That is why we think that many of Dan Pallotta’s arguments are extreme and “dead wrong.” I have more detailed explanations of my many disagreements with him here, here, here and here. Specifically on the issue of overhead, show me a nonprofit that uses 70% of its funds for overhead and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone’s pockets rather than effectively serving others. People may disagree on what the best metric of overhead should be, but to say overhead is irrelevant is to deny a useful indicator of where many thieves and scoundrels dwell. I have worked in enough nonprofits with unethical leaders to say without question that we need to get serious about their existence as more than a rarity (see the book Silence, by Gary Snyder). As noted above, this is not meant to imply in any way that overhead is the only metric donors should consider, but rather that it is an important data point.
This is exactly why, for a number of years now, we have been working towards a three dimensional rating system (which we now call CN 3.0). Specifically, we believe the three dimensions that must be considered for a social investor to have the critical information needed to make a wise decision are the charity’s:
- Financial Health (CN 1.0 launched April 2002) – Is the nonprofit sustainable? Does it have robust financial strength to survive in good times and bad? Is the overhead not at the extreme end of the continuum?
- Accountability & Transparency (CN 2.0 launched September 2011) – Does the organization have ethical practices, good governance and transparency? Is it accountable to its constituents?
- Results Reporting (CN 3.0 methodology launched January 2013) – Can the organization supply information about meaningful and lasting change in the communities and lives of the people it serves? Can they show evidence that these changes are as a result of their efforts? Do they have systems and processes in place to effectively manage their performance?
I believe that this is a critical battle for the very soul of the nonprofit sector. We MUST get past the notion that overhead is all that matters, while recognizing that efficiency and financial health is of critical importance in maintaining high performance and the best results for the long term. We MUST get past the notion of doing the “good work” with no accountability and transparency, because we know that charities without strong governance and ethical best practices are far more likely to have leadership problems. Once again, to maintain effective results we have to have these characteristics and policies in place. Finally, we MUST get past the idea that nonprofits are too complex or unique to be measured. I have seen it close up for years and it is not a pretty picture. The nonprofit sector must get its act together and make sure it is really helping provide meaningful and lasting change. It is life or death for many of those we serve whether charities are efficient, accountable, transparent and effective or not.