Donors Don’t Know They Are Choosing Charities All Wrong, Says Study

Despite the attempt in recent years to re-educate the public about the “overhead myth,” most donors still rely on the wrong signals when deciding where to donate.

That’s the conclusion of a recent study by the BBB Wise Giving Alliance, the branch of the Better Business Bureau that attends to charitable organizations.

Study Results

In this study, 46 percent of the respondents said they still depend solely on financial information to select their charities. Twenty percent cite ethics as their determining criteria; 14 percent use name recognition to make giving decisions; and only 11 percent look for results.

Experts all now agree that the overhead ratio of a charity’s finances is a poor barometer of its health or its ability to fulfill its mission. 

The overhead ratio has to do with the amount of money a charity spends on activities like fundraising and marketing (but it can also have to do with keeping the rent paid and the lights on) compared to the money it spends on actual programs and services. The rule of thumb used to be that charities should keep overhead as low as possible and spend as much money as feasible on direct services.

Unfortunately, that turned out to be short sighted, resulting in the terrible condition known as the starvation cycle. Many charities were cutting themselves off at the knees, keeping salaries low, letting their tech capabilities deteriorate, and living with outdated methods and facilities. It could mean a slow death spiral. 

We now know that charities need to spend money just to stay in business. They have to invest in infrastructure, talent, marketing and fundraising to both provide good services and keep their wheels turning. The final grade for any charity should rest on how well it gets its mission accomplished, not on a boiler plate set of financial numbers.

Donors Still in the Dark

That message has yet to reach many donors.

Art Taylor, president and CEO of BBB Wise Giving Alliance said, “Donors using only one piece of information may have a false sense of confidence….It is best to holistically review a charity before donating.”  

That can be a daunting task for the average donor. The information is often scarce or scattered so making a “holistically” correct giving decision can be hard.

There is help though. The BBB Wise Giving Alliance evaluates charities on more than 20 variables and maintains a database of reports on many charities. A donor can look for the BBB’s badge on a charity’s website or use the database to find how a particular charity scores. CharityNavigator also evaluates nonprofits on a variety of measures that include financial information, transparency and effectiveness.

But the fact is that not all charities are evaluated by a third party. The BBB only evaluates charities that solicit nationwide and charities have to ask for an evaluation. Charity Navigator gets to a few hundred charities per year and has seven thousand charities in its database.

There is still no truly easy way for one to check up on the nonprofit down the street. Until that happens, most donors will settle for quick and easy ways to determine which charity to donate to, even if they are making those decisions with less than “holistic” criteria.

Most people spend more time planning their vacations by checking out airlines, hotel rooms, and amusement parks than they do investigating the charities they donate to. But there are pretty easy ways to do all of that. Heck, it’s even darn easy to determine which stock to buy for our retirement account, or which car best fits our lifestyle.

The charitable world in contrast remains fairly opaque to most people. Donors can hardly be faulted for not digging into 990s, annual reports and complex data to determine how well a charity does its job. And, really, are terms such as “overhead ratio” and the “overhead myth” going to become dinner table topics? To convert donors to better methods of choosing charities, we need easy, comprehensive tools for judging charities and language that most people can relate to.  

Meanwhile, most of us mainstream donors tend to rely on reputation, the word of our friends and family, how well a particular charity communicates with us, the fact that it is close to us, or that we have had a wonderful experience with it. Honestly, until we have better ways to compare charities, those criteria are not all that bad.

If you would like to be a better informed donor, do read Your Guide to Safe Charitable Giving. Also check out some of the new ways of giving that make it all seem less like a gamble and more of an investment.  

Categorized as Funds

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