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Do you know where your money is going when you give to charity?
Finishing touches are put on Markhor shoes. - photo by Markhor Shoes

The best charities give most of their money to programs, not to administrative costs — like overhead, fundraising, and staff salaries.

That has been the conventional wisdom, but major charity watchdogs like Charity Navigator and the Better Business Bureau Wise Giving Alliance say not so fast. For years they prized low-overhead charities, and donors have been geared toward organizations that spend "90 percent of every dollar" on programs.

But is that the best way to measure a charity? These watchdogs say that it's not, and they're trying to help convince the public of that, too.

After-school programs, soup kitchens, and health clinics can't run without computers and competent staff. How much a charity spends on overhead doesn't tell you if a shelter is safe or keeping people off the streets, or if a food pantry is serving healthy food.

And yet, the Better Business Bureau Wise Giving Alliance released a report last week that found that the most important thing that helps donors verify their trust when donating to a charity is how funds are spent. Just 10 percent said that "results achieved from charitable activities" was the top priority.

"If you're only focusing on finances, you're missing a lot," says Art Taylor, president of the Better Business Bureau Wise Giving Alliance. "it's important to know not just how charities spend, but what they do."

Missing the whole picture

The overhead ratio is alluring in its simplicity, but it has come under fire for skewing the way that charities are viewed.

Last year, watchdogs GuideStar, BBB Wise Giving Alliance and Charity Navigator released an open letter to donors to end what they call the

"Overhead Myth," and they released a second letter last week urging America's nonprofits to join them in educating consumers on impact, not just overhead.

For the most part, Americans trust charities, and give $300 billion to charity a year, according to BBB Wise Giving Alliance. What drives people to donate, says Taylor, is trust, and what measure do donors use to affirm that trust?

"We knew that finances would be a big one," says Taylor, and sure enough, most respondents in the BBB survey chose that area.
"We thought this was a teaching opportunity," said Taylor, "because in reality, of the work we do, only 7 percent fail to meet our standards on the financial side."

But 45 percent of charities fail to meet one of their other standards, says Taylor, like ethics or impact.

Room to innovate

One of the criticisms of stressing overhead is that it doesn't give charities much space to innovate.

Businesses, for example, are encouraged to try solutions and failure is part of the learning process. Emphasis on financials doesn't give charities that luxury.

"Sometimes you try good ideas and they don’t work, and that’s not bad," says Taylor. "There are no known solutions for a lot of things. Sometimes you have to try and fail."

Donors want to see quick accomplishments, says Sandra Minuitti, CFO of Charity Navigator. But problems would get solved faster if donors saw themselves as long-term partners with charities they like.

"We advocate finding charities that are doing work that you can stick with over time — just because they had a bad year doesn't mean you should jettison them," she says.

She recommends finding a charity that you can stick with for years, rather than just giving $5 or $10 here and there in random donations.

"Stick with them, be a partner, not just a one-off," says Minuitti.

Partnering for change

Isn't it important to watch financials to make sure you don't get cheated out of money that could be used to do good? Yes, says Minuitti, and looking at financials is a critical way to identify "outliers."

"There are some [charities] that spend less than a third of their funding on programming, and that's a concern," she says.

But she echoes Taylor in saying that those are few and far between. "The vast majority are good," she says, pointing out that most organizations on Charity Navigator get three or four stars (the highest rating).

In the rare case that there is a scandal with a charity, that news captures a lot of interest — but nobody covers the daily good work that charities do," Minuitti says.

There's also a double standard for charities that's not reasonable, she says. There is an expectation that people working for charities work for free — or close to it. Yet, no one expects businesses to run successfully with no resources and without adequately paying competent staff.

"There's a balance, we try to educate donors that six figures for a multimillion dollar charity is not unreasonable," she says, noting that as with most things, you get what you pay for.

Still, donors should be smart about where they put their money. Donors should watch for organizations that have clear goals, and are tracking toward them. For example, if the charity is a job-placement service, you want to know how many people got jobs, but also how many had jobs six weeks or six months later.

BBB Wise Giving Alliance asks charities to answer 300 questions — from financial information to annual reports to proof that fundraising is up to standards. It uses 20 standards to measure charities for a more holistic view, says Taylor.

Charity Navigator is looking more at impact in its ratings as well, and Minuitti notes that donors look at numbers because that's often all they have. But that's changing.

"The sector is maturing, it's not just 'here's some heart-wrenching photos, give to us," she says. "People want to see data that you've had an impact."