Judging a charity by its overhead

Posted by Chris Chappelle on Sep 1, 2016 1:59:16 PM
Chris Chappelle

What defines a successful nonprofit? Overhead? Impact? Brand? Revenue? And must nonprofit organizations be run like normal businesses in order to be successful?


These questions are at the heart of recent public discussions on redefining the way we think about charity. Leading these conversation are Ken Stern, former CEO of National Public Radio (NPR), as well as fundraiser, activist and founder of AIDS Ride, Dan Pallotta.


Both Stern and Pallotta call for a paradigm shift in the way we rank and assess nonprofits, demanding drastic change to create a more innovative and growth-oriented charity marketplace.


The crucial argument linking the two gentlemen’s criticism is what Stern refers to as the “overhead myth.” This approach to assessing the performance of a charity focuses solely on the percentage of donations that are used towards overhead.


“That is a destructive analysis,” Stern told NPR’s Diane Rehm on a recent edition of her radio program.


The danger, Stern warns, in this method of evaluation is that it focuses entirely on short-term results and punishes organizations that spend significant portions of their funding on long-term considerations such as strategy, research, technology, training and personnel.


In a March TED Talk, Pallotta elaborates on this point and notes that the way we think about charity is “dead wrong.” Today’s individual donor equates frugality with morality, Pallotta remarks, and that pushes funding away from ambitious and innovative nonprofits and towards those with the lowest published overhead percentages.  


And you know what, they are absolutely right. Why should “investors” in charity be scared of giving to organizations that are working towards innovative breakthroughs? Many of the most deserving nonprofits are facing the biggest issues of our day: poverty, disease eradication, environmental preservation, securing and maintaining clean water sources and accessible education. 


…These are BIG problems that require big budgets and and even bigger talent. 


One approach is to think of charity as you would any “for profit” investment opportunity and “vote with your pocketbook.” As donors, we should demand results, but also understand that as you invest in a particular organization you are contributing to the long-term health of that nonprofit. Charities that invest heavily in themselves, by securing top flight talent and running successful marketing campaigns, do well in the long run in terms of impact.


Your $100 donation may not, for example, go directly to buying a meal for a homeless person. However, your $100 may be used towards a marketing campaign that helps generate $10,000 for expansion of an existing homeless shelter. Now that’s return on investment.


Yet another key fact remains: there are over 1.1 million nonprofits in the U.S. How do you choose the right one?


“There should be more professional help to get donors and to help them get their money to the best charities,” Stern professed to NPR.


As an aggregator and filter of highly effective and impactful nonprofits, this is the role that Bright Funds aims to fill. Stern described the mutual fund approach of Bright Funds as the cutting edge of charitable giving:


“I actually think that’s where the marketplace is going.”

File under: Donor tips

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