Nonprofit Chronicles

Not long ago, I met Brett Jenks, the chief executive of a global conservation organization called Rare, over coffee at Peet’s, near my home in Bethesda, Md. We’d never met, and I knew little about Rare, which is based in Arlington, Va. Brett impressed me–since taking the top job at Rare in 2000, he had grown the nonprofit’s annual budget from less than $1 million to $25 million. He had also attracted prominent donors, including Hank Paulson, Michael Bloomberg and Jeremy Grantham, a widely-admired investor and philanthropist who is devoted to environmental causes. I went on to write a favorable story about Rare and one of its programs, called Fish Forever, for the Guardian. I thought Rare was doing good work. I just couldn’t be sure.

Writing about Rare, I was reminded of the uncertainty that I felt when writing about startup companies for Fortune magazine during the 1990s and 2000s. I would meet a CEO, learn a bit about the product or technology, perhaps speak with a customer or competitor and see who had invested. I’d make an educated guess about the company’s prospects, write my story and hope for the best. A Fortune story conveys legitimacy on a startup. Yet I showcased a number of private-held startups–a search engine called iWon, battery-maker A123 Systems and electric-car company Better Place–that never got traction and failed.  I was also able to identify, early on, the occasional startup like Bethesda-based Honest Tea that went on to do well. Ultimately, of course, the market will render its verdict on the success or failure of any business, big or small.

That’s not true of nonprofit organizations. It’s difficult for even well-informed outsiders to know whether they are performing well. It can be difficult for insiders, too. I’ve been a board member of Net Impact, which I believe to be a wonderful organization, for the past five years. I’m confident that Liz Maw, the executive director, and her staff do an excellent job. But can I prove it? Net Impact’s mission is “to inspire and equip a new generation of leaders to use the power of business to do good.” As an organization, we measure what we can: How many people come to our conferences, join our chapters and visit our website. We ask those people if their lives have been changed by Net Impact. But those metrics are unavoidably imperfect. We don’t know — we can’t know — the organization’s net impact.

I’m guessing that you’ve felt uncertainty about nonprofits, too–whenever you decide to give money away.

Alleviating global poverty

Suppose you want to help poor people in the developing world. You could donate to big international NGOs like CARE, Save the Children or WorldVision.  You could give to an organization guided by your religious beliefs, like Catholic Relief Services or American Jewish World Service. You could support locally-focused grass-roots groups that seek funding through new platforms like Global Giving. Or, if you’d prefer to eliminate the middleman (because western-educated aid workers driving around in SUVs don’t come cheap), you can send money directly to extremely poor people in Kenya and Uganda through GiveDirectly. If that sounds foolhardy, well, consider the writings of William Easterly and others who have argued — persuasively, in my view — that trillions of dollars spent on aid by global development banks and nonprofits over the past half century have, for the most part, generated low returns when it comes to lifting people out of poverty.

To be sure, some do-good efforts in the global south—particularly those aimed at improving the health of poor people—seem to have produced dramatic results. Since 1988, when a global initiative to eradicate polio was launched, new cases of the disease have dropped from about 350,000 a year to fewer than 250 in 2012. Malaria deaths are down by 42 percent since 2000.

Bill Gates, whose foundation has worked on global health, writes:

A baby born in 1960 had an 18 percent chance of dying before her fifth birthday. For a child born today, the odds are less than 5 percent. In 2035, they will be 1.6 percent. I can’t think of any other 75-year improvement in human welfare that would even come close.

Gates, the founder and longtime CEO of Microsoft, has tried to bring a metrics-driven approach to the work of The Bill and Melinda Gates Foundation, But when operating in any complex system, like the economy of a poor country, determine the effect of a particular intervention is difficult. How do you separate the signal from the noise? Ultimately, it’s hard to know which NGOs focused on global development are effective, and which are not.

It’s no easier to identify the best (or worst) nonprofits in any arena — education, health, domestic poverty, children and youth, the environment, human rights, race relations, immigration, whatever.

What’s needed are feedback loops

This is not just a problem for donors. It’s a problem for nonprofits, too. Most nonprofits lack what my friend Dennis Whittle, a former World Bank executive and the co-founder of Global Giving, calls “feedback loops.” In an essay titled How Feedback Loops Can Improve Aid (And Maybe Governance), Dennis writes:

Well-functioning private markets excel at providing consumers with a constantly improving stream of high quality products and services. Why? Because consumers give companies constant feedback on what they like and what they don’t. Companies that listen to their consumers by modifying existing products and launching new ones have a chance of increasing their revenues and profits; companies that don’t are at risk of going out of business.

I wrote the first draft of this blogpost on an iPad. It’s awesome. A design breakthrough, and a commercial success. What are the equivalents of the iPad in the nonprofit world? I’m sure they are out there. I’m also sure we need more of them.

Competitive markets do an effective job of delivering goods and services because businesses are accountable to those they are aiming to serve–their customers. Over time—not right away, and sometimes not for a long while—those companies that serve their customers well will be rewarded with higher earnings–yes, earnings are usually earned — while those companies that fail to please customers will suffer. Apple has become the world’s most valuable company because it is very good at what it does. ExxonMobil and Microsoft are not far behind, for the same reason, whatever we may think of fossil fuels or Windows. Markets don’t necessarily produce social or environmental good–that’s why we need nonprofits–but they are ruthlessly effective at separating companies that are well-run (Walmart, Google, Amazon) from those that are not (Sears, Yahoo, Borders).

Nonprofit organizations and their leaders face market discipline of a sort: They must satisfy their donors. But their donors are not the people they are trying to serve. (At least, they should not be. Too often, unfortunately, they are.) This is both an obvious problem and a profound one. CARE does not rely on poor people for its support. The Sierra Club may thrive, even if the planet does not. As it happens, in the nonprofit world, some incentives are grotesquely misaligned. When abortion rights come under attack, money flows to Planned Parenthood. If cancer disappeared tomorrow, so, presumably, would the American Cancer Society.

After my first interview with Brett Jenks of Rare, we lingered over coffee and talked about about the effectiveness of nonprofits. Again, I came away with the strong impression that he is doing good work at Rare (for reasons that I plan to explore in a future posting.) But it struck me then that the performance of the manager at Peet’s, whose cafe can be compared to any other Peet’s in terms of traffic, revenues, profits, employee satisfaction, cleanliness and the like, is easier to measure than the effectiveness of Brett, or Mark Tercek of The Nature Conservancy, or Fred Krupp at Environmental Defense. This is not to say that nonprofits “should operate more like business.” It is to say that they could benefit from better feedback loops.

How journalism can help

They could also benefit from better reporting. Nonprofits don’t get nearly as much journalistic attention as they deserve. The US has about 57,000 reporters and editors, the labor department estimates. Tens of thousands cover government. Thousands focus on business. Perhaps a few hundred — that’s my best guess — give sustained attention to the nonprofit sector. Sadly, journalism and investigative reporting have been in decline in recent years, just as NGOs and big foundations have grown more powerful, and thus merit more scrutiny. America, you might be surprised to learn, has about 1.1 million nonprofit groups that raise about $300 billion a year. If you believe, as I do, that good journalism can improve the institutions that it covers, then the nonprofit sector should welcome more journalistic scrutiny. The work that nonprofits do is too important to be ignored.

Finally, it’s worth noting that all of us support nonprofits because of their tax-exempt status. The IRS rule that allows taxpayers to deduct charitable contributions from their income for tax purposes essentially functions as a federal matching contribution for taxpayers who itemize their deductions. If a taxpayer in the 20 percent bracket makes a $100 donation to a charity, and claims a charitable deduction, his or her taxes are reduced by $20.The Center for American Progress estimated in 2011 that the tax break would cost the US Treasury $315 billion over five years. Was that money well spent? The point is, the effectiveness of nonprofit organizations is everybody’s business.

In a biting critique of big philanthropy in Democracy, Gara LaMarche writes:

However many well-intentioned and high-minded impulses animate philanthropy, the favorable tax treatment that supports it is a form of privatization. Money that would otherwise be available for tax revenue that could be democratically directed is shielded from public control for private use.

In a modest way, and with your help, my aim with this blog is to deliver thoughtful, provocative and fair-minded reporting and opinion about nonprofits. I’m going to focus on questions of impact. What does a high-performing nonprofit look like? How can nonprofits measure their success, and learn from their failures? How transparent are nonprofits about their goals and strategies? Can they find ways to create feedback loops? How can donors identify and evaluate charities? And–importantly–what are the risks of reducing everything to numbers?

These are hard questions, and lots of smart people at foundations and NGOs have spent years thinking about them. I’m going to begin by identifying those people, talking with them, learning from them and sharing their insights with you. If you’re interested, please subscribe to Nonprofit Chronicles by clicking the Follow button on the home page.