Rethinking Ways to Give Wisely

As a new generation of donors seeks greater accountability from not-for-profits, advisers are seeking new ways to gauge the good an organization accomplishes

By Amy Feldman

Individuals in the U.S. give away more than $200 billion a year, yet the vast majority of those decisions are made ad hoc.Few donors have any idea whether they are giving to the best organization in the area they want to improve, or even whether their giving is doing what they want it to do.A slew of nascent efforts to rate and grade charities, as well as the pending overhaul of the big kahuna of nonprofit ratings groups, Charity Navigator, may change all that.

At least a half-dozen groups have come up with different answers to the question of how to help donors make good decisions. In addition to Charity Navigator, these online efforts include GiveWell, Philanthropedia, and GreatNonprofits. In addition, GuideStar, which serves as a clearinghouse of data and information on nonprofits, has begun adding some of these rating efforts to its site.Offline, two new efforts—from Root Cause and Partners for Change Initiative—are working to get information into the hands of financial advisers as they struggle with how to help their clients make giving decisions.

Not all of these efforts are new, but philanthropy experts say that they have begun to reach critical mass, and that the proliferation of different approaches to the same question will ultimately be good for both donors and nonprofits. "There is a mindset shift going on in philanthropy," says Sean Stannard-Stockton, chief executive of Tactical Philanthropy Advisors, an advisory firm to high-net-worth donors based in Burlingame, Calif. "People want to know that their money is actually making a difference."

That's especially true in the current economic downturn. Donors have less money to give, while charities need more cash to provide services to more people in need. The result is more donors who want to know that the money they do give makes a difference, and not-for-profits taking more steps to show their results. But the longer-term trend predates the recession. Baby boomers have become used to getting advice on their finances, yet there are few places to turn for philanthropic advice for those giving less than $1 million. While increasing numbers of people have set up donor-advised funds, which can be a smart financial-planning move, these vehicles don't answer the question of where to give the money for greatest effect.

Washington is also playing a role in the mindset shift. The Internal Revenue Service did a massive overhaul of the Form 990 that not-for-profit organizations must file—the biggest such change to the form in three decades—requiring lots of new information on governance questions. Meanwhile, the Obama Administration has set up the Social Innovation Fund, which is slated to invest $50 million this fiscal year in bringing innovative nonprofits up to scale.

"There is a lot of energy around this right now," says Laura Callanan, a philanthropy expert at McKinsey & Co. "Social impact assessment is the holy grail for people doing philanthropy and nonprofit work. How do you know what works and why? And how do you know that money is making a difference in people's lives?"

Calculating Social Impact

As with any new benchmarking effort, figuring out whether a charity is effective at what it does is not so simple.

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