|BYU Anti-Human Trafficking Club|
I’m surprised I haven’t already written this one since I’ve done so much on this topic already. Having done two internships for non-profit organizations (Polaris Project and Eagle Condor) and worked extensively with others through BYU’s Anti-Human Trafficking Club, as well as having received formal instruction through my Social Innovation Fellowship with the Ballard Center, this topic has had its fair share of my mental space and time.
The 80-20 Rule
Non-profit organizations have to report their financial expenses in three categories: program expenses, fundraising expenses, and overhead expenses. This sort of division is harmful in the first place, but on top of that we’ve lumped extra layers of problems.
The primary problematic addition is our idea of an ideal expense proportion. The general rule of thumb has been that “good” charities should be spending 80% (at least) on programs and 20% (at most) on overhead and fundraising. This is ridiculous.
First, what in nature dictates that such a convenient and arbitrary proportion will make a charity any good? Perhaps the Pareto Principal, but in the case of social impact there’s no empirical evidence that this number is better than 70-30, or 50-50. All this idea has really done is make it so that NGO’s (Non-Governmental Organizations(Charities)) that are able to pay for full-time accountants who are sufficiently experienced and qualified in non-profits get closer to the ideal, and those NGO’s unable to pay for a full-time accountant have bad financial reports.
The fundamental assumption behind the 80-20 rule is that overhead is inherently bad. But what happens when we look at an organization that manages to put 100% of its resources into programs? This means that everyone that’s a part of it will be a volunteer, including top management. Will the directors of this organization really be able to put in sufficient time and effort to solve whatever problem their working on? Will the workers on the ground be willing and able to put in sufficient effort to see a problem solved to the end? Will the organization be able to attract enough donors to give to programs?
Considering the fact that I’ve yet to see any NGO worth its salt operate this way, I would have to say no. An organization with 100% of expenses going to the program is probably a bake sale where the food was donated, bringing it, at best, hundreds of dollars to give to some other charity that does have overhead to actually try and solve whatever problem they care about.
Charity Navigator is a website that, in attempts (and successes) to do good, has inadvertently compounded these harmful ideas. It audits the financial statements of charities to look at how much money an organization receives, and how it is spent. It also checks financial checks and balances to rate the transparency of the organization. After all the analysis, each charity receives a rating of 0 to 4 stars.
For a while, the star rating was done primarily on how the charity spent its money. In other words, the 80-20 rule (or similar ideas) ruled the perception of many people on how “good” a charity is. Fortunately they now throw transparency and accountability into the mix, but it still reinforces the idea that money spent on overhead is evil.
The fact is that financial data doesn’t give you answers about anything. All it does is give you clues on where to look to find the answers. A for-profit company that has negative net income one year isn’t necessarily on its death bed or even doing poorly (contrary to popular sentiment and reaction.) Perhaps the company made many large investments that will pay ginormous dividends in the future. If you just look at the number, you will miss out on the future gains.
So although Charity Navigator can be useful, it needs to be used as no more than a starting point, and its star rating should probably be scrapped or better explained. The stars do not indicate how good the charity is, but how acceptable most people will find its financial management.
Let’s bring this idea home with a look at two hypothetical organizations: a “saintly” organization dumping 95% of its expenses into a program and the other “jerk face” organization dumping 95% of its expenses into overhead. Let’s also say that they are both working on a problem you care about (hunger, poverty, human trafficking, cancer, etc.) Finally, let’s say that you have 2 billion dollars to give to one and only one of these charities, and that the NGO’s will spend 2 billion you give them in the same proportions as they have historically. Even with all that I’ve said above, “Saintly” still sounds like the better choice.
Let’s go even farther, and say that the organization that dumps 95% of its expenses into overhead is dumping it specifically into the pocket of the CEO (meaning that of the 2 billion you give, 1.9 billion is simply going to the CEO’s coffers.) Although this guy is the CEO of a charity, he’s a big jerk who hates children, runs over daisies with his car, thinks puppies are stupid, and goes out of his way to trip people carrying heavy bags.
But now let’s say that if you give the 2 billion to the “saintly” organization, that the problem you care about will stay about the same as before, but if you give the 2 billion to the “jerk face” organization, that the problem will be wiped out. No more hunger, poverty, human trafficking, cancer, whatever.
Hopefully you see the point. You may not agree with the point (you may still think we shouldn’t give the money to a daisy crusher,) but I say that it’s most important to look for impact. If it were me, I would give the 2 billion to jerk face.
Look For Impact
|From Not For Sale Campaign’s Impact Report|
Many Will Provide
Most well established organizations will provide some sort of report on impact. They’ll be quite fruitful with statistics, numbers, charts, and especially success stories. They’ll talk about how many people they’ve helped, how much food they’ve given, how many new areas they’ve expanded to, etc. They’ll have glowing reports from recipients, anecdotes about distressed people being empowered, and sometimes even pictures of the happy beneficiaries.
Unexpectedly (to me,) these are usually pretty good. The success stories are usually real. The people are really becoming empowered. The numbers generally reflect those being helped. Sometimes organizations will even have third party evaluations to aid in their transparency. The content itself is often sufficiently accurate to warrant trust in what they say.
Few Will Provide All
The trouble is in what’s not said. What NGO’s don’t tend to do a good job talking about is the impact they couldhave had in a world where people gave for the impact more than any sense of moral superiority or knee-jerk reaction to an emotional advertisement.
They don’t tell you that if they could run their program without people worrying about overhead, that they may be able to multiply their resources and help hundreds or thousands more with just the money that already gets donated. They don’t tell you that if they could take more risks they might be able to find more innovative solutions that really make a dent in the problem. They don’t tell you that the best impact will normally come over long periods of time, often requiring years of preparation and cultivation before any impact is visible.
They don’t tell us those things because even when they do, we tend to not want to fund it.
There are exceptions. No one has revolted over the fact that breast cancer hasn’t been cured even after the oodles of money that has been spent on it. But when more innovative organizations come out to fight poverty, clean up land mines, educate the isolated, or what not, they generally have to rely on funding from organizations designed to invest in such solutions instead of a supportive and educated populace.
The Way We Think About Charity Is Dead Wrong
I’m happy about that since I already had most of the ideas before the TED talk, he just says it way better and with more authority than I can. He also adds some really interesting insights, such as where the ideas we have about charitable giving come from.
Of the 5 points he gives that disadvantage the non-profit sector against the for-profit, I glean 4 additional tips to charitable giving. They are:
1. Don’t be afraid of NGO leaders earning top dollar
2. Don’t be afraid of money being spent on fundraising (but perhaps fear NGO’s not spending money on fundraising)
3. Allow nonprofits to fail; be willing to give to riskier ideas and ventures
4. Give NGO’s time to make an impact
I’m not going to expound much more on the tips above, but recommend that if you haven’t watched his talk, I highly recommend doing so. Nearly all of us will give charitably at some point, and we should know what we’re getting into.
One of Dan’s best lines in his talk is:
“Our generation does not want its epitaph to read ‘We kept charity overhead low.’ We want it to read that we changed the world.”
I agree. Let’s be smart about this.
Afterthought on Self-Interest
Perhaps a good way to handle this whole situation is to be a little more self-interested with our giving.
Instead of giving for the purpose of helping someone else, perhaps we need to give because we have a personal interest in seeing an issue solved. If that’s the case, we’ll naturally shop around for the organization that does the best at solving the problem, rather than the one that does the best at cutting the pay of their employees.
We should give to hunger charities because we personally want to see hunger ended, not because we think it’s good to give to some sort of cause. We should give to organizations fighting human trafficking in an effort to purchase reduced slavery in the world. We should give to charities trying to end homelessness because we personally want people off the streets and in their own shelters.
We need to shift our paradigm on the purpose of charities. Treat them more like a business that you’re buying services from, and maybe then we can put forth the resources necessary to solve our problems and permit the people willing to tackle them to earn enough to feed their families.
Keep seeking truth.
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