Caveat Emptor (Buyer Beware) & the Charitable Sector

Why we need strategic philanthropy, not just good financial records…

There has been a lot in the news over the past few months about transparency in the charitable sector.  Most of these articles end up honing in on the cost of raising a dollar, overhead expenditures and tax compliance.  While these financial issues are definitely part of the equation, they should not be the basis upon which strategic philanthropy is based. 

Addressing complex social issues is not just about the financials, it is about the effectiveness of solving the social problem.

When we invest in operating expenses, we are also investing in operational effectiveness.  This means, that the question around financials that should be asked is, how is overhead money being used? What is being expensed as overhead and how is that driving the social change issue?

For example, take an organization that is addressing youth homelessness – they might say that it costs them $100/child/month for their program and that they have a 20% recidivism rate. Another organization might say that it costs them only $50/child/month for their program and that they have a 55% recidivism rate.

Which is better?  If you were just to look at costs of running the program the $50 a month program seems better, but at the end of the day, the overall success of the program is not being achieved because their  success metrics aren’t as high.

When a charity says that 100% of the donation is going directly to programs and services, as a donor I would be concerned.  How are they covering their day-to-day operations? Will they be around in a year’s time to tell me how they used my donation if they aren’t investing in their overhead? How will they report on the program to their donors if they aren’t putting funds aside for reporting?

Why is Strategic Philanthropy important?

Strategic philanthropy looks at your social vision and how you would measure success, and then aligns that vision with organizations that will achieve your vision.  At the end of the day it’s creating a portfolio of charities.  In addition to organizations that align with your vision, Strategic Philanthropy also integrates policies around the assets in your foundation or Donor Advised Fund.  Thereby insuring that money that is generated within your charitable fund is balanced with the charitable purposes of your foundation.

In Canada there are only a few intermediaries providing philanthropic advising services. When deciding which platform or service to use, it is important to ask what the largest determinant in the evaluation equation is. If it is purely a financial equation (how well did they complete the T3010 tax form or the IRS 990 form) then this platform isn’t getting to the root of effective philanthropy.  What that type of platform is doing, is indicating whether the charity is in tax compliance.  This of course, is VERY important, but with 85,000 registered charities in Canada, and only 2200 losing their charitable status each year due to non-compliance or closure, the issue of transparency is not around tax filing, but around effective use of dollars once they are donated.

Transparency in charities is not standardized, regulated or enforced beyond a tax implication. It is up to the donor to ask the questions before s/he makes the charitable investment.  Just like in the general marketplace, a version of caveat emptor, is implied in the charitable sector.