News and analysis
June 17, 2013

3 Major Charity Groups Ask Donors to Stop Focusing on Overhead Costs

Three major groups that publish information about charities have started a campaign to persuade donors to look beyond overhead costs when deciding which groups to support.

“The percent of charity expenses that go to administrative and fundraising costs—commonly referred to as 'overhead’—is a poor measure of a charity’s performance,” says an open “letter to donors” drafted by GuideStar, the BBB Wise Giving Alliance, and Charity Navigator.

The effort includes a Web site, a social-media campaign, and a pledge that supporters can sign “to end the overhead myth.”

The three organizations are attempting to build on efforts by a growing number of charities and nonprofit experts to suggest that journalists, foundations, government, and individual donors place too much emphasis on how much nonprofits spend directly on programs and are therefore discouraging groups from investing in critical areas like training, evaluation, and internal systems.

“We ask you to pay attention to other factors of nonprofit performance: transparency, governance, leadership, and results,” the letter to donors says.

The letter concedes that “at the extremes,” high spending on overhead can tip off donors to fraud or poor financial management.

Focus on Results

In describing the new project on his group’s blog, Jacob Harold, GuideStar’s president, pointed to a major investigation into “America’s 50 Worst Charities,” which was published this month by the Tampa Bay Times, the Center for Investigative Reporting, and CNN. It found that the “worst” charities had channeled almost $1-billion to commercial fundraisers over a decade while spending less than 4 percent of donations on direct cash aid.

In an interview, Mr. Harold said that investigation could help the campaign because it highlighted “very rare, very egregious cases of fraud.”

“We need to reset the conversation about, for lack of a better phrase, normal nonprofits, the vast number of organizations that are doing their best to do good work in their communities,” he added.

Charity Navigator, which evaluates charities on a four-star scale based partly on their overhead costs, still maintains that spending on administration and fundraising is “an important data point,” Ken Berger, the group’s president, wrote on his blog today.

“Show me a nonprofit that uses 70 percent of its funds for overhead, and I predict with a great deal of certainty that it is an organization that is either clueless or focused on lining someone’s pocket rather than effectively serving others,” he said.

However, he said he joined the overhead campaign because he agrees that donors should also look at other factors, especially whether a group is “achieving meaningful results.”

Charity Navigator announced this year that it planned to start evaluating charities partly on the quality of the results that they report publicly.

The BBB Wise Giving Alliance issues reports on charities based on whether they have met 20 “accountability standards,” including spending at least 65 percent of expenses on program activities. GuideStar publishes tax forms and other information about charities but does not grade them.

Data for Donors

Mr. Harold, a former program officer at the William and Flora Hewlett foundation, said he had been thinking about starting a campaign like this for several years and that the time is ripe because more data are available to help donors judge charities, including from new evaluation groups like GiveWell and Philanthropedia, a GuideStar project.

The three groups did not invite CharityWatch, a watchdog that rates charities exclusively on their financial performance, to join the overhead campaign.

Daniel Borochoff, CharityWatch’s president, said he agrees that “overly simplistic” looks at overhead “ratios” are not helpful. However, he said, “thoughtful, analytical ratios have huge value for donors” because it allows them when comparing similar groups to give to the one that spends the most on its programs.

He added that, contrary to the suggestion in the “letter to donors,” charities can count much of their spending on training, planning, and operating systems toward their program expenses, so the three groups are “spreading their own myths.”

Dig deeper: See The Chronicle’s article, “Overhead Costs Pose Dilemma for Charities.

Send an e-mail to Suzanne Perry.