategy with goals. So often we give because we are asked and we don’t take the time to reflect on what we want to give, who or where we want to give it and what we want to accomplish. That work is for another article but I encourage you to read Phil’s book as he has some great questions and tools to help you map this out.
“Do the organizations you support have evidence of progress you find compelling?”
~Phil Buchanan, CEO of The Center for Effective Philanthropy and author of “Giving Done Right”.
Our attitudes towards assessing non-profits is important as well. Being humble and listening to the nonprofit staff and leaders is critical to understanding how your gift will have impact. Partner and collaborate with your organization by asking them how you can support them in deepening, expanding or improving upon their work. It’s equally important not to make assumptions. In doing this work for many years, your nonprofit leaders may not see benefit to expanding to serve more lives, rather they see benefit in going deeper within the community to offer more services and support. Or, these same leaders may need your help in advocating for improvement in infrastructure for their organization. In any event, by engaging and listening, you are putting yourself on the right path to assessing impact.
Like What You’ve Read?
Sign up with your email address to receive news and updates.
We respect your privacy.
Talk to the financial experts at Fairlight Advisors to learn more about managing your nonprofit’s investments. Schedule a free consultation today!