In the wake of the devastation created by recent hurricanes, debates ensue about the most effective charitable organizations for donors’ dollars. Texas A&M University Associate Professor of Economics Jonathan Meer paints a complex picture for donors attempting to determine the most effective charities for their donations. And there is not an easy solution.
Meer reported in IZA World of Labor earlier this year that, “the overhead cost ratio, the most commonly used metric for ranking charities, is a crude measure that does not evaluate their effectiveness,” and that the solution lies in policymakers avoiding oversimplified metrics and implementing improved methods for evaluating impact, despite enhanced complexity and costs.
Furthermore, according to Meer, donors tend to use these inadequate measures provided by third-party rating agencies, which focus on relatively easy-to-measure metrics like overhead cost ratios for directing their charitable contributions.
While Meer urges donors to look beyond overhead cost ratios in their approaches to selecting charities, he also acknowledges that none of the charity rating agencies, even the most lauded, including Charity Navigator, CharityWatch, GuideStar, the Better Business Bureau and GiveWell, adequately assess the effectiveness of nonprofit organizations. Most of these agencies provide breakdowns of program expenses, total revenue spent on delivered programs and services, administrative expenses, fundraising expenses and fundraising efficiency, as well as accountability and transparency metrics. Accountability refers to reporting whether or not the organization has an independent board, an external accountant prepares the financial statements, and a conflict-of-interest policy is in place, among other factors, Meer said.
“Alternative measures based on true impact of a charity’s activities would be far more useful, but they require substantial investigation and are often difficult to compare across different fields,” Meer said.
Despite charity rating system reports that a mega-nonprofit organization’s expenses exceeded $2.5 billion and more than 90 percent of the organization’s total expenses went toward programs and services delivered that same year, NPR and ProPublica reported criticism of the organization’s handling of a natural disaster. While the nonprofit collected nearly $500 million in donations and claimed to build 130,000 homes in a devastated area, according to the media reports, the organization, in fact, only built six permanent homes.
Meer also reported that excess focus on overhead expenses could lead charities to underinvest in crucial operating infrastructure, especially skilled workers, thereby diminishing their ability to deliver services.