‘Tis the Season for a Lot of Bad Advice on Charitable Giving. There is a Better Way.November 22, 2022
The holiday season officially is upon us, and with it comes many traditions we look forward to this time every year. The spirit of giving is certainly one of them.
Unfortunately, another thing we can expect to see this time of year is terrible advice on charitable giving from so-called experts who will tell you to focus on misleading metrics of “efficiency” instead of the reason you actually want to donate to organizations that matter to you: that they are helping people in need and making our community a better place for all of us. There is a better way to think about your giving, and I am updating a post I did back in 2016 because this bad advice remains so prevalent.
Defining the problem
Many so-called experts on charitable giving focus on some version of this advice: focus on how much of your donation is going to “program” rather than administrative and fundraising expenses. The problem with most of that stock advice that goes out this time of year is it focuses primarily (and sometimes exclusively) on the inner workings of the organization using often dubious rating scales in an attempt to determine how “efficient” the organization is rather than to what extent the organization is actually achieving its mission.
Mistaking efficiency for effectiveness is a danger for any organization, and particularly for nonprofits. Yet that is exactly what many of the so-called experts that give advice about what makes a charity worthy of giving do, usually compounding their error by utilizing misleading standards for determining efficiency. As the eminent Peter Drucker famously said, “There is nothing quite so useless as doing with great efficiency something that should not be done at all.”
The reason most of us make charitable gifts is that we believe in the cause the organization is pursuing and want to be a part of advancing that cause, and that should remain your focus. This is not to say that you should completely ignore whether the organization operates efficiently, just that you should put that into the proper context and focus on whether the organization is actually any good at the work they are doing.
Following below are some general advice for thinking about your charitable giving, and a few specific tips to keep in mind for evaluating whether a particular organization is worthy of your investment when you want to dig deeper.
- Remember why you are giving in the first place. Any due diligence you are doing should be in the context of confirmation rather than cross-examination. If you feel the need to be in cross-examination mode about an organization’s worthiness, that is probably a bad sign.
- Don’t ever give over the phone unless it is an organization you already have a relationship with and you know who you are talking to. Solicitations over the phone often come from professional fundraisers who are taking a large cut of the donation right off the top, and/or on behalf of organizations that sound like one you would know but may not be all they are cracked up to be. If you are interested in the organization making a pitch over the phone, the caller should be able to refer you to the organization’s website or follow up with information by mail. If you are getting pressure tactics to give over the phone, that is a big red flag.
- Same advice for solicitations on the street. Dropping money in a Salvation Army bucket (which I often do this time of year) is a whole lot different than the aggressive pitches you often see on downtown streets from overly energetic young people with clipboards in hand (which I’ll never respond to, ever).
- Size matters. It should be a given that any organization you are contributing to is doing good work. That said, as you are evaluating an organization, you can expect a lot more information to be readily available from a large international charity than a small neighborhood food pantry. For the large international charity, key information should be readily available on their website. For the small neighborhood charity, that generally is not reasonable to expect.
Other Helpful Evaluation Factors
With those general tips in mind, and again stressing the point about being reasonable when looking at smaller organizations, here are some things to look for if you want to know more about a nonprofit organization before donating:
- What is the organization accomplishing? Is the organization making progress in advancing its mission? While there is no one size fits all measure of organizational success for every cause, a good organization should know how it defines success and be able to point to results that advance its mission. That may be in an annual report or in a blog or newsletter that gives you a sense of their current work. If progress in advancing the mission is not apparent on the website, which again will often be the case for smaller organizations, you should feel free to ask them.
- How transparent is the organization about its governance? For established organizations, you should be able to easily find out information about the board and staff leadership on their website as well as more specifics about the nature of their work and operations.
- Does the organization receive funding from reputable foundations? Foundations like the CBF do significant vetting of partner organizations before giving a grant, and you generally can take that as a sign the organization is reputable and doing good work.
- Use Guidestar.org as a resource. Guidestar is a great resource to do a quick check on an organization to make sure it is in good standing and to find out more about the organization’s finances and operations if you have questions on those issues that aren’t apparent on the organization’s website.
- How to use those overhead ratios. So-called overhead ratios and other similar efficiency ratings too often are misused as scorecards for organizational effectiveness, but they can be useful for spotting red flags in organizations you have questions about. Overhead is shorthand for the investments that any for-profit or nonprofit organization needs to operate successfully: people, space, computers, supplies, etc. Without sufficient investment in overhead, a nonprofit will be hard-pressed to be effective in its mission, and you should not assume that just because an organization has a lower overhead ratio they are a better organization. In fact, the reverse may be true. (A great article in Forbes some years ago makes that point well: Charity Isn’t Cheap).
So long as an organization reports an overhead ratio in the 10-50% range, there generally is no reason that should set off any alarm bells if you are comfortable they are doing good work. Where exactly a particular organization falls in that overhead range depends as much on its size, its funding model, and the nature of its work as anything else. While there is not an exact corollary for the business sector, overhead rates in the for-profit world average around 25% and typically range from 20% to as much as 50% depending on the type of business. That provides some context to think about nonprofits too.
If an organization reports an overhead ratio of more than 50% or less than 10%, it is not necessarily disqualifying but should cause you to raise additional questions. Too little overhead can be just as bad a sign as too much, as it may be a sign the organization is not making the necessary investments in its people and infrastructure.
You May be Wondering…
Hey, your fearless author works for a charitable organization, right? Is this just a self-serving screed because his organization does not come out well on efficiency measures?
Actually, the CBF comes out quite well on those “efficiency ratio” analyses, with close to 90% going to “program” in our just completed audit.
For the reasons noted above, however, that is not the reason I would want you to contribute to the CBF. If you believe that the justice system should be fair and accessible to everyone regardless of their income or circumstances, I hope you support the CBF because you believe we are doing a solid job of advancing that goal and your support is helping to make that possible. And that is the same way I’d suggest you look at any other charitable organization too.
Give From Your Heart
There are many great organizations working to help people in need who are making our community and our world a better place for all of us, and virtually all of them depend on generous donations from people like you to make their work possible.
You make a big difference with your support of their work, and as an added bonus, giving is good for you too!
So, with the above tips in mind, please give generously as you close out the year. It will make for a happier holiday season both for you and the people in need you are supporting.