Money

The Most Common Mistake We Make Judging Charities

March 12th 2015

By:
Kathleen Toohill

An oft-voiced criticism of charities, and an easy way to scare off potential donors, is the allegation that a particular nonprofit spends too much money on overhead - more specifically, on staff and fundraising costs.

In “A Path Appears,” New York Times columnist Nick Kristof and Kristof’s wife and former Times correspondent, Sheryl WuDunn, explain that this has become a pervasive misconception about charities that has significantly stunted the growth of the nonprofit sector. This attitude is dangerous, write Kristof and WuDunn, because it leads many nonprofits to struggle to attract talented employees, to fail to take risks for fear of upsetting donors, and to keep advertising costs to a minimum, thus severely limiting their potential to scale and grow. 

“Forced to squeeze their overhead, aid groups cut corners in ways that undermine the mission,” write WuDunn and Kristof. “Nonprofits are often afraid to take risks or acknowledge failure for fear that failure will antagonize donors: Why donate to an aid group that wastes its money? Yet risk taking is the only way to improve, and it has been central to growth in for-profit companies.” 

A major driver in the movement to change the way we think about charities is Dan Pallota, founder and former CEO of the now defunct Pallota TeamWorks, which organized multi-day bike rides and walks for AIDS and breast cancer until 2002, when, according to Pallota, negative media coverage spotlighting high overhead costs (40 percent) caused its sponsor to walk away. Not long after, TeamWorks went under and its 350 employees lost their jobs. 

According to Pallota's 2013 TED talk “The Way We Think About Charity is Dead Wrong,” in 2002, its most profitable year, TeamWorks raised $71 million for breast cancer. In 2003, TeamWorks' former sponsor held its own walks, and raised only $11 million. 

“This is what happens when we confuse morality with frugality,” said Pallota in his TED talk. “We've all been taught that the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we're missing the most important piece of information, which is, what is the actual size of these pies?” 

Pallota mentioned a Businessweek survey found that a Stanford MBA would sacrifice hundreds of thousands of dollars of income by choosing to be the CEO of a hunger charity rather than entering the for-profit marketplace. 

“We have a visceral reaction to the idea that anyone would make very much money helping other people. Interesting that we don't have a visceral reaction to the notion that people would make a lot of money not helping other people,” said Pallota in his TED talk. “You know, you want to make 50 million dollars selling violent video games to kids, go for it. We'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself.”
 
Donors want their donations to go towards the needy, which is understandable, yet if nonprofits invested more in hiring and retaining talented people and getting the word out about their causes, many of them would raise more money. It's a catch-22 hundreds of years in the making (Pallota traces the foundations of these attitudes back to the Puritans), and as things stand now, those in need suffer most. 

Websites like Charity Navigator and CharityWatch track expenses and reputations of nonprofits. While these sites provide valuable tools to help donors avoid scams and donate wisely, the emphasis that sites of this nature place on overhead can help fuel fears that any non-profit with a focus on growth is wasteful and greedy. 

In the wake of Pallota’s 2013 TED talk, the BBB Wise Giving Alliance, Charity Navigator, and GuideStar published a letter to the nonprofits of America addressing the “overhead myth.”  

The letter explained the problem with evaluating nonprofits on the basis of overhead expenses rather than results and had three asks of nonprofits: “First, demonstrate ethical practice and share data about your performance. Second, manage towards results and understand your true costs. Third, help educate funders (individuals, foundations, corporations, and government) on the real cost of results.” 

In 2015, these three organizations sent another letter, this time to the donors of America, requesting that focus shift away from overhead: “We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results,” reads the letter. 

A study published by Ann Goggins Gregory and Don Howard of the Bridgespan Group in the 2009 Stanford Social Innovation Review details how unrealistic expectations on the part of donors often set nonprofits up for failure:

“A vicious cycle is leaving nonprofits so hungry for decent infrastructure that they can barely function as organizations—let alone serve their beneficiaries. The cycle starts with funders’ unrealistic expectations about how much running a nonprofit costs, and results in nonprofits’ misrepresenting their costs while skimping on vital systems—acts that feed funders’ skewed beliefs. To break the nonprofit starvation cycle, funders must take the lead.”

For more information on changing mindsets about nonprofits, check out Dan Pallota’s book “Uncharitable” or “A Path Appears” by Nick Kristof and Sheryl WuDunn.