Does cost of added disclosure by nonprofit groups create real benefits?

Published in the September 8, 2006 edition of Columbus Business First

Donors are to nonprofits what investors are to for-profits: people looking for a way to participate in the future of an organization.

In the for-profit world, full and fair disclosure has been deemed so beneficial to investors that the cost to companies is considered worthwhile. As the principle of full and fair disclosure spreads into the nonprofit world we should ask what benefit do donors get and at what cost?

Cost of disclosure

For a long time, the primary standard for nonprofit disclosure was the IRS Form 990 annual nonprofit tax return. This disclosure isn’t as widely known by donors, nor is it as carefully filled out by nonprofits.  

This is partly because until recently a donor had to visit the offices of the nonprofit or the state attorney general to examine the document. Now a donor can readily see the returns of any U.S. nonprofit by going to www.guidestar.org. The Philanthropic Research Inc.’s GuideStar is by far the most extensive and readily accessible source of information on nonprofits.

Unfortunately, the lack of popular appreciation of the breadth and easy accessibility of GuideStar information has led many donor advocates to create their own approaches to full and fair disclosure. Examples of this trend are the Better Business Bureau’s Wise Giving Alliance reports, the Maryland Association of Nonprofit Organizations’ Standards of Excellence and the Greater Kansas City Community Foundation’s DonorEdge.

The good intentions should be applauded, but these individual efforts are creating a Tower of Babel effect because each approach has its own definition of the appropriate way to profile and identify a responsible nonprofit.

With multiple approaches, a nonprofit needs to customize its responses to each with the effect that the profile it presents can vary, sometimes widely, between the multiple reports. This comes at a cost to each nonprofit with the added disadvantage that the divergent profiles may create mistrust that any of the reports is consistent or reliable.

Nonprofits are understandably reluctant to resist efforts to expand disclosure. Nonetheless, as the for-profit sector benefits from one standard of disclosure by the Securities and Exchange Commission, so the nonprofit sector would benefit by adopting a single standard of disclosure with a single set of definitions of financial and programmatic terms.

Keeping donors informed is a worthy enough goal to warrant better coordination among the IRS and representatives of donors and nonprofits. 

Benefits of disclosure?

I admit to being a fan of disclosure and objective evaluation of an organization’s effectiveness. But one body of research suggests donors that tolerate excessive administrative costs are more likely to research a new refrigerator than a charity before they write a check and do not respond consistently to measures of the effectiveness of their gifts.

Recent articles in the Chronicle of Philanthropy and New York Times have highlighted the work of professor John A. List of the University of Chicago, who studies what motivates donors. He finds that donor decision-making is rational but has little to do with measures of the effectiveness of contributions.

Consider: 

• Donors do not respond to opportunities to increase the effectiveness of their gifts. While a challenge gift – giving an additional dollar is matched by a dollar from the challenger – results in additional donations, increasing the match to $2 or $3 for each additional dollar results in no added contributions.

• Donors feel pride by association with the object of their gift, so they are reluctant to study the effectiveness of the charity because that suggests they are not confident the charity is worthy of their pride.

• Donors respond to incentives that have little relation to the value provided by the nonprofit. The least effective method of fundraising is asking for a donation while the most effective is conducting a raffle or lottery. And having a pretty girl ask for the money has more than double the effect on giving as moving from the least effective method (simply asking) to the most effective (the raffle).

Where to start

All this leads to the question of whether we are putting the cart before the horse in asking nonprofits to devote more time, effort and money to multiplying the ways in which information is disclosed. 

Rather, it may be more effective to create a single, rational way to measure the effectiveness of nonprofits and to devote the remaining effort to educating donors on why this method of evaluation is in the donors’ best interest. The new disclosure efforts are each legitimate approaches to the right way to look at a nonprofit.

But the result of multiple approaches is to raise nonprofits’ costs and create a confusing number of right ways without addressing the prior condition for this effort to be worthwhile: Educating donors on how identify the best investment for their charitable dollars.  

Allen J. Proctor was chief financial officer of Harvard University and is the author of “Linking Mission to Money Finance for Nonprofit Board Members.”  www.proctorconsulting.org

Copyright 2006. Reprinted with permission, Business First of Columbus Inc.