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!

Monday, July 22, 2013

The Nonprofitization of Business: Two areas where business can begin to learn from nonprofits

Jeremy Kohomban and I wrote the following article which appeared in the Stanford Social Innovation Review on July 3rd, 2013. The purpose of the article is to provoke thought on how nonprofit values and structure can help for-profit businesses.

"For years, especially in the business community, many have assumed that nonprofits need to adopt hardnosed business practices to become more effective. In May of 2012, we read with interest Phil Buchanan’s engaging Center for Effective Philanthropy blog post series on this topic. Buchanan expressed frustration with this thinking, which devalues the guiding ideals and contributions of nonprofits, and elevates the role of business and markets as the long-awaited panacea that can out-perform nonprofits and solve the world’s problems. We agree with much of Buchanan’s thesis. Between the two of us, we have spent a lot of time on the front lines of nonprofit management, working with high-risk and underappreciated people. Given our hands-on experience in the work and management of nonprofits, we believe that we have an important practitioner’s perspective to share on this difficult topic.

We hope to move the conversation beyond the one-sided and uninformed “business is the panacea for all that ails nonprofits” argument, and instead suggest that there is an ongoing cross-pollination between the two sectors. Business practices help nonprofits, and the values of nonprofit management and operations positively influence how businesses conduct their work. We call this “the nonprofitization of business”—the infusion of nonprofit qualities and practices into business. We are confident that the nonprofitization of business can truly make our world a better place while still providing shareholder value. We express this opinion in the spirit of collaboration and keeping in mind Buchanan’s admonition that:
The right answer is not to disparage companies, in a sort of tit-for-tat “Sector War,” but rather to point out that each sector has its strengths and limitations. There is much to be learned, and much work to do, across sectors … But we need to remember that each of the sectors play distinct, and vital, roles.

As evidence of this ongoing cross-pollination, consider the myth of surplus vs. profit. Many assume that when a business is financially healthy, it generates a profit, whereas a nonprofit generates a surplus. Many also assume that corporations pursue only profit and that nonprofits are left to work only in areas of “market failure,” where there is little or no reward. This distinction is simplistic and in many ways erroneous. The distinctions are in fact far less clear, and there is ample evidence of overlap. For example, although many business leaders vigorously defend the independence of their profits, the truth is that a significant amount of business revenues come from government investment and subsidies—$170 billion, according to The New York Times.

On the nonprofit side, half of all annual revenue comes from earned income—profit-generating ventures such as healthcare spending and college tuition. So for those who assume that the nonprofit sector has no profit-making ability or focus, the evidence speaks loudly to the contrary. Therefore, it has long been the case that business needs to provide a public benefit alongside at least some of its services, and nonprofits need to generate billions of dollars of earned income each year.

The value proposition in the nonprofitization of business falls into at least two important categories: workforce and corporate model evolution.

1. Workforce implications: There is increasing evidence that not everyone who goes into the business world is solely interested in making money. In fact, we believe that most people want a sense of meaning in their work. Courses in social entrepreneurship are gaining in numbers and popularity. Today’s MBA students, according to Dean of Stern School of Business at NYU Peter Henry, “are clamoring for more course content on the role of business in reducing world poverty and the ways in which globalization can benefit [the] poor.” One journal reports that Millennials “seek meaning from work—even at the entry level” and Kevin Thompson at the University of Connecticut writes that they “prefer having the option to learn independently or in small groups to deepen their understanding of new knowledge.” Others observe that Millennials who frequently participate in workplace volunteer activities are more likely to have higher employee satisfaction, as compared to those who rarely or never volunteer. Some experts take this reality a step further and observe that “in the long run … social and economic goals are not inherently conflicting but integrally connected.”

2. Corporate model evolution: In a Business Development Strategies post, the author writes, “The rapid development of international markets and globalization demanded a corporate ‘shake up’.” That “shake up” does not come easy for corporations still struggling with diversity and equality. This need to change or “shake up” corporate culture is magnified when US businesses operate in a foreign market with a different set of cultural values. For example, in China and India, experts observe a belief that “the human race is so intricately woven together that one person's misbehavior may harm many; they also feel and experience this interdependence.” The business model of short-sighted maximization of profits is not the best long-term approach for expansion in such a cultural context. People will require that others respect their cultural values. Nonprofit values of cultural sensitivity help corporations find the right balance. Indeed, many of the aforementioned Millenials will also expect that such a value proposition is the norm where they work.

We believe that we are seeing these two value propositions in the nonprofitization of business with the advent of B Corporations and L3C hybrids—organizational models that promise to drive social impact while earning a profit for the investor. These new corporate models can potentially address at least some of the Millenials’ workplace demands. At the same time, there are reasons why LC3s and B Corporations cannot replace the nonprofit model. For example, we believe it will be quite challenging to show how to make a profit on operating permanent housing and support services for the chronically mentally ill. So we should welcome these organizations but not make the mistake of assuming that there is a “one size fits all” solution to helping others.

In conclusion, when we compare our challenges in the nonprofit sector (such as weak management skills, frequently tight budgets, and the never ending challenges of reaching scale) to those in the for-profit sector, a typical response from our business colleagues is: “You think it is any better in the for profit realm? Well it is not!" Some suggest that these problems are even worse in the for-profit realm, which often has less of a participatory management approach, a short-sighted fixation on immediate profit over quality, and so on. But we are not going to take sides on which is better and which is worse. As the old saying goes: Let's not judge someone until we have walked two moons in their organization. Otherwise, there is no profit in it!"

Wednesday, July 17, 2013

Ken Berger Provides Testimony to Congress on "The Combined Federal Campaign: Making Every Dollar Count"

On July 10, 2013, the House Committee of Oversight and Government Reform’s Subcommittee on Federal Workforce, U.S. Postal Service and the Census held a hearing titled, “The Combined Federal Campaign: Making Every Dollar Count.” Charity Navigator's own Ken Berger, who was a member of the CFC-50 Commission which was established to review the CFC and determine what if any changes should be made to ensure its continued success, was among the witnesses. His testimony starts around 40 minutes into the video below.

Monday, July 15, 2013

What are Non-profits Doing To Demonstrate Effectiveness?

Thanks to Dr. Dennis Smith and the conference committee, I had the opportunity to present at the 2013 Wagner Philanthropy Conference. Below is my presentation (about 26 minutes in length) titled Performance Measurement and Management in Philanthropy: What are Non-profits Doing To Demonstrate Effectiveness?

The following video is the Q & A period (about 27 minutes) following my presentation. Dr. Dennis Smith participated in answering the audiences questions.

Below are the accompanying slides to my presentation.

I hope you enjoy the presentation!