Why philanthropy needs reinventing

Special to Philanthropy Journal

Eric_FriedmanEric Friedman

We have an unhealthy relationship with charitable giving. Giving USA reports that Americans donated over $300 billion annually to nonprofits in 2012, averaging about $1,000 per person. We love the charities we give to and feel good when we give to them. This is a nation of do-gooders.

At the same time, philanthropy is not working as well as it should, and almost everyone knows it. The causes that receive the most donations are not necessarily the ones that make the greatest impact. Instead, the personal whims and preferences of donors determine where dollars flow. Donors choose recipient organizations based more on reputation and trust than proven effectiveness.

Many donors do not know how to define a “high performing” nonprofit, let alone how to identify one or assess whether there are more worthy charities. The donor community has a reputation for responding to inspirational anecdotes in professionally written fundraising material rather than asking for meaningful evidence of performance; simultaneously, they express concerns about high overhead costs and program effectiveness.

Philanthropy is broken, and it needs to be reinvented.

But how? There are three key areas that can create a domino effect of improving charitable giving.

1. There must be greater honesty about charitable giving.

Although the media often reports on fraud and waste in the charitable world, such instances are not the most problematic lack of honesty. The larger issue is more common and very subtle.

For example, today’s dominant paradigm of giving is that donors give to the causes they care about and have personal ties to – the university they attended, the nonprofit searching for a cure to an illness that touched their lives or the organization promoting the type of art or music they enjoy.

This type of giving itself is not dishonest, but few people acknowledge that giving based on the personal preferences of the donor dramatically reduces the impact of the donation. While these are “good” causes, this type of giving is very different from trying to make the biggest dent in the causes that are most effective at helping others.

Is philanthropy about helping those in need or pursuing the personal passions of the donor? If it is the former, then shouldn’t a central tenet be to try to provide the most help possible? In this case, such donor-driven strategies should be widely regarded as failed philanthropy.

Being honest is not just about not lying but also requires a certain level of frankness. Not every good cause is equally good, and not every donor is equally deserving of praise. As long as the philanthropic community views those who donate millions to their favorite opera houses to be as generous as those who help the poorest people in the world, there is a lack of honesty. We should reserve the highest public praise for donors with the most altruistic motives and better understand our own reasons for giving. This type of honesty would lead donors to be less whimsical and more thoughtful about their giving choices.

2. There must be better ways for donors to evaluate nonprofits.

Although there are several charity rating agencies, their weaknesses are often so glaring as to make them virtually useless. Most focus almost exclusively on financial metrics, such as the percentage of donations going to fundraising and overhead costs. This is far from a good measure of performance – just because a charity only spends 10 percent on fundraising and overhead costs doesn’t mean the programs funded by the remaining 90 percent are effective.

Even among the charity rating agencies that have advanced beyond pure financial measures of performance, most give their top ratings to hundreds of extremely different charities, effectively watering down the value of their ratings and expressing little conviction about what really works best. These rating agencies can be counterproductive to their own missions, as they give donors a false sense of confidence when providing high ratings for charities that might not be very effective.

There are only a small number of charity evaluators that present their views of the best of the best charities; the most notable is GiveWell. More of these evaluators, as well as a higher profile for the existing ones, would go a long way to make charitable giving more effective. Such charity evaluators will develop and thrive as donors express more interest in them.

3. Donors must take more responsibility for the impact of their giving.

According to a study by Hope Consulting, only 35 percent of donors do any research before giving, and only 9 percent do more than two hours of research. Instead of giving with all “heart” and no “head,” a better balance is needed.

Donors must think about not just what causes tug at their hearts, but also what are the greatest problems and where charities are likely to make the biggest impact. The irony is that, as donors make their giving decisions based less on emotional appeals and more on evidence about what works best, the increased conviction they have in their giving will ultimately provide even greater emotional satisfaction.

A reinvented, better world of philanthropy will not happen overnight. But it can happen gradually, as one donor at a time takes responsibility for their own giving.

Eric Friedman is the author of “Reinventing Philanthropy: A Framework for More Effective Giving.” He can be reached through his website, http://reinventingphilanthropy.com/.

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