Getting Something for Nothing

Sometimes relatively insignificant measures can assume an absurdly disproportionate importance.

For decades U.S. News and World Reports has been ranking the country’s top universities and colleges. These rankings have taken on great importance to college administrators, who routinely crow about moving up in the lists and who stay awake at night worrying about dropping down a notch or two. One of the qualities the magazine measures in compiling these lists is “selectivity” – that is, how hard it is for high school seniors to get admitted. The more selective the college, the better. And one of the dominant methods by which U.S. News and World Reports calculates selectivity is tracking the percentage of total applicants who are admitted.

Consequently, one of the easiest ways for schools to move up in the rankings is to do whatever they can to attract more applicants. Having more applicants lowers the percentage of acceptances and makes the school appear to be more selective, which in turn attracts a greater number of (status-seeking) applicants the next year, which reduces the percentage of those accepted once again, all of which which raises the institution yet higher in the rankings. So a single, easily manipulated measure affects an important (if deeply flawed) ranking system, which then feeds back to influence that measure and the ranking system still further.

Manipulation of these rankings came to mind when a report recently hit the internet about how a remarkably high percentage of nonprofits, including those raising lots and lots of money, report spending nothing – zero! – on fundraising expenses on their IRS 990 tax forms.

Neat trick, that, raising money without spending a penny. In fact, according to the study, 41% (that’s not a typo) of nonprofits with budgets of $1 million or more report that they spent not one dollar on fundraising costs.

For those of you who have never had the pleasure of filling out a 990 tax form, let me explain that there is a section where the organization needs to categorize every dollar spent into one of three areas: “Program services,” “Management and general expenses,” or “Fundraising expenses.” So if you do a mailing asking for donations, the cost of designing, printing, and mailing that piece are fundraising expenses. So too, of course, should be the staff time that goes into that work. Common sense justifies this expense: without the effort to ask for money, few donations will arrive. Yet somehow that lucky 41% of nonprofits report that they raise their funds immaculately – without any expenditure of money whatsoever.

There are many reasons organizations make this rather astonishing assertion, but undoubtedly one enormous driver is the preoccupation that the general public has with fundraising overhead. Fundraising costs have become a proxy for the careless spending of donated dollars. As Dan Pellotta has pointed out in his book, Uncharitable, the obsession that people have for keeping nonprofit overhead low has kept many organizations from raising enough for their mission. Pellotta rails against this approach and essentially asks: is it better for an organization to spend $10,000 (10%) to raise $100,000 or $150,000 (15%) to raise $1,000,000? Most people, in thinking about it, would say that the second scenario serves society better. But most people don’t think about it.

Instead, people obsess about fundraising overhead. And this has gotten worse with the advent of well-intentioned but, to my mind, deleterious efforts like Charity Navigator, an on-line service that rates nonprofits according to certain ratios and measures.

One of Charity Navigator’s central measures of a nonprofit’s value is “fundraising efficiency,” or how much an organization spends to raise the money it brings in. As Charity Navigator explains, “Financially effective charities must in part be efficient fundraisers, spending less to raise more. We calculate a charity’s fundraising efficiency by determining how much it spends to generate $1 in charitable contributions. In other words, we divide a charity’s fundraising expenses by the total contributions it receives.”

Some people believe in the power of faith, or democracy, or the value of hard work. The folks at Charity Navigator believe in fundraising efficiency. Their core belief is that a nonprofit should spend less than 10% on fundraising. Period. But I would bet that even Charity Navigator doesn’t think the percentage should go below 1%, because at that point even they would have to admit that the charity is lying. And lying in determining your fundraising costs is pretty easy to do: you simply manipulate what portion of each staff member’s salary is directed toward what. These figures rely on self-reporting and are usually not questioned by the IRS, though some state regulators seem much more effective than others in encouraging more candid results.

The rewards for honesty are more muted than those for getting a high score on Charity Navigator. A simple ratio is easier to measure than organizational effectiveness, so we latch onto it. In this high-tech interconnected age, where information is plentiful but real knowledge is hard to find, going to a website where nonprofits are rated on a simple scale of one to four stars is comforting and convenient, if largely meaningless.

As the adage goes, “Not everything that counts can be counted, and not everything that can be counted counts.” What everyone wants to know is: How good is the nonprofit at getting the job done? How well do they use my money? It’s complicated to answer these questions, and in their effort to come up with a simple answer, people confuse effectiveness with efficiency. And in embracing efficiency, we get overly simple answers that carry a ridiculous amount of weight. The fear of how people will interpret those answers consequently drives many nonprofits to underreport their fundraising costs.

I’m not at all condoning the slight-of-hand that seems to have overtaken the way nonprofits fill out their 990s. But, as with college administrators who game the system to move up in the national rankings, you understand why it’s happening. If you elevate a fairly unimportant number into the be-all-and-end-all for evaluating an organization, people will do extreme things. Even pretending that they didn’t spend a penny to raise a dollar.

Copyright Alan Cantor 2012. All rights reserved.

Why Mergers Make Sense… On Occasion

With funding cuts and rising demand for services, nonprofits are in a bind. One reaction – which sometimes makes sense, but often doesn’t – is to consider merging with another organization. After all, if the combined organizations paid only one CEO instead of two, and one CFO instead of two, and if they merged their back shop operations, there would presumably be efficiencies.

Funders love encouraging mergers, partly to improve these efficiencies, partly to avoid confusion in the community about who is providing which service, partly to cull the weaker nonprofits, and partly, I assume, so they have fewer potential grantees to choose between. And grantees, at the very least, have to pay lip service to what their funders are saying. But do nonprofit mergers really make sense? It depends.

There are some appropriate mergers where the two organizations provide a complementary piece to one another. For example, say there’s a small organization that has preserved and oversees a large wetlands area, and another small organization that provides hands-on environmental education to kids and adults. It’s a match made in heaven: turn them into one organization that uses the wetlands as the base for their educational work. As the line goes in the Austin Powers movies, “You complete me.”

Another promising situation for a merger is where a very small organization is providing a  valuable service, but it simply doesn’t have the size to be economically viable. It’s logical to merge that tiny entity into a larger umbrella organization that has the strengths of scale: viable finance, IT, development, and HR departments — and reliable funding sources.

Then there are proposed mergers of organizations of similar size that provide similar services in the same geographic area. These can be more challenging.

If you’re a board or staff member of an organization contemplating a merger – or being pressured to do so – check out Thomas A. McLaughlin’s Nonprofit Mergers & Alliances. McLaughlin talks about two kinds of nonprofits – the “prototypers” and the “industrializers.” Prototypers are young organizations in relatively new fields, such as community economic development or climate change activism. They tend to have a dynamic CEO who sets the tone. They’re opportunistic: something comes along that fits their mission and they hop right to it. In the best of ways, they’re making it up as they go along. They’re characterized by innovation, experimentation, quirkiness, and enthusiasm. And, to critics, they may come across as scatter-shot and impulsive.

Industrializers, on the other hand, are older organizations in established fields. They provide known, tried-and-true services. Their organizational charts have a clear and established hierarchy. Think of hospitals. Though hospitals put a great deal of effort into differentiating their services, they all provide, well, hospital care. Day surgery. Kidney dialysis. Emergency rooms. Maternity wards.

It’s relatively easy for industrializers to merge, according to McLaughlin. Hospitals, indeed, do it all the time. United Ways from adjacent communities do it. Adjoining girls’ and boys’ private schools do it. Sometimes it proves to be a mistake, but more often than not, it works out.

It’s much more difficult, on the other hand, for prototypers to merge. Generally, each organization has a distinct and strong culture. They resist compromising their processes, which were established, after all, by the staff members who in most cases are still there. Prototyper organizations are often brilliant on their own, but they tend to get defensive and a bit irrational if they have to change their ways of doing business. Merging two prototypers together rarely works.

Prototypers are more accepting of mergers if there’s a whiff of desperation in the air. For example, if one organization is struggling financially and the other is strong, the weaker organization may well bend and welcome the stronger organization as a savior. Or in the case where one organization has an older CEO who hopes to retire soon (with no successor in the wings and a weak management team) and the other has a CEO in the prime of life and a strong management team, the first organization may well merge into the second without much of a peep.

But if two prototyper organizations are both going along pretty well – leave them be. There may indeed be some efficiencies to be gained through a merger, but that won’t be worth the trauma and loss that come from combining the cultures. And think of the relationships each organization has built through the years with donors: it’s not at all a sure thing that the donors will stay with the new combined entity. They may miss the old place or the dismissed CEO and take their donations elsewhere.

All of this said, you may work for a prototyper organization that’s being inappropriately pressured to merge by funders. You may have done a thorough analysis and decided that a merger didn’t make sense — yet the funders may still be pressuring you. My suggestion: take a minute and imagine suggesting to the funders that they merge with another organization to gain efficiencies, or that they simplify their application or reports, or that they streamline their operations in a way that makes sense to you.

You can’t actually tell the funders these things, of course, but you can think them.  And rebellious thoughts like these may help get you through difficult economic times.

Copyright Alan Cantor 2012. All rights reserved.

 

Front Seat, Back Seat

A few weeks ago I was in California on business, and my last evening there I visited the home of my high school friend Dori, now an English professor at a major university. Dori started telling her 12-year-old daughter about our adventures nearly forty years ago sharing a bicycle built for two. “It was so fun!” Dori said. “It was totally terrifying!” I added.

Our experience, you see, depended on where we sat.

Dori had the better sense of direction, so she usually sat in front. I provided a little more power, so I sat in the back. All well and good – a logical utilization of our talents. But you get a strange and unsettling sensation on a tandem bike if you’re sitting on the back seat.

Let’s say you’re going down a hill and there’s an unexpected parked car in the way. The person in the front steers calmly to the left. But for a split second, the person in the back (that was me back in 1974) feels as though he’s still headed for the collision, momentum continuing straight toward the disaster, until the bike pulls away from danger – seemingly at the last minute.

In my experience, this is an apt metaphor for leadership in a nonprofit organization. There’s one person at the front – the CEO – and everyone else on the staff rides in the back. The staff, the back-seat riders, see apparent collisions coming. Sometimes it’s not a major problem. Sometimes the danger is real, but they’re tugged to safety in time.

But sometimes – there’s a crash.

Unless there’s clear and continual communication from the person at the front, explaining what’s ahead, what the plan is, and how they are going to avoid calamity, the people in the back begin to fret about the problems and worry that the person in charge isn’t paying attention. They sometimes begin imagining problems that don’t exist. At the same time, others on the staff simply assume that everything’s going to be alright – “the boss always seems to pull things out at the last minute!” – and they grow passive, don’t sound the alarm, and fail to speak up to offer advice.

Crash.

This happens in the for-profit world as well, of course, and famously. Just look at Wall Street in recent years. (Anyone want to be Jamie Dimon dealing with the shareholders of JPMorgan Chase this week? Financial compensation aside, of course?)

The key for leaders is to communicate. What they say internally needs to be more candid and direct than what they say to external audiences — reassuring, certainly, but honest. Leaders should not react to challenges by trying to spin their staff. They need to talk about the problems. (People know when something’s wrong, so you might as well acknowledge it.) Discuss the long- and short-term plans. Solicit ideas for getting out of the jam. In short, let everyone feel in some way that they have the view from the front seat, and that, working together, they can steer away from disaster.

Above all, a spirit of candor from the front seat encourages those in the back to speak up when they see an obstruction ahead. And for nonprofits in 2012, there are obstructions aplenty. You need all hands, eyes, and voices working to keep you rolling forward safely.

Learning From Warren

I am pleased to discover that I have a few things in common with Warren Buffett.

(Unfortunately,  being fabulously wealthy is not one of them.)

Like Warren, I’m not one for formalities, and I’m known to appreciate a bargain. So I got a kick out of hearing the details of his 2006 marriage to his wife Astrid. They had a simple ceremony with immediate family at the home of Warren’s daughter Susie. Then the family celebrated with a meal at the Omaha Bonefish Grill, where Warren made a point of ordering off the Seniors Menu.

Truly, that’s the kind of wedding reception I could get behind. Why waste money, even if you’re one of the richest men in the world?

I also find that Warren and I agree about the inefficiencies inherent in creating a perpetual charitable foundation.

Buffett has famously made an enormous, multi-year commitment to the Bill and Melinda Gates Foundation. He’s been popping $1.5 billion a year or so into the Gates Foundation since 2006. That Buffett is giving through the Gates Foundation and not feeding his ego by creating his own personal foundation has gotten much well-deserved attention and praise.

But the truly notable part about the arrangement is that Buffett insisted that all the money he contributes is granted out in the same year. Indeed, he donates $1.5 billion or so each year, and all $1.5 billion goes out to charity – just about doubling the grants that the Gates Foundation distributes annually.

People keep asking me why I’m opposed to the creation of perpetual charitable foundations. And I respond: There are problems in the world that need solving today: environmental degradation and climate change; disease; famine; homelessness; injustice; lack of access to education. If you have money to spend on the problem now, why not spend it now? Don’t invest your money forever in a foundation, giving the investment managers and the lawyers and the accountants and the foundation staff their annual cut, with only a few percent a year going out in grants. Instead, get the money out to solve the problems now before more lives are lost and the planet irreversibly damaged.

This is still a minority viewpoint, but I think that’s mostly because people haven’t thought about it, and because many of the people who are entrenched in the philanthropic system are so adamant that nothing needs to change.

Schopenhauer said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.” Sometimes these stages can follow one another with stunning quickness. Think of the revolution we’re seeing in how people view same-sex marriage. Twenty years ago, it was common to openly mock the idea. Only 12 years ago opponents hyperventilated and implied that the world would come to an end because of the Vermont civil unions bill. Today same-sex marriage is legal in several states and many countries, and we have a majority of people in the United States, including the President, endorsing the concept. Even deep-set attitudes about emotional social issues can change very quickly – when people realize that the new idea is fair and true.

This is not to say that something as relatively arcane as how a charitable gift is structured has, or ever will have, the attention of the public at large. But it’s worth noting that in a society where, alas, great wealth is often seen as a proxy for wisdom, the most famous and wealthy investor in the world says that it’s better to apply one’s wealth to charitable purposes today than to lock it up in a permanent foundation and dribble out the proceeds year by year. I’m happy to join him in that sentiment. Maybe Warren and I are onto something?

Copyright Alan Cantor 2012. All rights reserved.

The First Rule of Business

My friend Rory, who has made a good living selling medical equipment, shook his head describing a failing company. “They violated the first rule of business,” he told me. “Make it easy for people to do business with you!”

When I look at the websites of a lot of small nonprofits, I’m struck by how often organizations violate this rule, at least on the donations side. Most of the sites are fairly welcoming to clients, but donors and prospective donors have to hunt all over to figure out how to provide financial support or to connect with the staff members who can help them with donations.

While overhauling websites is a significant project for smaller nonprofits, a few simple changes can make all the difference for you.

1. Put a “donate now” button on the home page. And also on the “Ways you can help” page. And on many other pages, too. If people are flipping through your site and are suitably impressed, make it easy for them to do business with you. Click! Donate!

2. Work to have your credit card donations page (where people go after pushing the “donate now” button) align with the look and feel of your overall website. Some people drop away because suddenly they find themselves in a generic PayPal site and they feel lost or disoriented. They’re afraid to give their credit card number. They log off before they make the gift.

3. Show the name and face and contact information of the staff member they can call or write with questions. Don’t direct them to an “info@” email address and a central switchboard number. Keep it personal. If Gina Capelletti is the Director of Development, have Gina’s photo, her direct line phone number, and her email address right there on every page having to do with donations. Again, make it easy for people to connect with you.

4. Suggest gift amounts, indicate which gifts put donors into the Leadership Circle, let them know what a gift of a particular size will provide, and allow them to choose among programs to support. In other words, turn the very act of donating into an activity that is educational and makes donors feel more attached to your mission.

5. Don’t dwell on how much of the gift is being siphoned off by the company processing the credit card gift. It’s common to see sites that encourage donors to add 3% to their gift to pay for the processing fee.  Personally, I think that’s a turn-off. Stores don’t ask you to pay extra to cover their fees on a credit card transaction. Neither should nonprofits. People already assume there’s a processing fee, and making that explicit turns away more money than the extra payments would bring in. I’m all for transparency – but in this case, silence is golden. Keep the focus on the mission and the donors’ generosity, not how much their gifts are costing you.

6. In the email thank-you sent immediately to the donor for an on-line gift, be sure, again, to provide a contact name and information. And then follow it with a traditional letter. (See my post “Keeping the Glass Filled” for suggestions on thanking people properly.)

A store on Main Street displays its items clearly, turns on its lights, unlocks the door, greets the customers (ideally by name), speeds them through the cash register efficiently, and thanks them for their business. They make it easy. The best on-line retailers do it as well – only 24/7. Nonprofits need to be even better than the retailers. After all, if people need winter boots, they’ll buy winter boots… somewhere. People don’t really need to donate to charity – it’s purely optional. Make doing business with you easy. Don’t create speed-bumps in that process. Don’t play hard to get.

Copyright Alan Cantor 2012. All rights reserved.

How Philanthropy (Strangely Enough) Can Widen the Wealth Divide

With the growing concern about the wealth gap, most of us can at least assume that charitable giving helps in some way to redistribute the wealth from the rich to the poor. After all, a central tenet of charitable giving is that those with financial resources donate to organizations that help those with fewer assets.

Unfortunately, we shouldn’t assume that that’s the case. I just read Immortality and the Law: The Rising Power of the American Dead  by Boston College Law School professor Ray D. Madoff, and the book pretty much blew me away. Don’t let the academic credentials of the author and the fact that it’s published by a university press scare you off: the book is wonderfully accessible, it’s not very long, and it’s worth every second you devote to it.

Part of what I read was news to me: how evolving copyright laws, for example, increasingly stifle artistic creativity by requiring permission from and/or payment to corporations that hold the rights to the images, art, and even personalities of their dead creators.

Part of what I read confirmed what I’d been observing from afar: that more and more family wealth can be sheltered indefinitely from taxation. The most troubling of the new methods is the Dynasty Trust, which allows enormous wealth to be passed on to generations not yet born with virtually no taxation. This is a new phenomenon. Multi-generational wealth transfers used to be prohibited by the Rule Against Perpetuities, which served as a check on permanently sheltered family wealth. The Rule Against Perpetuities is now in retreat, and Dynasty Trusts are the new reality. A wealthy couple can pretty well take care of a great-great-great-grandchild whose parents are yet to be born. If that does not help create an economic aristocracy, I don’t know what does.

And much of what Professor Madoff discusses confirms and amplifies my concerns about the inefficiencies and distortions created by charitable giving – particularly by the establishment of perpetual charitable foundations.

There are lots of ways the philanthropic rules help the rich financially. First, Madoff points out that charitable deductions are only available to the minority of the population that has enough income and wealth to itemize its deductions on federal income tax returns – or, in the case of estate taxes, only the one out of 200 estates (worth more than $3.5 million) that are now taxed at death. The charitable tax deduction is essentially a subsidy by the federal government, and for the most part it’s available only to the well-off, particularly to the very rich.

Second, Madoff notes how so much of charitable giving goes to elite institutions. For example, she quotes legal scholar Miranda Perry, who calculates that in a recently studied year 23% of all educational bequests went to twenty-five private colleges and universities and ten socially prestigious private schools, out of more than 27,000 such institutions. That is, only 1/10 of 1% of the schools in the country receive nearly a quarter of the charitable bequests to education. So clearly, the big money is going to Phillips Andover and Princeton, not to the local community college.

Third, Professor Madoff takes aim at the effectiveness of perpetual charitable foundations. She asserts that when you take into account the ever-shrinking present value of future distributions, the foundation will never distribute as much to charity in real dollars over the course of its existence as it would if the money were simply distributed at the time of the foundation’s creation. Meanwhile there are the costs involved in staffing the foundation and paying for the management of its assets and the ongoing legal and accounting services.

Taking these factors together, you see how philanthropy often does very little, if anything, to narrow the wealth divide in the United States. The very wealthy get more of a tax break from charitable deductions than middle- and lower-income families. They tend to make major donations to the “haves” of the nonprofit world, rather than to small, community-based nonprofits that serve the needy. (That is, they contribute to the schools their children attend and the opera houses their families patronize, rather than to the soup kitchen or the Boys and Girls Club.) And while the instrument they often choose to use – the charitable foundation –  provides the donors with significant tax benefits, its impact on society is less clear. Foundations are inefficient at best, and their benefits to the community are neither robust nor immediate.

We have to remind ourselves that we as a society subsidize these actions through hefty tax deductions. Since 1980 or so it has become commonplace to denigrate the efficiency and effectiveness of government spending. But that doesn’t mean that private charitable gifts are automatically more efficient, effective, or directed to the areas of the greatest need. The fact is that the charitable deduction takes away money from the government and lessens its ability to help the needy in a way that meets with the approval of the body politic. There has been a transfer of authority from the government to wealthy private individuals. The wealthy may do wise things with the money – but not necessarily.

Don’t get me wrong. I’m a big believer in the charitable deduction. It’s a cornerstone of our charitable sector. But has the pendulum swung too far?

Do donors have too much say, in their lifetimes and after their deaths? Can’t we do something to curtail charitable giving’s inefficiencies? Can we create a “Give Now” movement that encourages charitable contributions to operating nonprofits that are meeting the needs we face today?

Perpetual charitable foundations glorify the donors, enrich the investment managers, but do far too little to solve the problems of society in 2012. At the very least, can we help donors think about the problems surrounding perpetual foundations before they routinely create more of these entities?

Copyright Alan Cantor 2012. All rights reserved.

The Best Kind of “Ask”

I was giving a fundraising seminar a couple of weeks ago. Most of the audience members were nonprofit CEOs, development directors, and Board members. A woman asked me, “So the other day I was sitting at Rotary with a man I knew had lots of money. But I couldn’t figure out, there at the breakfast table, how to ask him for a contribution.”

I told her that I was relieved that she hadn’t asked him for a contribution. He didn’t know the organization. He didn’t really know her. They were surrounded by other people. It was entirely the wrong setting, and he had not come to Rotary to be solicited. But the fortuitous seating arrangement was a great opportunity for her, one that she apparently hadn’t taken advantage of because she was so worried about how to ask him for a gift.

What could she have done? She could have asked him about his family, about his vacation plans, about last night’s baseball game. She could have found out that they have children the same age who were both majoring in the same field in neighboring colleges. She could have found out that they both like Tex-Mex cuisine, that they both like to vacation in cities, not resorts, and that they’re both fond of golden retrievers. She could have discovered that they had both run in the same 5k race last week and finished with almost the same time. They might even have slipped into political talk (dangerous territory, but often productive) and found out that they supported the same presidential candidate, and that they share concerns about the same state and national issues.

At some point she might have mentioned her organization and given the quick elevator speech. He may have expressed some interest and asked a bit about it. She could have responded with great enthusiasm about the mission and said it was the greatest place she’s ever worked. They might have talked about mutual friends who served on the Board of Directors, and a major new construction project that will double the organization’s capacity.

And she might have said, now that they knew one another and found that they enjoyed so many of the same things and one another’s company, that she’d love to have him over one day to show him the place – and could she email or call him to set that up?

A friend of mine is fond of saying, “The answer to all premature questions is ‘No’.” You shouldn’t ask people for a major gift to your organization until they know you and your cause well. Get to know them as individuals, as human beings, not as cash machines. Allow them to know you as a three-dimensional person who is more than simply a fundraiser. Share your interests. Show them the impact of your organization. Allow them to get excited about your work. In doing this you’re giving them the time and space to get enthusiastic so they will eventually, in essence, ask you what they can do to help.

The best asks are the ones the donors make of themselves. That’s never going to happen on a chance first meeting at a Rotary Club breakfast table. But that’s a good place to start the process.

Copyright Alan Cantor 2012. All rights reserved.