I recently had a discussion with Mr. Colin Glassco of the Colin B. Glassco Foundation for Children.  I was interviewing him for a book I am writing on strategic philanthropy.

Our conversation meandered in and out on the topic of effective philanthropy and the reporting obligations of charities to their donors.  One of the overarching themes of our conversation was around overhead.  Colin's foundation is uniquely structured such that 100% of external donations go directly to the projects that the foundation manages (currently building water wells and schools in Zambia benefitting a tribe called the Tonga).  As Colin personally finances the overhead and administration expenses of the foundation to the tune of approximately $40,000/year (he does not draw a salary which helps keep costs low).

He added that because he looks after all the administration expenses the donors are not so concerned with this aspect however they are very interested about is HOW efficiently their money is being invested in each project.

In this regard, I asked Colin, how he reports this back to his funders:

The Glassco Foundation project donors are provided with feedback through DVD's, photos of the project, letters and updates and Colin personally visits each well site and project space at least once per year. In addition, Colin provides information on the foundation's website. (Photo curtesy of Hector Gomez). 

 

His goal he stated is to, "Have the donors feel that they have been to Zambia without quite being there."  This organization is not only managing their donor dollars effectively, they have also made a personal commitment ensuring that projects are being completed in as efficient a manner as possible.

So what can we learn from this?  As donors, whether we give $25 or $25,000 it is important to know how much it costs the recipient organization (foundation or charity) to manage our donations.  It is important, not only so that we are holding the recipient agency accountable for how they invest our money, but also so that we have a clear understanding of the business behind the philanthropy.

Let's do a case study - Would you invest in a company that you know will generate your 5% return annually, but there have been some questionable dealings as so how that business is operating?  If you are reading this blog my guess is that your answer is probably no. 

The same goes for charities.  Would you invest in a charity if you knew that it costs the charity more to secure your donation and disburse it than the actual value of the gift (even if the costs for securing and disbursing were covered by another source)?  Again, my guess is no.  Why?  Because it goes directly to our core understanding of good business - return on investment.  We will not invest our money if we think that there are ethical questions around it just as we won't give to a charity if we think that they are spending too much money administering the finances.  Extrapolating this one more level, we might even begin to question the effectiveness of our donation even if 100% of it is going directly to a project or service.  If the organization cannot manage its overhead, what is to say they are not properly managing the expenses of the project? 

Charity Intelligence uses a formula identifying the proper overhead to project expense ratio.  Published on their website, Kate Behan shared with me how they do this:

They call it program cost coverage.  This is the ratio of funding reserves to annual program costs and shows whether a charity has funds that exceed its annual needs.  In her opinion, it is best to support charities that, "have a program cost coverage ratio of between 25%-100%."  Anything over 100% means that your donated dollars will not be used in that year and will be banked for future programming.

In addition to program cost coverage, they use a similar model to that of Dexterity Consulting in determining a charity's value.  As articulated by Ci, a charity is valued with the following formula:

Total Charity Value = Donated Money + Donated Time + Donated Goods

"Charities typically use administrative staff to do all the necessary tasks of running the office, while the staff and an army of volunteers run the programs and provide the service.  Yet volunteer time was "off the books" and not recorded in the financial statements."  This means that for a small charity the administrative costs might be skewed to the higher end because the volunteer receptionists hours would not be included in the overhead costs and yet that receptionist is freeing up time so that the Executive Director to do her job of running an organization.

On a related note - I was recently in a blog conversation on Tactical Philanthropy with Sean Stannard-Stockton and fellow bloggers - Brendan and Chris on salary compensation in the non-profit sector.  In a focus group I held in Calgary there was a comment made by one of the participants that in her research she had learned that a salary for a top-level non-profit sector employee should not exceed $60k in the mindsets of those she interviewed.  So here's the question - what is it about compensation of staff that donors find so abhorrent?  What value standards are we using to measure fair compensation?  Is my master's degree worth less because I am using it in the charitable sector than in the corporate sector?  What if I were to use it in the government sphere (okay I hear the jokes already)?  Knowing that my salary would be capped at $60K would I be as inclined to keep moving up the charitable sector ladder?  How could we attract and retain other individuals if they knew from the beginning that in their lifetime in the charitable sector they would never exceed the $60K threshold?

 

Just some food for thought for when you think about how you value a charity.

 

Looking forward to your feedback and comments.

I was planning on writing this piece before the Bell Canada Enterprises (BCE) deal was stopped by the courts and their stock tumbled.  The concepts are still the same, if the dollar figures are not.

Until recently, BCE stock prices had been making considerable gains and if the sale had gone through shareholders would have had to sell by the end of this calendar year.

Any sale of stock where there is a net gain is subject to capital gains tax.  This tax is applied to 50% of the shares sold and as a result the seller can be paying upwards of 24% tax on the money earned.  So how can you avoid paying tax on the gains?

In 2006 the Canadian government passed a bill ensuring that donations made to a registered charity by way of publicly-listed securities are 100% free of capital gains taxes.  By donating a portion (or all) of the taxable amount to a charity through stocks the donor not only receives a tax receipt for the donation (tax credit) but they also do not pay the taxes on their earnings AND they generate additional social capital through the investment in a charity that is benefiting society.

BCE aside, any stock that has seen considerable gains (EnCana) over the past year can be used in this example.

(All figures are rounded and approximate)

Let's say you sell 5,000 shares at $30 with an adjusted cost/share of $14 and the tax credit rate is 46%.  Total value of the sale is $162,500.

If you DO NOT donate your stocks to charity you will be paying capital gains in the amount of $46,000 (total capital gain recognized $92,500 - after $70,000 adjustment).  This leaves you with $141,000 to reinvest back into the stock market, add to the economy by purchasing a new car or going on a nice holiday.

If you DO donate your stocks (or a portion thereof) to charity you will be paying capital gains in the amount of $0!  How does this work?

You determine what your taxes would be on selling 5000 shares (in this case $46,250) if you didn't make the donation.  Now here is where it gets tricky...

Then you donate IN-KIND a portion of that value in shares to a charity(ies) of your choice.  This amount should be the value of the charitable tax credit that you would like to see offset your capital gains AFTER you have set up a donor advised fund.  Keep reading, it makes sense...

So let's say that you decide to donate 1200 (of the 5000 that were in scenerio 1) shares at $30.  After adjustment the capital gain recongized is $20,000.  You aren't paying tax on the capital gains and you receive a donation credit of approximately $16,000.

With the remainder of the share (just over 3800 totalling 5,000) you sell those shares.  The adjusted sale is $72,000 and the capital gains is $16,000.  You have a $16,000 tax credit from the donation of stocks in-kind to a charity that offsets the capital gains you with $126,500 in cash to reinvest, buy a new car, or go on a very nice holiday!  AND you have $36,000 in your charitable fund or foundation (the initial portion that you donated through your fund to a charity(ies) of your choice earlier).  The net total exceeding ($162,500) what you would have if you had just sold off the shares without developing a funding strategy.

Phew that was hard... Drop me an email if you have questions.

Here's to generating social capital!

An article I wrote for OnPhilanthropy.com is now posted.  The direct link is: http://www.onphilanthropy.com/site/PageServer.

More blogging to come...