This article by Tom Murphy originally appeared in PSI’s Impact Magazine. See other stories about measurements here.
The number that calculates how much a nonprofit spends on administrative and fundraising costs is a fixture on newsletters, websites, reports and even Tweets. Nonprofits signal to their donors that they are effective because more money is spent on programs. Some even go as far as to say that 100 percent of donations go to programs.
A quiet debate emerged over the past year. Some people within the charity sector began to question the focus on overheads. The barn doors of the conversation blew open this year when the leading charity rating organizations published an open letter on the ‘Overhead Myth’ and a TED talk by charity fundraiser Dan Pallotta succinctly argued against the overhead fetish.
“The percent of charity expenses that go to administrative and fundraising costs – commonly referred to as ‘overhead’ – is a poor measure of a charity’s performance,” wrote Art Taylor, President and CEO of BBB Wise Giving Alliance; Jacob Harold, President and CEO of GuideStar; and Ken Berger, President and CEO of Charity Navigator.
They argue that too much focus on overheads can hamper the work of organizations. Impact, what programs actually accomplish, is emerging as the area where charity raters are focusing their energy. In addition, they believe that potential donors should consider transparency, governance and leadership when determining where to give money. “We think governance is critically important,” says Berger. “Not enough attention is paid to principles of good governance and ethics.”
Figuring out whether or not a nonprofit has good governance may sound hard, but Berger says there are some basic things that can speak volumes. Board structure, for example, is one of those areas. The board for a nonprofit should be made up of at least five people independent of the founder.
A poor board structure led to the problems of Greg Mortensen’s Central Asia Institute and singer Madonna’s organization Raising Malawi.
“Some people say it is all about results. They are wrong,” said Berger. “If you have good results today, but poor ethical practice and governance you will not have good results tomorrow.”
The open letter decrying the overhead myth was spearheaded by GuideStar’s Jacob Harold. He brought together Taylor and Berger to reach out to individual donors and advise them against placing too much emphasis on overheads.
“It is true that the nonprofit sector has reinforced this myth by prominently display- ing overhead ratios,” says Harold. “There is a rational reason to do that, and there are donors who demand it. That is something I hope we can push back on.”
The letter is the first step by charity rating organizations in pushing back against the myth. Berger and Harold agree that impacts are a vital measure, although caution against focusing on it too much.
“The nonprofit sector is diverse,” says Har- old. “We can’t expect to have one single metric that will capture performance across all that diversity. So we have to look for proxies.”
Assessing universities and global health organizations on the same impact indicators is insufficient, he argues. That is why a diversity of measurements and organizations that are doing it are a good thing. Harold’s vision for GuideStar is for it to act as a sort of warehouse for the nonprofit information supply chain. Its site can take in the varying reports and feed- back collected elsewhere in order to create a more complete picture of any given nonprofit.
Advertising is one area where Harold shows reluctance. He says that the money spent raising money should be seen separately from other administrative costs like staff fees, travel and supplies. Spending money on administra- tion is what allows programs to work, but it should be balanced against wasteful spending.
“To me, administrative costs are money going into what you want to do. They are essential to achieve the results you want to achieve,” says Harold.
Pallotta’s headline-grabbing “TED” talk made the case for spending on advertising and marketing in order to raise more money. He said that overhead rates should not detract from the amount of money brought in. Berger said that there are some important points made by Pallotta, but he worries if his message prevails.
“I remain in strong disagreement with Dan with some issues,” Berger says. “I think it is a road to ruin to have him as the darling for the charity sector.” Pallotta’s office did not respond to Impact’s request for a comment.
Charity Navigator has let nonprofits know that impacts are going to be a more important part of their rating system. Surprisingly, the majority of nonprofits do not publish anything on their websites about program impacts.
A two-and-a-half year analysis of nonprofits by Charity Navigator revealed that the vast majority do not publicly report their results in a meaningful way.
“We believe that the vast majority do not have anything to report,” says Berger.
Nonprofits have until 2016 to start publishing impacts or they will see their scores decrease. Furthermore, the organizations that continue to make claims of zero overheads will see notices added to their profiles. Berger hopes that this will help dissuade the championing of low overheads. The majority of organizations already fall under a 25 percent overhead rate and nearly all are under 35 percent. Exceeding those numbers is an easy red flag.
The raters that are meant to hold nonprof- its accountable are now holding themselves accountable. Actively dispelling the overhead myth is a way to ensure that they are keeping up their end of the bargain. The changes in the sector will have the greatest benefit on the people who matter most: the beneficiaries and people affected by nonprofits.