“Change is the law of life. And those who look only to the past or present are certain to miss the future.” -John F. Kennedy
“Change is the law of life. And those who look only to the past or present are certain to miss the future.” -John F. Kennedy
Jacob Harold, on 10/21/14 3:30 AM
In 2013, I joined with colleagues at BBB Wise Giving Alliance and Charity Navigator to write an open letter to the donors of America explaining that “overhead ratios” are a poor way to understand nonprofit performance. As you know, these ratios—the percent of charity expenses that go to administrative and fundraising costs—tell us nothing about an organization’s performance against its mission.
We believed that the nonprofit sector was hungry to dispel this “Overhead Myth.” The field’s extraordinary reaction to the first letter has thunderously affirmed that belief. Today, we build on that momentum by offering a second letter, this one addressed to the nonprofits of America. In this second letter we suggest a set of steps nonprofits can take to help us all move beyond the Overhead Myth. In simple terms, we must—collectively—offer donors an alternative. We believe it will take a shared effort to focus donors’ attention on what really matters: nonprofits’ efforts to make the world a better place. Please join us as we seek to move from the Overhead Myth to the Overhead Solution.
-Jacob Harold, President and CEO, GuideStar
The preceding can also be found on the Overhead Myth Blog:
Buzz Schmidt was frustrated. As a fundraiser and a donor, he’d encountered the same roadblock: he couldn’t find the nonprofit information he needed.
Jacob Harold, on 8/5/14 6:00 AM
The following is a (slightly edited) response from GuideStar president and CEO Jacob Harold to the blog post by GiveWell co-founder Holden Karnofsky. In his blog post, Karnofsky reflects on the William and Flora Hewlett Foundation’s Nonprofit Marketplace Initiative (NMI) – specifically Karnofsky experience with it, his opinion of its strengths & weaknesses, and his take on its conclusion.
There is much debate about how to measure the effectiveness — or strength — of a nonprofit organization. Some argue that measures like percentage of “overhead” or CEO compensation tell you everything you need to know about an organization. Others, including both of us, argue that organizational effectiveness cannot be reduced to crude financial measures — that to truly understand organizational effectiveness, you need to understand what the organization is trying to accomplish, what its track record of success has been, and what its plan for future impact is.
At the heart of this debate is the critical question of trust. Donors are asking, “Can I trust this nonprofit to do what it says it is going to do?” “Will it use my resources wisely and effectively?” “Is it stable and sustainable enough that an investment in it is an investment in the future?”
These questions are both emotional and rational, and get to the core of the delicate and essential trust between donors and organizations. And while there are lots of mechanisms to help donors and organizations build that trust, we often overlook the very important role of the board of directors.
Boards — by definition — exist to preserve and protect the public’s trust. They have both a legal and an ethical responsibility to ensure that there is meaningful oversight of their organization’s operations and finances. They guarantee that the chief executive is held accountable to an independent body of individuals who protect and serve the organization’s mission and — by doing so —safeguard the public’s trust in the organization.
All too often, though, basic information about nonprofit boards is hidden from view. Left with no way to tell which organizations are following clearly established governance best practices, the public is left in the dark and organizations are subject to speculation and skepticism.
That is about to change. In a move that we believe will create a seismic shift in the public’s understanding of governance and board leadership, BoardSource and GuideStar are launching a new tool to help organizations share information with the public about its highest level of leadership: its board of directors.
Beginning today, organizations will have an opportunity to share information about their board’s practices as a part of their profile on the GuideStar Exchange. It now includes questions about board orientation and education, CEO oversight, ethics, board composition, and board performance — key elements of strong oversight and accountability. Soon, as a part of the ongoing evolution of GuideStar’s website, this information will be visible to the public in a new section of the GuideStar profile focused on “People and Governance,” creating transparency around what has all too often been hidden from the public’s view.
We hope that organizations will embrace this opportunity to share more information about how their boards are leading their organizations in thoughtful, intentional ways and help build trust with their donors and the public at large. And for those organizations that have not yet embraced the essential governance practices that are highlighted in the profile, we hope that the questions will serve as a catalyst for self-reflection and change within their boardrooms.
Ultimately, we hope that boards begin to be seen for what they truly are: an essential mechanism to ensure that nonprofit organizations are worthy of the public’s trust. And for those boards that might be asleep at the wheel, we hope that this will be a wake-up call — and an opportunity to fulfill the promise of good governance.
The preceding is a co-authored article by Anne Wallestad, president & CEO, BoardSource, and Jacob Harold, president & CEO, GuideStar. This is cross-posted on the BoardSource blog, Exceptional Boards, here. BoardSource is the recognized leader in nonprofit board leadership and supports, trains, and educates 90,000 nonprofit board leaders from across the country each year. GuideStar is the go-to resource for individuals searching for reliable information about nonprofit organizations, with more than 6 million users in the last year.
Editor's note: the following is a cross-post of Jacob Harold's article in the Huffington Post's TEDWeekends issue published September 21. You can read the original post here and the entire TEDWeekends series here. We've also posted this to the Overhead Myth Blog here.
Allow me to begin with a back-of-the envelope estimate: every year nonprofits have one billion interactions with donors in which they prominently focus on their "overhead ratio" -- the proportion of their expenses that goes to administrative and fundraising expenses.
Thus, nonprofits find themselves telling the story of work to house abused children or fight climate change... through an accounting ratio. They are responding to the tragedy of the "Overhead Myth": the common belief that such a ratio is a proxy for nonprofit performance (instead of a filter for rare cases of fraud.)
But, worse, nonprofits find that they are reinforcing that myth every time they communicate with a potential donor. Unlike Alanis Morissette's famous song, this actually fits the classic definition of "ironic": in order to raise money to do good, nonprofits highlight a ratio that constrains their ability to do good.
Indeed, the focus on overhead is more than ironic: it has very practical consequences for nonprofits. As described in a seminal article in the Stanford Social Innovation Review, the overhead myth creates a "starvation cycle" that undermines nonprofits' capacity to solve our world's most fundamental problems. Nonprofits find themselves choked by explicit or implicit funding restrictions, and sometimes even starved to death by under-investments in infrastructure.
And yet, there are glimpses of light. We've seen multiple examples of work to shift donor behavior. This summer, I joined with the CEOs of Charity Navigator and the BBB Wise Giving Alliance to write an open letter to the donors of America denouncing the "overhead ratio" as a valid indicator for nonprofit performance.
We will continue our work to educate donors and change this conversation. But we need nonprofits' help. We understand if they -- temporarily! -- feel compelled to continue sharing the overhead ratio in their fundraising materials. But if we're going to move beyond the Overhead Myth, we need to begin to offer donors an alternative. Help donors pay attention to the factors most relevant to nonprofit performance: transparency, governance, leadership, strategy, measurement, and results.
In particular, nonprofits can join the 95,000 organizations that have shared information through the GuideStar Exchange -- with 43,000 achieving one of our three levels of participation (Gold, Silver, or Bronze). Gold-level participants answer the five Charting Impact questions to populate the impact tab on their GuideStar nonprofit report. And through their own materials, nonprofits can begin to cite meaningful data about results instead of the overhead ratio. (Donors have other great resources available, too --they can find top nonprofits identified by Philanthropedia, GreatNonprofits, or GiveWell.)
The shift to a results-based approach to philanthropy will take time, but the path ahead is clear. Instead of promulgating the myth that low administrative costs are associated with high performance, let's focus on helping donors give with both their hearts and their heads.
It's time to retire the overhead ratio in favor of a multidimensional, impact-oriented framework to achieve what really matters: getting more money to the best performing organizations.
Ideas are not set in stone. When exposed to thoughtful people, they morph and adapt into their most potent form. TEDWeekends will highlight some of today's most intriguing ideas and allow them to develop in real time through your voice! Tweet #TEDWeekends to share your perspective or email tedweekends@hufﬁngtonpost.com to learn about future weekend's ideas to contribute as a writer.
Click here to read an original op-ed from the TED speaker who inspired this post and watch the TEDTalk below.
Jacob Harold, on 7/22/13 1:20 PM
There’s the often-quoted parable of the three wise blind men touching an elephant and describing it: one touches the tail and says the elephant is a rope; one touches a tusk and says it’s a pipe; one touches a leg and says it’s a tree trunk.
This parable is usually told to illustrate the importance of perspective: individuals can perceive the same thing in different ways. But there’s another lesson here; one the nonprofit sector needs to embrace. That lesson is this: a full understanding of anything complex requires that we bring many perspectives together.
In the nonprofit sector, we’ve been blind in our sole focus on the overhead ratio. A nonprofit’s overhead ratio is kind of like the left front knee of an elephant: it’s an important part of a nonprofit’s makeup, but it’s not even close to the whole story.
In the nonprofit sector in general – and at GuideStar in particular – we face the challenge of figuring out how to articulate a holistic view of nonprofits. And if we are to truly replace the Overhead Myth, we must offer an alternative which reflects the full richness of individual nonprofits – and the nonprofit community as a whole. And, then, we have to actually collect enough data that donors and volunteers and journalists and nonprofit leaders can actually use.
Luckily, there are many efforts that are helping understand pieces of this broader puzzle: transparency (GuideStar Exchange), impact data collection and story-telling (Charting Impact—now part of the GuideStar Exchange), expert surveys (Philanthropedia), third-party analysis (GiveWell), stakeholder reviews (GreatNonprofits), star ratings (Charity Navigator), accountability standards (BBB Wise Giving Alliance), and many others. Our challenge is to take these pieces and bring them together. Our hope at GuideStar is to grow our GuideStar Exchange program into a common “profile” for the field—so that people can find what they need about a nonprofit in one place and nonprofits only have to provide their information once—and to supplement that with many types of analysis from these colleague organizations.
Over the next few months, we’ll be working to offer a clear framework for how the nonprofit sector can bring together these many parts of the elephant into a much greater whole.
The above is cross-posted on the Overhead Myth Blog: http://overheadmyth.com/how-the-overhead-ratio-is-like-the-left-front-knee-of-an-elephant/.
My nonprofit friends, it’s time we changed the conversation about “the overhead ratio”: the percentage of your organization’s expenses that go to administrative and fundraising costs.
For too long, we’ve let a few bad apples—the rare cases of outright fundraising fraud—confuse donors about what matters when judging a nonprofit.
This confusion is actively harming the nonprofit community, creating what the Stanford Social Innovation Review called “The Nonprofit Starvation Cycle.” Experts agree that many nonprofits should invest more in overhead, particularly administrative costs. You all know this as well as I do: you need to invest in your organization to be able to effectively serve your missions.
My counterparts at BBB Wise Giving Alliance and Charity Navigator, Art Taylor and Ken Berger, respectively, have joined me in signing an open letter to the donors of America denouncing the overhead ratio as an indicator of nonprofit performance—though recognizing its rare utility as a filter for fraud.
The letter, published today on a new website, www.overheadmyth.com, states that “Overhead costs include important investments charities make to improve their work: investments in training, planning, evaluation, and internal systems—as well as their efforts to raise money so they can operate their programs. When we focus solely or predominantly on overhead…we starve charities of the freedom they need to best serve the people and communities they are trying to serve.” The letter instead recommends that donors focus their attention on more relevant factors behind nonprofit performance: transparency, governance, leadership, and results.
I ask you today to stand with GuideStar, BBB Wise Giving Alliance, and Charity Navigator to end the Overhead Myth. You can support the campaign in four ways:
Will you join us in the campaign to end the Overhead Myth? Please leave a comment below!
The above can also be found on the Overhead Myth campaign blog: www.overheadmyth.com/blog.