So, Should Donors Check Charities’ Financial Percentages or Not?

brainReading the recent New York Times “Giving” section, I wasn’t sure whether I was watching change in the making or an example of cognitive dissonance. The subject in question was how much weight donors should give a charity’s financial percentages — that supposedly key ratio of expenses spent on programs and services versus overhead (admin and fundraising) — when deciding whether the charity is effectively carrying out its mission.

On the one hand, David Wallis devotes an entire article to Dan Pallotta, founder of the Charity Defense Council, and his argument that nonprofit organizations “worry too much about keeping overhead low and pay too little to attract the most talented executives.” Pallotta describes the dramatic turn of events when “the Better Business Bureau, Charity Navigator and Guidestar issued a joint news release called The Overhead Myth. It’s an aggressive campaign to really backtrack on this history of teaching the general public to ask about overhead. And now they are saying, ‘Charities don’t need low overhead; they need high performance.’”

On the other hand, the title of this article is, “Gadfly Urges a Corporate Model for Charity,” and Wallis takes pains to point out that Pallotta is a controversial figure with some major failures in his fundraising past.

And then there was an article called, “How to Choose a Charity Wisely,” by John Wasik. It lists the various organizations that evaluate charities (mostly using the standard financial ratios), quotes a Charity Navigator spokesperson saying, “a good benchmark for a worthwhile charity is having at least 75 percent of income spent on programs, or the nonprofit’s mission,” and in the section on “Getting Granular,” advises that charities whose accounting practices include “lumping in fund-raising or solicitation with the charity’s program expenses” are “muddy[ing] the waters” when it comes to “gauging how much is really being spent on the charity’s mission.”

Oh, but the article also warns that: “Like GuideStar and Charity Navigator, the [BBB Wise Giving Alliance] cautions against paying too much attention to the percentage spent on nonprogram expenses, also known as the ‘overhead ratio.’”

Okay, so are we supposed to pay attention to these percentages or not? According to Merriam-Webster, the definition of cognitive dissonance is “psychological conflict resulting from incongruous beliefs and attitudes held simultaneously.” I think we’re seeing some of that here.

A few years from now, perhaps everyone will laugh at how attached we once were to those magical fundraising versus overhead percentages. In the meantime, for the sake of clearheadedness, it might help if everyone took a closer look at the assumption that you can divide program expenses and overhead expenses in the first place. Where’s the bright line when a development director meets with a major donor, gets that person excited about the organization’s mission, and invites him or her to participate in the organization’s work more deeply? Or when the Executive Director goes out to speak at a public event, increasing awareness of the issue the organization is concerned with?

The people and tasks that are commonly called “overhead” are, in many cases, integral to the nonprofit’s mission. This isn’t “muddying the waters,” it’s practical reality.