Tuesday, February 22, 2011

Crowdsourcing, Transparency and Results Based Charity Ratings

I presented on the topic of “Crowdsourcing, Transparency and Results Based Charity Ratings: The Next Generation of Nonprofit Evaluation” at Columbia University. The audience included students, faculty, nonprofit professionals and others. This was at a conference hosted by NextGen and was held in November of 2010. The Power Point slides that I covered in the presentation can also be found below. I hope you find it of value!

Crowdsourcing, Transparency and Results Based Charity Ratings

View more presentations from CharityNav.

Tuesday, February 1, 2011

Uncharitable Webinar 2-1-11

Today, Charity Navigator’s president & CEO, Ken Berger, author Dan Palotta and Guidestar’s CEO Bob Ottenhoff participated together in a Network for Good Nonprofit 911 Webinar. They discussed the ideas presented in Palotta’s book, Uncharitable:How Restraints on Nonprofits Undermine Their Potential, including his view of CEO pay in the nonprofit sector. Below is a transcript of Ken's presentation from the webinar.

I must begin by complementing Dan, because his book caused me to review my assumptions about the nonprofit sector. In addition, I was very engaged by the book in that, if you were in a room nearby while I was reading it, you could hear me shouting frequently! Therefore, it was at least a stimulating read for me.
At the same time, I don’t recommend the book generally because I don’t think it is a good book (1) for the general public to read, (2) for those who you are new to or thinking about joining the sector or (3) for Board Members with limited experience. If you haven’t been inside the nonprofit sector for a good while and seen all of its beauty and also its ugliness, you might get swept up in what are the book’s many false and misleading arguments.

Which leads to the other side of the coin, one of the main themes in the book - over and over again was Dan’s tendency to use extreme arguments and examples that are completely inaccurate characterizations of the state of affairs in the sector (hence my frequent yelling at the book). In other words, he repeatedly sets up a phony straw man and then knocks it down. All the while I am thinking BUT THAT MAN DOESN’T EXIST (!) or so rarely that the opinions stated as facts can totally mislead an otherwise uninformed reader!!! This becomes particularly important as we see the growing interest in people desiring to transition from the for profit sector into the nonprofit sector. God help us if this is a book they base their career decisions on.

Another theme in the book is Dan’s idealization of capitalism almost as a God that can lead to self fulfillment and “stunning change” through the wonderful motive of personal gain. He counters this with the sad nonprofit sector that is restrained by the evil of traditional religion (which he claims mostly “obscures the bigger picture”) as well as a laundry list of nonprofit beliefs based on false ideology. This leads us all the way up to the present with sexism, homophobia and other horrors rounding out his bleak view of the state of things. At the same time, he presents a somewhat Pollyanna view of the nonprofits in the sector implying that we have a few bad apples but not too much to worry about on the ethical front. Well, based on my 30 years of experience working in nonprofits, as well as the reports we get at Charity Navigator almost daily from donors and investigators around the country, it is quite clear to us that we have more than a few scoundrels and thieves to worry about. Although I do not believe it is the majority of nonprofits that fit this picture, it is a substantial number. Therefore we need to be very cognizant of this fact in developing solutions to improve the sector’s performance.

Furthermore, my readings on the history of the nonprofit sector reflect a very different set of facts and conclusions about its origins than Dan’s. Whereas he seems obsessed with the Puritans as our historical fore bearers, there are many civilizations and belief systems we can point to as having an influence, including those of the Egyptians, the Romans, the Jews, the Muslims as well as Christians. All of them shared the view that helping others is a most noble, honorable and important part of life and a key part of the path to being a good, decent, happy person!

Additionally, in looking at the history of our country I think it is clear that our founders worried that unrestrained capitalism, could lead to the concentration of wealth and power along with tremendous ethical abuses. Many of their worries have been realized during our history and seem to be accelerating in some of what we see today. That is why many of them worried whether, given our natural human tendencies, we could handle the liberty of the revolutionary republic they fought and died for.

Many historians and political scientists also point to the checks and balances in our founding documents and our reliance on the rule of law as being just as critical to our country’s success as the value of capitalism as an economic engine. In summary, I am a believer in capitalism just like Dan is, but in his case capitalism seems to be his panacea to deal with all the imperfections of the nonprofit sector as well as the human condition in general!

Ironically, most experts note that a key factor in the unique development of our nonprofit sector is the related American belief in the power of the individual and voluntary associations to solve problems. At least up until recently, most Americans have not wanted a more centralized, powerful governmental apparatus, but the creative, innovative, dynamism and heart of millions of independent nonprofits operated by 10% of the American workforce, along with over 60 million volunteers. It is a distinguishing feature of our country. As a result, the size and diversity of the nonprofit sector in the United States is historically unique and vital to our political, economic and social systems. Scholars further note, that the nonprofit sector is a critical vehicle to balance out or mitigate the imperfections and potential heartlessness of unrestrained capitalism. I share this as a more historically evidence based view of the imperfect but also noble and vitally important nonprofit sector that Dan calls the poor stepsister of his titans of industry.

In addition, there is one area where Dan and I have already publicly crossed swords a couple of times (here, here and here). That is on the question of nonprofit executive compensation. Dan says we need to pay our nonprofit CEOs the same as for profits. Let them become millionaires if they perform well. That way we can get some of those of the best and brightest MBA’s to come into our sector that normally go to Wall Street or Silicon Valley. In fact he says, until we do, the most talented among us in the sector will leave. So I guess that makes me a real dummy with my MBA from Rutgers for having stuck around for 30 something years, as well as the many amazing and yes, brilliant nonprofit workers I have met along the way.

The vast majority of experts hold the view that best practice is to set nonprofit executive compensation based upon local market conditions (geography, cause area and budget size of comparable nonprofit leaders). Our data at Charity Navigator indicates that with such an analysis, the typical nonprofit CEO of a mid-to large sized organization makes a good six figure income and is already in the top 6% of wage earners in the US. So, you can live a very comfortable middle to upper middle class life style as the leader of one of these charities. But Dan seems to think we need to get into that upper class of the top ½ of 1% before we can really get the best and the brightest.

As my colleague Dr. Penna and I have argued before, we find Dan’s argument on compensation not just wrong headed but down right insulting. Just as he makes a fetish out of unrestrained capitalism, he makes a fetish out of cash over other means of securing happiness and satisfaction at work. How insulting to think that, if we make less pay than our for profit counterparts, we must be less creative, talented, intelligent and less capable of helping others. Give me a break! In fact, the research I read consistently indicates that job satisfaction comes more from the purpose or mission of what you do - a sense you are doing something that is meaningful - rather than cash.

The primary challenge in our opinion is not a lack of high priced nonprofit leaders, but rather fragmentation and inefficiency in the use of existing resources. This is caused in part by an incentivized focus on manipulative marketing and storytelling, over performance and results. In other words, we waste a tremendous amount of money in the sector each year on untested, unproven and often ineffective services, to say nothing of the scoundrels and thieves. Fixing those problems at this stage is FAR more important than throwing more money into leadership salaries. And yes, we believe you can do one without the other Dan.

I also don’t agree with Dan’s other primary solution for getting us to focus on results. He suggests that we require a fee of up to 1% be charged on all donations into the sector. Dan wants to take that three billion or so that he charges private contributors to create some sort of government or quasi-governmental behemoth to provide results based evaluations of charity performance. What a bureaucratic and hyper-regulatory solution! Then we can watch runaway for profit consultants take that three billion and create a whole new boondoggle!

I leave you with a quick glimpse of part of the dream that some of us hold, as to what the future might look like in ten or twenty years, to get us to our mutual goal of driving more money to high performing nonprofits. I hope that through the efforts of CN and others, in the not too distant future, every charity will have two audits each year - the traditional financial audit AND a results audit. This is a more grass roots, American solution that is decentralized in implementation and yes paid for by the charities themselves because they BELIEVE that results evidence is critical to performing their missions. They can also be motivated by enlightened self interest in knowing that the audit will ultimately pay for itself as more and more funders and donors will gravitate to evidence-based, high performing nonprofits.

So, as we move away from financial measures as the sole or primary dimension by which we and the public evaluates the performance of nonprofits, let all of us work together to get more and more charities to become passionate about performance management and measuring outcomes. Let us all aspire to getting everyone who does this noble work to do it for the right reasons. Let us all come to realize how critical it is to the sectors future to manage and measure what matters most – whether or not we are providing meaningful and sustainable change in the people and communities we all care about. Once we achieve THAT, we can move away from being Uncharitable.

You can view/listen to a recording of the entire webinar on Network for Good's website.

Fighting for Transparency in Canada

On December 6, 2010, I was asked to present remarks before the Canadian House of Commons, Finance Committee. This followed the blog exchange Dr. Penna and I had with Dan Pallotta (here and here). An array of nonprofits gave their rationales for why CEO and other executive compensation of nonprofit leaders should not be required to be disclosed. Below are my brief remarks on why they should be!

Mr. Ken Berger (President and Chief Executive Officer, Charity Navigator):

My name is Ken Berger. I'm the president and CEO of Charity Navigator, and I make $140,000 a year.

Our organization's mission is to be a guide to intelligent giving. So we're here for the donors.

I have to tell you—on behalf of donors in the United States, at least—that the question of the compensation of the leadership of charities is one of the most critical pieces of information donors want to know. We have over three million people who use our website. We get five million hits a year. It's estimated that we impact between $5 billion and $10 billion of charitable giving each year. The most frequent comment we get from our users is regarding CEO compensation. Every year we do a CEO compensation study, and it's because of the public disclosure of that information that we're able to do this. We provide it freely; you can download it from our website. It is without a doubt the most popular thing we do.

I just want to say that from the scandals that have occurred in the United States among well-known charities, from the Red Cross to the United Way to the Smithsonian, and others, there's been the firm belief that transparency in every area, including salaries, is one of the ways to shine a light on the scoundrels and to avoid scandals in the future.

In the United States, the IRS gathers this information. For the first time in over 30 years, they have modified their reporting form to obtain even more information, far more information and more detail on the salaries, because it has been so relevant. While the auditing of charities is a function of theirs, the fact is their ability to do this is very limited. Their staffing is limited. So we think that public disclosure, that shining of the light, is a restraint on some of the extreme outliers and abuses that are out there. It affords an opportunity for a groups like ours, and the media and others, to do investigations of those outliers and problems.

I read with some amazement an argument that's been made by some here that in the United States, because of the transparency and the fact that we now know the salaries, the salaries have skyrocketed. Well, did you know there's been an increase in the number of buffalo and a skyrocketing in text messaging in the United States?

Some hon. members: Oh, oh!

Mr. Ken Berger: The correlation between transparency and this notion of salaries.... In fact, the reason that salaries have increased is in part that in the United States there's been a dramatic increase in the amount of government contracting for charities to do the kinds of work that government has done before; and as the economy has done well—at least up until 2008—and the percentage of money that people give has grown, so have the size and complexity of these organizations. That is the way salaries get determined. According to all of the experts we speak to, the salaries are based on size, complexity, and cause. Those are the reasons that salaries go up, not because of transparency. My God, it's the opposite! Transparency helps as a brake against abuses.

So, other than that, I would argue, in conclusion, that if a charity is truly mission-driven, then when the dust settles and this information is disclosed, it will become more trusted. The most precious commodity a charity has is the trust of the public, and the public wants to know this information. Those charities that are open in this way and disclose information will garner more trust, and it will lead to a more efficient sector. The information will help all of us in making more rational decisions related to determining CEO compensation in this sector.

In conclusion, I hope we can have more disclosure in areas like this, so that the mission can be better fulfilled, rather than seeing the abuses where people's pockets get lined, rather than the world being made a better place.

Thank you.