There is a great e-newsletter called “Blue Avocado” that provides really interesting and useful material for nonprofits. The latest issue has a lovely explanation of why the financial metrics and ratios used in sites like Charity Navigator can do more harm than good. For donors with few objective sources of information about charities, ratios and ratings can seem like one useful measure. I think they’re not. Here’s an excerpt from the column in their latest newsletter by Jan Masaoka:
“One of the less-told stories about the financial meltdown is one of particular relevance to nonprofits: how comparative metrics can lead to disastrous decision-making by organizations.
In the last several years, when investment banks compared their performances with that of Lehman Brothers, they found it almost impossible to do as well. To improve performance, they turned up the heat on their managers, product developers and sales teams. “Why don’t our metrics measure up to theirs?” was the demand echoed in countless conference rooms and memos. People lost their jobs and others felt pressured to take riskier and riskier steps.
The same phenomenon occurred within Enron’s competitors. It was impossible to stay competitive with Enron . . . and honest managers lost their jobs and honest companies failed.
“When financial metrics are used to compare nonprofits, the results are often as destructive. Two nonprofits, each working with children with disabilities, can show hugely different costs for serving the same number of children. When government agencies, foundations and donors compare financial performance, they may not realize that one is working with upper-income children with dyslexia while the other is working with low-income children with autism. Pressuring the second to improve its financial performance means pressuring it to work with children from higher-income families, and with less severe disabilities.
“As easy as it can be to compare two stock prices, it’s almost impossible to compare the performance of, say, two counseling centers, two environmental health rights groups, two mentoring programs, two job training programs. Not only do they work with different people, they work in different communities and settings, and they bring different methodologies and different styles to the work, different sets of assets and liabilities.”
I have often argued that financial metrics and sites like Charity Navigator are not measuring a nonprofit’s performance so much as the savvy of its accountant. Asking nonprofits to focus on these ratios may be distracting at best and damaging at worst. They don’t even purport to measure the effectiveness of the charity at accomplishing actual social results that the charity was formed to accomplish.*
So What is a Donor to Do?
It’s a real problem. You want to be a responsible donor but don’t know what you’re supposed to be looking at. In my experience, you are better than you think at evaluating charities. Individual donors have some powerful ways to make decisions about charities they are considering donating to.
- Give where you live. Individual donors are, I think, best suited to give locally. They can see the needs in their own community, and they can see the nonprofits at work there. You can follow the local press coverage, hear the locals talk about problems and people working to solve them, and heck, you ARE a local so your own personal opinion counts, too.
- Look for charities that address a real need. A good sign for this is that they have members of the neighborhood involved in the planning. Outsiders are not nearly as good at designing programs to “help” people as people are at identifying the help they need. Check the board roster. If it’s composed solely of bank presidents and big-name lawyers, the nonprofit may be good at fundraising but you’ll need to dig deeper on the question of addressing need.
- Follow the leaders. Many local nonprofits are fairly small shops and they are highly dependent on the vision and leadership of a founder. That can be good and bad, but it definitely means you need to have confidence in the organization’s leader. Chances are you can actually see this leader in action if you are focusing on a local nonprofit. There’s a great discussion of how to get the most from visiting charities in the book Grassroots Philanthropy by Bill Somerville. Tactical Philanthropy did a nice interview with Bill as well.
- Ask for the “elevator speech.” Every organization on the planet should have an “elevator speech,” in which they can convey the essence of the problem they are trying to address, the urgency of their work to address it, and why they are the best-suited organization to do the work. The elevator speech gives you a quick view into whether the organization has clarity in their mission and purpose and methods without a five-page grant application. If they say something you don’t understand, ask questions. If you can’t get clarity in about three questions, be wary.
- If you really care about financials, look at their operating budget. I’m no accountant, but as a former grant writer for a struggling nonprofit I learned that it wasn’t good if the funder asked for the operating budget. It would show that last year we didn’t raise enough money to cover our operations. That is, we were running an operating deficit. Look at their published annual reports. If nonprofits are running red for several years in a row, it’s a sign that their business model isn’t working out. They probably either need to do a major retooling or go out of business.
- Your best bet is to get out there and see the programs they put on. This means that if they are a charity providing after-school mentoring, go see the program in action, or go to get trained as a mentor. Find a way to be around the kids that are supposed to be benefiting and see if they are, in fact benefiting. Volunteering is a great, low-risk way to see how the charity is really run, and if the programs seem to be effective.
- After all this, Trust Your Instincts. You’re a smart person. You can tell from this whether the organization is well-run, whether they have their act together. You don’t need numbers-crunching and star ratings to tell you they are paying too much for pencils. If you think they’re making a difference on an important problem, then you should feel good about your donation.
Individual givers are by far the largest source of donations to charity in this country, dwarfing every other source. If we’re just willing to invest a little of our time and intelligence, we can find and fund great nonprofits doing important work in our own communities.
In your experience, how else can individual donors lacking the resources of a paid staff or the luxury of dozens of hours to evaluate a particular charity conduct appropriate due diligence? What makes you feel good about the charities you donate to? What makes you shy away from donating to a charity?
*For a thorough discussion of the futility of these ratios, see a series of posts by Holden Karnofsky over at the Givewell blog
