Best of Social Change Consulting, Year One. #4 The Danger of Charity Rankings
Our number four entry of the best blog posts of the year relates to the danger of charity rankings. In the piece, we reference Dan Pallotta, an author and philanthropist who recently gave a TED talk related to the topic below. He says it in his talk, as well as in his book, and we say it below, but it cannot be said enough: it is time to stop holding nonprofits to such an antiquated standard, and to allow them to really have an impact in their communities.
Anyone who has worked for a nonprofit organization likely has a story about the lack of money and resources in their working environments. From antiquated technologies, to underpaid staff, to old and impractical furniture, nonprofits are expected to change the world with budgets that for profits would find laughable. Which begs the question – why do we hold charities and nonprofits to such unrealistic expectations of financial accountability?
In his recent book, “Uncharitable,” Dan Pallotta goes into a bit of the history behind charitable giving and postulates on its impact on our modern day interpretation of what nonprofit governance should look like. His theory revolves around Puritanical ideals of charity being something that is separate from one’s selfish desires – to be truly charitable means that no benefit can come to the doer.
This idea has in one way or another spread to the governance of nonprofits and charities, as most now agree that these organizations should be run with little to no overhead or administrative costs. A common sentiment is that 80% of money coming into the organization should be spent directly on the mission, and that any lower amount is tantamount to wasteful and uncharitable. These numbers only get more unrealistic in the world of grants, where grantees oftentimes do not factor in for administration of said grant in their donation to the charity, but still factor in overhead costs when evaluating possible winners.
But worst of all in these categorizations of nonprofit success are the so called “charity ratings” (and the websites that provide these). While an admirable goal to make it easier for the average donor to know what organizations are considered to be trustworthy, what they are actually doing is over simplifying charity success – to an increasingly negative degree for the future success of nonprofits.
While most would agree there should be accountability with charities in how it uses donor dollars, these rating systems have a tendency to only focus on these numbers through analysis of what is knowns as the IRS-990 form. An imperfect form to be sure, but one created with the intention of tax exemption status and not what it is currently being used for – analysis of success of a charity.
The prominence of these sites, and the active communities that interact and add reviews to them, bring new challenges for charities already battling with a lack of resources. To keep up with the unrealistic expectations of financial frugality, some charities have started to change how they fill out their 990 forms. In order to fall under the 20% overhead ratio, some are pushing fundraising and administrative expenses to other areas of their budgeting so as to seem more efficient in the eyes of donors, but also in effect making this system of analysis useless moving forward.
When not reorganizing their financial figures to fit the mold, most are also cutting back in key areas. Infrastructure is usually one of the first pieces to be left behind in a nonprofits budget – but when staff use outdated and slow technologies that belabor their efforts and slow down their work, what is really being saved? How does spending less on operations, fundraising, and administrative tasks truly show the value and impact a charity is having in its community?
This is not an easy problem to fix, and likely any nonprofit that breaks away from convention and fights back against these rigid requirements will find themselves ostracized from the giving community. But changes do need to take place. Nonprofits will continue to struggle to make long term and significant social change if they are hampered by antiquated and obtuse policies. If donors considered their gift as more of an investment, than a charitable offering, would there be less need for intense bureaucratic oversight? How much time and resources are wasted by nonprofit organizations each year in the pursuit of creating transparency? The next time you look into the rating of a charity before donating, take a moment to think why you are donating. Is it to make an impact in your community? Is that something you can determine just by looking at the bottom line?