Today, the most common way that donors evaluate charities – when they evaluate them at all – is by asking questions about financials, such as “How much of my donation goes to programs vs. salaries?” This approach makes no sense.
We’ve argued this point before at length. Picking charities based on the “overhead ratio” is like picking your doctor by the percentage of revenue spent on medicine (more absurdity-highlighting analogies here). The actual reported “overhead ratio” is vaguely defined and generally up to the charities reporting it; the concept of “minimal money on overhead” discourages a lot of good and necessary spending, and is ultimately irrelevant to the question of whether a charity is changing lives.
What today’s press release (PDF) makes clear is just how much agreement there is on these points. Today’s two most prominent sources of financial metrics – GuideStar and Charity Navigator – agree that there needs to be more to the picture, and are working toward more meaningful metrics.
It’s scary to think about how commonly this metric is touted, when it’s recognized as a red herring. It seems to us that people have responded to the extreme scarcity of information on charities by using whatever information is available, whether or not it’s meaningful. Fortunately, alternative ways of evaluating charities are emerging.
GiveWell, Great Nonprofits and Philanthropedia are all new, small organizations. None of us have perfected a methodology yet – no one has – and all of us would benefit from more input. If more donors took a look at these resources, we would finally see the conversation around “Where should I give?” move beyond the distracting and unhelpful question of “Who has the lowest ‘overhead?'”
That would be a huge step toward a world in which donors reward charities for effectiveness in improving lives.