Tuesday, July 30, 2013

Ken's Bodacious Dream for the Social Sector

In the following blog post, which was originally published on MarketsForGood, Ken Berger provides a spot check on the state of charitable giving and the information that is shaping how organizations are evaluated and perceived.

Eric J. Henderson, Conversation Curator, Markets For Good (EJH): You were recently interviewed on Fox Business News to discuss fraudulent fundraising for charities, highlighting “The Worst Charity in America.” What is the state and scale of fraudulent donation activity today?

Ken Berger, President & CEO, Charity Navigator (KB): Having spent almost thirty years in direct service and then nonprofit management, before I joined Charity Navigator, I was struck by the amount of questionable, unethical and outright fraudulent practices undertaken by many nonprofit leaders. My five years at Charity Navigator has only reinforced my impression that the problem of nonprofit fraud as well as questionable activities is significant and the sector has yet to take it as seriously as it should.

Based on these experiences, I believe the investigative reports conducted by the media reflect the tip of the iceberg of the problem we face. It is not a rarity as some claim, it is a BIG problem. I am not saying a majority of charities fit this profile but far too many do. However, state and federal regulatory and enforcement entities are under funded and therefore barely capable of keeping on top of the problem, while the nonprofit sector continues to grow at a rapid pace (faster than the for profit sector over the past decade).

The nonprofit sector typically reacts to problems of fraud and mismanagement through its trade associations which develop standards that it is up to individual nonprofits to voluntarily sign on to. Many do not. My direct answer to your question, given the state of affairs I have just described, is that it is and should be a major concern for donors. For many average donors, this state of affairs causes mistrust and a search for who can help them to identify good charities. With the explosion of easily accessible information many donors are overwhelmed and struggling to find their way. The challenge is to find meaningful information that will direct them to ethical and high performing charities in spite of these realities. We at Charity Navigator struggle mightily each day to try to do just that.

One way forward is for charities to be more transparent. The more transparent a charity is with information that it shares with donors (warts and all), the more valued and trustworthy it is and therefore the higher the rating we anticipate it will receive from us. Higher ratings by Charity Navigator will drive more money to these more transparent organizations that are innovative and take risks, and then learn from their outcomes (positive and negative) to get to the best results.

EJH: You’ve been a pioneer in research and reporting on nonprofits with Charity Navigator. In that context, what do you see as the first steps in upgrading the information infrastructure for the social sector, especially as it relates to assessing nonprofit performance?

KB: There are many pioneers out there who have been kind enough to lend their wise counsel and support to our efforts. In many ways they spurred us on to this effort. Anyway, I think there are two critical first steps in upgrading the information infrastructure.

First, funders have got to be willing to provide serious financial and technical support to charities as they work to build the required performance management and measurement systems necessary to supply meaningful information on their outcomes as well as to do the best job they can at meeting their mission! Funders (at least the larger ones) should strive to become role models for having these systems in place within their own organizations as well.

Secondly, charities have got to change their tendency toward “duck and cover” (discussed in response to your earlier question) when it comes to supplying this meaningful information publicly. Before we started down the road to measuring results (and we are not measuring results directly just yet) we were criticized by some within the sector for not focusing our rating system on what mattered most (the results of a charities work).
After years of research we concluded that, although that sounds reasonable, we had been asked to do the impossible, because the vast majority of charities do not publicly report meaningful evidence of their results. Furthermore, for many charities, it is because they have not yet built the performance management and measurement infrastructure to have anything to report on!

For those high performing charities out there, we hope the newest dimension to our evaluation system (focused on the quality of how a charity publicly reports on its results) will begin to untie this Gordian knot. As a consequence we believe we will help the sector move toward a greater focus on managing, measuring and reporting on its results as well as beginning to identify the best standards of evidence based practice for each type of program. I cannot think of any other information related priorities more important than this effort. In fact, Paul Brest, who recently stepped down as head of the Hewlett Foundation has described the work that Charity Navigator is doing in this are as “the most important work that is going on in the nonprofit sector”. Who am I to argue?

EJH: With Charity Navigator, how have you dealt with the tendency to rely on high-profile metrics, such as the overhead ratio? What other information would you counsel individual donors to rely upon – ones that may give a reliable view of organizational health and performance?

KB: Excellent question! The best answer I can give you can be found on our website with the launch of what we call CN 3.0 on January 23, 2013. You can find a concept note, methodology and a sample of a few charities we have already run through the evaluation. In summary, we believe that for a donor to make a wise charitable giving/social investment decision they need to consider three types of accountability – financial, organizational and mission related. But that is inside baseball talk. On the website we call these three dimensions of our evaluation system (1) financial health (not just overhead), (2) accountability & transparency (especially governance and ethical best practices) and (3) results reporting (especially outcomes). Of course the question of a charity’s results is the most important dimension of all and we intend to weight it accordingly once we get to the point of integrating it into a charity’s rating (a few years away for now, we only plan to post the information on this dimension until we have gathered it on all the charities we rate, for a variety of reasons). Anyway, go to our web site and check it out!

EJH: With nearly thirty years in the social sector, what would be your biggest wish regarding how we use information? What changes do you believe are needed for information to be used to be used in this way?

KB: My simple yet bodacious dream for the social sector (especially 501(c)3’s) is that in perhaps ten or twenty years it will become standard practice for every charity of a certain size to not only conduct a financial audit, but also a results audit. Of course this will require the hard work of our developing agreed upon standards of reporting and measurement for every type of program out there. It is also expected that this results audit would be publicly reported.

Once we achieve that, we can then conduct the challenging work of comparing the performance of one charity against another by program. In addition, charities will be able to learn much more from one another to discern what are the most effective evidence based approaches to achieve the best outcomes. Why does this matter? Because I believe it can greatly increase the efficiency and effectiveness of our precious social sector. As a consequence many more charities will provide evidence of social value (meaningful change in people lives and in communities). Therefore, we will have a much better world as a consequence. Then I can retire and rest!

EJH: Many thanks, Ken!


Gary Snyder said...

Great...right on target. Thanks

William said...

May we please dream bigger than results audits and measurement standards "in perhaps ten or twenty years"?! Steven Goldberg's 2009 book, Billions of Drops in Millions of Buckets: Why Philanthropy Doesn't Advance Social Progress," documents the futility of not broadly reconceiving philanthropic capital markets in a more efficient form. Goldberg asserts the obvious when he points out on page 14 that "Even when a nonprofit makes the effort to show measured improvement in impact, it does little or nothing to change their funding picture." Why? Because the nonprofit capital market is structured by institutions that do not require social impacts to be either comparable in standardized measures or expressed as standardized products that can be priced. The results include an inability to execute systematic total quality management and markets that cannot tell good outcomes from bad.

We need common currencies for the exchange of the human and social value created in nonprofit markets. The cost of actually structuring human and social capital transactions in the absence of such currencies is so large that no one even tries to do so.

Goldberg (pp. 94-95) contrasts financial and nonprofit markets in the following terms:

Financial markets
1. Market aggregates and disseminates standardized data
2. Analysts publish rigorous research reports
3. Investors proactively search for strong performers
4. Investors penalize weak performers
5. Market promotes performance
6. Strong performers grow

Nonprofit markets
1. Social performance is difficult to measure
2. NPOs don't have resources or expertise to report results
3. Investors can't get reliable or standardized results data
4. Strong and weak NPOs spend 40 to 60% of time fundraising
5. Market promotes fundraising
6. Investors can't fund performance; NPOs can't scale

The technology for scientifically rigorous social measurement has been around for decades; see the work of Rasch, Wright, Andrich, Duncan, and their students. Past this body of work, we need to link the calibrated instruments together so they measure in standardized units. This is metrology, which is hugely expensive and requires a broad social base of support. Basically, NIST needs a new division for human, social, and natural capital metrics, and accounting standards need to be expanded to require use of these metrics in financial spreadsheets.

For more information, see my publications and NIST, NSF, and 2011 World Standards Day white papers, all of which are linked in my blog posts on this topic, such as: http://livingcapitalmetrics.wordpress.com/2012/08/24/review-of-cdir72/.

Ken Berger said...


I have been a big fan of Steve Goldberg ever since his book came out. In fact, it is on our recommended reading list which is on the right hand column of this blog site.

Steve also provided pro bono consulting services to Charity Navigator when CN 3.0 was just a glimmer in our eye and even coined the term CN 2.0! So I am all for the bigger dream that he articulates.

However, I also have spent 30 years in the trenches in the nonprofit sector and I think I have a decent sense of what is and is not doable in the intermediate term. We need a simple, clear goal to set for ourselves that we can get a groundswell of effort to push toward.

I believe the vision Steve articulates can follow that, because I do not think you can have a meaningful social capital market without some consensus on standards of measure of results and an adequate supply of organizations who provide it. I also think we overstate the complexity of getting there because larger nonprofits (that 1% of charities that get 86% of the revenues) have ample resources to make it so.

Anyway, please feel free to dream bigger than me and suggest an alternative path to the result we both desire - a more efficient and effective nonprofit sector. I think the bottom line is, all of us who have these comparable views need to work together whenever possible to make those dreams come true.