A Foolish Way to Evaluate Charities

12/16/2014 02:07 pm ET Updated Feb 14, 2015

MoneySense recently came out with their 2015 Charity 100 under the title "A Smarter Way to Give," where they assign letter grades to the 100 biggest charities in Canada after assessing four areas: program spending efficiency, fundraising costs, governance and reserve fund size. This seems like a good thing right? A reputable, financially focused magazine doing an analysis of charities to help donors make smarter decisions. What's wrong with that? It's not about impact.

It's about accounting. It's about cost control. It's about financial outputs.

The biggest problem here is that "charity efficiency" is measured by how much money an organization spends on programs compared to its total expenses and not by how much impact it creates compared to its total expenses.

MoneySense says, "... one thing is common among all donors: They don't want to see their money wasted." But MoneySense is defining "waste" as funds not spent on programs. Wasteful things like marketing, fundraising, and, oh yeah, staff! How selfish and foolish of an organization to spend money such useless things like that.

And even if you wanted to support an organization that didn't care about those things (and do so at your own peril...) what about funds that are wasted while being spent on programs? Consider this example from Dan Pallotta, author of Uncharitable and Charity Case:

As for making donations "go as far as possible," consider two soup kitchens. Soup kitchen A reports that 90% of every donation goes to the cause. Soup Kitchen B reports 70%. You should donate to A, right? No-brainer. Unless you actually visited the two and found that the so-called more "efficient" Soup Kitchen A serves rancid soup in a dilapidated building with an unpleasant staff and is closed half the time, while Soup Kitchen B is open 24/7, and has a super-friendly staff that serves nutritious soup in a state-of-the-art facility. Now which looks better? The admin: program ratio would have failed you completely. It betrays your trust. Itʼs utterly deficient in data about which soup kitchen is better at serving soup. It undermines your compassion and insults your contribution. And yet we praise it as a yardstick of morality and trustworthiness. Itʼs the exact opposite.

Is that how you want to be deciding where you should give? I would hope not. And yet, that's the most prevalent way donors assess organizations. According to the Burk Donor Survey (one of the largest and most comprehensive donor survey's in North America), "81% of [donors] said they stop giving or reduce support to charities that spend excessively on administrative overheads. However, the specific budget items that donors define as administrative expenditures are actually costs essential to delivering programs and services."

So when reputable, financially focused magazines like MoneySense perpetuate this in their grading and ranking system, it only reinforces this concept for donors. That's how MoneySense is making donors foolish when it comes to evaluating charities (NOTE: Two years ago I wrote an open letter to MoneySense on my blog and sent them a copy asking to hear more and discuss how their system might be improved in the future. I received no response.)

Now, to be fair, MoneySense did not create these generally accepted principles they built their rating system off of and that are used in the industry. And they aren't the ones who refuse to help educate donors all year long about what costs are necessary, how they are used, and, more importantly, what the overall impact is. I'm looking at you charities.

Right after stating that 81% of donors reduce or stop giving because of administrative overhead and how those costs are actually needed, the Burk Donor Survey goes on to say, "Responsibility for this confusion or misunderstanding lies with not-for-profits who fail to use a cost-centered approach when allocating expenses and send the wrong message by insisting on the need for unrestricted gifts to cover these costs."

Responsibility for this lies with charities. MoneySense is a personal finance magazine who (clearly) doesn't know that much about charity. That's unfortunate. But charities know this way of viewing impact (based on financial ratios) is crap and do little to nothing to correct it. That's unforgivable.

Charities should be measured on the efficiency, transparency and governance. No question. But these measurements need to be made in light of the overall impact and effectiveness of the organization first and foremost. Without that, these measurement and rating systems are just ways for magazines like MoneySense to sell more copies and mislead more donors. It's on charities to do more to communicate actual impact and effectiveness to their donors and refuse to perpetuate the current line of thinking.

So while charities are working on that and until we have a more impact focused system to rank and rate charities, here's a few ideas to help you think about your giving, how you can give smarter and just give period.

  1. Give to a friend's cause for trust.
  2. Give to the best offer for impact.
  3. Give to the best story to feel good.
  1. Follow them for a month.
  2. Make a small donation first.
  3. Get a meeting or call with staff or leadership.
  1. Give to very specific projects.
  2. Give more frequently in smaller amounts.
  3. Give with no strings attached.
  4. Give when you know who your donation will help.
  5. Give in public ways.