We have an unhealthy relationship with charitable giving. Giving USA reports that Americans donate about $300 billion annually to nonprofits-averaging about $1000 per person. We love the charities we give to and feel good when we give to them. This is a nation of do-gooders.
At the same time, philanthropy is broken and almost everyone knows it. The causes that receive the most donations are not necessarily the ones that make the greatest impact. Instead, the personal whims and preferences of donors determine where dollars flow regardless of need or impact. Donors typically have confidence, which is largely based on reputation and trust, in the organizations to which they give. Many donors do not know how to define a “high performing” nonprofit, let alone how to identify one or assess whether there are more worthy charities. The donor community has a reputation for responding to inspirational anecdotes in professionally-written fundraising material rather than asking for meaningful evidence of performance; simultaneously, they express concerns about high overhead costs and program effectiveness. Philanthropy is broken, and it needs to be reinvented.
But how? There are three key areas that can create a domino effect of improving charitable giving.
1. There must be greater honesty about charitable giving. Although the media often reports on fraud and waste in the charitable world, such instances are not the most problematic lack of honesty. The larger issue is more common and very subtle. For example, today’s dominant paradigm of giving is that donors give to the causes they care about and have personal ties to–the university they attended, the illness that touched their lives, or the nonprofits promoting the type of art or music they enjoy. This type of giving itself is not dishonest, but the fact that so few people acknowledge that giving based on the personal preferences of the donor dramatically reduces the impact of the donations. While these are “good” causes, this type of giving is very different from trying to make the biggest dent in the causes that are most effective at helping others.
Is philanthropy about helping those in need or pursuing the personal passions of the donor? If it is the former, then shouldn’t a central tenet be to try to provide the most help possible? In this case, such donor-driven strategies should be widely regarded as failed philanthropy.
Being honest is not just about not lying, but also requires a certain level of frankness. Not every good cause is equally good, and not every donor is equally deserving of praise. As long as the philanthropic community views those who donate millions to their favorite opera houses to be as generous as those who help the poorest people in the world, there is a lack of honesty. We should reserve the highest public praise for donors with the most altruistic motives and better understand our own reasons for giving. This type of honesty would lead donors to be less whimsical and more thoughtful about their giving choices.
2. There must be better ways for donors to evaluate nonprofits. Although there are several charity rating agencies, their weaknesses are often so glaring as to make them virtually useless. Most focus almost exclusively on financial metrics such as the percentage of donations going to fundraising and overhead costs. This is far from a good measure of performance–just because a charity only spends 10% on fundraising and overhead costs doesn’t mean the programs funded by the remaining 90% are effective. Even among the charity rating agencies that have advanced beyond pure financial measures of performance, most give their top ratings to hundreds of extremely different charities, effectively watering down the value of their ratings and expressing little conviction about what really works best. These rating agencies can be counterproductive to their own missions, as they give donors a false sense of confidence when providing high ratings for charities that may not be very effective.
There are only a small number of charity evaluators that present their views of the best of the best charities; the most notable are GiveWell and Giving What We Can. More of these evaluators, as well as a higher profile for the existing ones, would go a long way to make charitable giving more effective. Such charity evaluators will develop and thrive as donors express more interest in them.
3. Donors must take more responsibility for the impact of their giving. According to a study by Hope Consulting, only 35% of donors do any research before giving, and only 9% do more than two hours of research. Instead of giving with all “heart” and no “head,” a better balance is needed. Donors must think about not just what causes tug at their hearts, but also what are the greatest problems and where are charities most likely to make an impact. The irony is that as donors make their giving decisions based less on emotional appeals and more on evidence about what works best, the increased conviction they have in their giving will ultimately provide even greater emotional satisfaction.
A reinvented, better world of philanthropy will not happen overnight. But it can happen gradually, as one donor at a time takes responsibility for their own giving.
Eric Friedman is an individual donor who has spent several years trying to understand how to maximize the impact of his giving, including traveling to Africa to see his giving in action. He is also an actuary. He graduated from Stanford University with majors in mathematics and economics. He lives in Oak Park, Illinois.