Here's a great column on the failings of efficiency measures and the shortcomings of the rating agencies that report them in the December 19th issue of the Wall Street Journal. One of the best mainstream paper articles I've ever seen on the subject.
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I was on Bill Handel's morning show yesterday. He asked great questions, was a quick study, and his grasped of the issues rivaled that of those who've been studying this for a long time. Click here to listen.
A Saturday headline on the Los Angeles Times front page print edition (click here for online edition - different headline) reads, "L.A. nonprofit spent zero on charity work in 2 years." In reality, the article has no evidence to back this up, as it never makes an effort to define what "charity work" means. I don't have any evidence with which to defend or condemn this particular charity; it sounds like they may actually be less than great stewards. . But the real point here is how society and the media view any expenditure that does not immediately benefit the needy as something other than "charity work" and how the media uses every charity report as an opportunity to re-indoctrinate the general public in this idea. It is irrational on its face. What would donors prefer, if they really thought about it - that I spend $1 million today on a fundraising engine that could increase annual revenues for the needy to $10 million within five years, or that I give the $1 million to the needy and condemn the cause to low revenues in perpetuity?
We demonize growth expenditures as "overhead." We say that they aren't part of charity work, and instead call it charity to spend every penny we have on program needs immediately in the short-term, leaving no hope of ever solving the long-term problem that gives rise to the program needs in the first place.
Lest anyone think we are making mainstream progress on new evaluative methods for charitable efficacy, and despite the fact that academic experts agree that the %-spent-on-charitable-purpose measure is utterly useless, the article states, right there on page one - in the Los Angeles Times - that, "Charity watchdogs say that nonprofits should never have zero program expense in two successive years..." (as if they have defined what program expense even means) and that "well performing charities direct at least 70% of their annual spending to their charitable purpose." Really? In 1995, Physicians for Human Rights had revenues of approximately $1.3 million. They spent approximately $750,000, or 58 percent of revenues, on programs. Today it would fail all of the watchdog standards for "efficiency." It would not be eligible for a seal of approval. The Nobel Peace Prize committee felt differently. Physicians for Human Rights won the Nobel Prize in 1997 for its work as a founding member of the International Campaign to Ban Landmines.
It's time to close this gap between what the smartest people working on charitable efficacy know and what the mainstream media feeds the public. It is standing in the way of all hope of progress. I can think of no cause more urgent. This misinformation is an umbrella tragedy that towers over all of the other tragedies charity exists to address.
Richard Steinberg at Indiana University / Purdue University Indianapolis sent me a tremendous collection of various academics' quotations, from a variety of perspectives, on the failings of the "efficiency measure." This from Phyllis Freedman eleven years ago. That not much has changed in eleven years shows just how entrenched the measure has become:
"In fact, the Cost of Fund Raising ..., along with Program Expenditure Rate, ... should not even be considered by donors when evaluating charities. In fact, these calculations overlook entirely the real measures of success. If a soup kitchen can feed fifty additional homeless people a week if it raises more money, although in doing so the cost of fund raising rises to 50%, should those fifty people go hungry so the soup kitchen can meet an arbitrary Cost of Fund Raising standard? Is that a real measure of effectiveness? Wouldn't the parents of a child with leukemia consider a charity worthy of support if it contributes $10 million dollars a year toward a cure, even though it spends half of every dollar raised to reach that goal?"
- Freedman, Phyllis. 1997. "Fundraising Cost Percentages: Do They Really Matter?" Federation Folio of the National Federation of Nonprofits, Vol. 1 #3, October 1997. pp. 1-5.
A reporter was interviewing me yesterday and asked me to name some charities I think are doing a lot of good and some that are wasting people's money; i.e. "paying these honchos big salaries" when the money is supposed to be going to the needy. There again the zero-sum game rears its head, where money spent on a CEO is necessarily seen as money taken away from the cause, instead of being properly seen as money invested to bring more money to the cause - and this without even knowing if the "honchos" are or are not bringing in a lot more money. And what is a "honcho" anyway, and why do we start from that premise? I responded to him that there was a 2008 NYU study, done by Paul C. Light, that found 70% of respondents think charities waste a great deal or a fair amount of money. But there have been no studies done that show that charities actually do waste money.
On the contrary, I think charities deserve enormous credit - way more than they get - for the amazing things they do with the limited resources they have and the huge constraints they're under. The prevailing cultural prejudice that they waste money comes from this incessant focus on "overhead," without the public really even knowing what overhead is or isn't; what value it has or does not have. It's like the preverbial idea of what happens when I tell you not to think of a polka-dotted elephant. When all anyone asks about is overhead, and when all anyone talks about is overhead, what image do we think the public is going to come away with with respect to charity? Overhead. And thus this unsubstantiated notion that charities waste a lot of money. This is yet another reason that the overhead measure has to go. Overhead has become the be-all and end-all measurement of charity, when in fact, the word has no meaning, and the measurement of it, even if it did, has nothing to do with results. Smart people, from Steven Smallwood to Richard Steinberg to the U.S. Supreme Court have recognized this and been saying it since the seventies. It's time we all caught up to them.
What a pleasure it is to do an interview with a host who has read your book and is actually interested in the issues. I was on Larry Mantle's AirTalk show this morning talking about the book. You can listen to the interview by clicking here.
