Markets & Finance

Seeing the Big Picture on Charities


A few high-profile transgressors have put charities under a microscope. By all means stay informed -- but remember why you give

Giving to charity has become more challenging for donors in recent years. The U.S. charity sector is much admired abroad, yet here at home it's subject to intense and sometimes painful scrutiny -- both from those within the philanthropic field and from the outside. So much is known about the liabilities and failings of various charities that donors sometimes wonder if it makes sense to give at all.

This is a distressing state of affairs for people who have spent much of their professional lives in the nonprofit sector, as I have. We're acutely aware of the problems, yet we also know how much good is accomplished by charities, and at what sacrifice.

In recent years, some of our most historically revered charities -- the American Red Cross, the United Way, and the Nature Conservancy -- have been caught up in disturbing investigations. In other instances, regulators have uncovered scandals in charities that had previously enjoyed widespread public admiration. We've been made aware of groups that have violated the public trust to attain their goals more quickly or easily.

LOSS OF FAITH.

At other times, a board of directors is accused of failing in its fiduciary responsibilities. Even the misdeeds of one individual -- such as a bookkeeper who has regularly stolen miniscule amounts of money over extended periods -- can take a severe toll.

Each time such a story comes to light, donors feel let down. Their faith in the nonprofit sector lessens and they begin to eye other -- if not all -- charities with suspicion. To an extent, all charities suffer because of the transgressions of the few. How did it come to this -- to so many donors questioning how and why they should give? And how can trust be restored?

The spotlight is shining brighter on the nonprofit world than ever before. In part, this is because of the unprecedented wealth coming into the sector, and also because of transformations resulting from the Internet. As a result, the media now gives more coverage to charities than before, often carrying out their own investigations. Some business and nonprofit publications issue their own annual reports on the philanthropic sector, offering analyses of some of the nation's larger charities.

SOMEONE'S WATCHING.

There's also increased transparency in the nonprofit sector. Charities' tax returns can be viewed on the Internet, most notably on Guidestar.org, which provides a database of information on more than 1.5 million tax-exempt organizations. This information is available to the public at no cost. Such accessibility was unheard of merely a decade ago.

Another contemporary dynamic is the publicity and credibility given to numerous charity-ratings organizations. The major third-party charity evaluators -- American Institute of Philanthropy (AIP), the BBB Wise Giving Alliance, Charity Navigator, and Ministry Watch -- attract millions of visitors to their Web sites.

Ratings of individual charities are frequently based on administrative expenses reflected in tax returns without taking into account other important factors, such as program effectiveness. These reports are widely quoted by journalists, regulators, and the public, who use the ratings to assess how well charities are serving the public good.

MANY FACTORS.

The problem, though, is that numbers tell just part of a charity's story. Tax returns were never intended to be an all-inclusive indicator of an organization's effectiveness in carrying out its mission. Nor are administrative expenses necessarily the best or the only indicator of an organization's fiscal responsibility. Ratios can be helpful if comparisons are made among organizations with essentially similar missions and programs, or where there's comparability of such factors as charities' size, longevity, or location.

However, other pertinent factors have to be considered when evaluating a charity. There are numerous reasons why a nonprofit may have high operating costs or be struggling financially even while doing good. It may be a young organization with a less powerful board. The charity's focus may be on solving an unpopular cause or a rare disease. It may have just launched a capital campaign. Or its offices may be in a high-rent city.

Comparisons derived solely from financial data may be misleading and unfair to a charity's reputation. On the other hand, misleading comparisons may improperly boost the reputation of an undeserving charity. It's essential for all of us to recognize that "rating" charities is a confusing endeavor -- even for experts. An assessment of the charity-watchdog organizations, "Rating the Raters," done by the National Council of Nonprofit Associations and the National Human Services Assembly, is helpful in deciphering the differences among the various ratings organizations. This report can be found on the Internet at nassembly.org.

EASE OF INFORMATION.

In the end, we all want easy answers to hard questions. We simply want to know if a charity is "good" and deserving of our hard-earned dollars, or if we should donate somewhere else.

We can find that out in part by using the data at our disposal. Certainly a positive outcome of the overall data deluge we're experiencing is that donors are much better informed. They can readily tap into excellent "wise-giving" information on the Internet. I think there may possibly be less wrongdoing among charities today than in the past simply because of the availability of information.

Be grateful that it's available. We should also take comfort in the fact that board members are under mounting pressure to be responsible fiduciaries, and that charity employees are protected by whistle-blowing statutes. But in the end, you have to take into account the reasons you have always given:

Your emotional tug: You simply feel strongly about the cause.

You consider it morally important to give.

You volunteer or have experience with the organization.

Your family or friends have asked you to contribute, and you want to be responsive.

You simply want a tax benefit.

BOTTOM LINE.

There can be other reasons, of course. But we all give in spite of knowing that there will always be human mistakes and transgressions in the nonprofit world -- just as in every other aspect of society. We also know enough to ask questions and do research. We appreciate that the sector is under a microscope, and hope that will ensure there are fewer opportunities for future scandals.

Continue to rely on your own instincts. If your inner voice tells you something sounds phony about a cause, then investigate further, or simply walk away. And never lose sight of the fact that what it's really about is each one of us doing some good, reaching out to those in need, and improving our society whenever we can.


Later, Baby
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