In 2015, Giving USA announced that giving levels across the country had returned to record highs—finally restarting the philanthropic pause triggered by the 2008 recession. If donor confidence had been restored and all is right in the charitable world again, why is it that a poll conducted by the Chronicle of Philanthropy showed stalled levels of confidence in nonprofits? 64% of the 1,000 or so people surveyed said they had a great deal of confidence in charities. That’s more than 50% of those surveyed which is pretty good, right? So, what’s the problem? Donor trust levels have stayed about the same since 2002 when Professor Paul Light from New York University started studying donor confidence.
Donor trust is directly tied to how well they think an organization is using their gifts. Increasingly donors believe that charitable organizations “waste” money—whether on staff salaries, fundraising expenses, or other core costs considered administrative or anything not directly benefiting its programs. You know what comes next…donors favor organizations with low administrative and fundraising costs. In fact, 54% of donors who participated in that Chronicle poll said they like charities that get good ratings by validators like Charity Navigator or the Better Business Bureau. This seems to reward the “lean and mean” organizations putting us squarely back in the thick of the Overhead Myth.
There’s been quite a bit written and discussed about the Overhead Myth and the charity validators. The reality is that they are not going away. Think about it, we use external validators each and every day, whether it’s an Amazon or Yelp review or a movie review from Rotten Tomato. It’s the same for donors who want to find the best investments of their gifts in this sea of 1.6 million nonprofits in the U.S. That’s where the validators come in. The unintended consequence is that the measure of nonprofit performance has gotten stuck on financials which we know is only one part of the story of an organization’s effectiveness.
Charities’ fear of disapproval pressures them to cater to public prejudices (like lowering overhead, keeping salaries down, low investment in fundraising and marketing expenditures). The more the charities lower these costs, the less able they are to educate the public about the good work they are actually doing; hire and retain the number and quality of staff; ensure operational infrastructure to support their programs. The nonprofit won’t likely have cash reserves to protect against risks, or to respond to opportunities in a strategic way that moves their mission forward.
When full cost of a nonprofit’s program is not met—communities pay the price because you have compromised or interrupted effectiveness which is the exact opposite of what we believe to be the main driver of donor intention. Then donor expectations might not be met leading to broken trust (like we referenced earlier) and so the cycle continues.
So, if we know that donors are scrutinizing charities more than ever and they question how nonprofits really are using their money, how can we restore their confidence?
- Look internally to ensure that you are positioned for social sector excellence. High performance results when an organization focuses on effective leadership, operational results, regular performance monitoring and making course corrections when necessary. In fact, part of Charity Navigator’s rating formula evaluates these very aspects of fiscal management, operational excellence and good governance. Understand how these areas are measured and reported on your 990.
- Change the conversation. Share your vision and plans for the future. Celebrate your successes and be honest about your challenges and how you are addressing them. Quantify your results and impact both in numbers and stories. If donors see that you are doing good work with visible results, then their question moves from “How much does your overhead cost?” to “How much do good outcomes cost?”
Donor trust should never be assumed. It’s earned. While you may not be able to shift your donors from restricting their gifts to specific programs, you can inspire greater investment by positioning everything you need to continue to do your work well—from vision to staff to resources.
