Opinion
August 31, 2015

With Money So Tight, We Need to Get Rid of Poor-Performing Charities

America faces a potentially devastating domestic disaster the likes of which we have not seen in our history. As more and more charities seek money to deal with escalating problems, private support is stagnant and government money is on the decline.

That means a slowdown in charity work to deal with intractable human and social problems like crime, drug addiction, and school dropouts.

Four trends have dramatically altered the nonprofit landscape, making it clear we need to act soon before disaster hits:

The number of charities is growing astronomically. The number of nonprofits in the United States has nearly doubled since 1995, from 518,000 to more than 1 million today.

Sam Younger, the former chief executive of the British Charity Commission, was on the mark when he recently said the following about the increase in the number of nonprofits in his country: "Many people set up a new charity without making sure they have identified an unaddressed need or found an innovative solution, without making an honest effort to establish whether another charity is already doing similar work. The result is duplication, inefficiency, and, sadly, too many charities that are not managed well enough."

Charitable giving is static. While giving has rebounded from the sharp decline caused by the Great Recession, overall donations have remained static at about 2 percent of the gross domestic product. As The Chronicle of Philanthropy noted in a cover piece, "The Stubborn 2% Giving Rate," "giving as a share of GDP has rarely strayed far over the past four decades — despite the huge growth in the number of charities."

The ranks of the poor are still too high. Poverty is now almost 3-percent higher than it was in 1974, when the War on Poverty had taken hold and made a real and lasting difference in reducing the number of people in poverty by eight percentage points.

Nonprofits are feeling the effects of so many people in need.

The most recent survey by the Nonprofit Finance Fund found that more than half of nonprofits couldn’t meet demand for their services in 2014, the third straight year that the percentage has been so high.

Government aid is harder to get. In the last two decades, the amount of money nonprofits have received from government at all levels has grown markedly but is expected to decrease sharply. Many federal programs have faced trims in the past three years, and more cuts are likely.

What these trends make clear is that we need to act quickly to increase charity efficiency and make sure scarce dollars are used well. That means slowing the growth in charities that are redundant, and getting rid of those that are not doing a good job but are absorbing too many government and private dollars. Doing so would have a multiplier effect, not only because it would ensure today’s money is well used but also because it could increase charitable donations substantially by boosting donor confidence.

The problem in the charity world today is that it’s just too easy to be a poor performer.

As Ken Stern wrote in With Charity for All: Why Charities Are Failing and a Better Way to Give: "Unlike private corporations that respond to market signals and go out of business when they fail, nonprofit organizations have a very low barrier to entry, answer to often naïve and far-removed donors, and once established rarely die."

In spite of the growth of online evaluation entities like Charity Navigator and GiveWell, there is still a dearth of comparative data on the plethora of charities compared with the data that is available on the performance of hospitals, colleges, doctors, schools, banks, mutual funds, cars, airlines, hotels, restaurants, and sports teams. According to Mr. Stern, 150,000 people in the mutual-fund industry work to evaluate companies before investing, while fewer than 100 are "employed by charity evaluators, which rate charities before you give."

We can put an end to that problem by creating independent and objective systems that screen charity applications to prohibit any group from getting tax-exempt status if it plans to do work others already do.

We also need a system to regularly evaluate organizations to ensure they adhere to requirements for financial management, governance, stewardship, transparency, and performance. If a group didn’t measure up, it would lose its tax-exempt status.

While that kind of system has been proposed before, what we also need to do is make sure charities are doing far more than just managing their money and staffs well. An evaluator should also make charity status contingent on making a genuine effort to secure feedback from clients. Groups should also be expected to create and maintain an appeals procedure that allows clients to challenge what they see as an arbitrary and capricious action by the management of a charity.

When a nonprofit’s status is up for renewal, an accrediting body should be expected to spread the word in newspapers, social media, and elsewhere. Clients, other nonprofits, and the public should be offered a chance to weigh in on whether an organization’s status deserves to be renewed or to submit evidence of why renewal is not in the public’s best interest.

Lots of independent accreditation approaches could serve as a model for a new entity to evaluate charities. Many of the most common monitors are essentially a form of peer review. The Council on Accreditation has given its stamp of approval to more than 2,200 human-services organizations that it has reviewed. Health-care organizations are monitored by the Joint Commission on Accreditation of Healthcare Organizations. Colleges are accredited by several types of bodies based on their region or specialty.

Another option is to create an entity like the Consumer Financial Protection Bureau, the Securities and Exchange Commission, or the British Charity Commission. Such a body would establish accountability, performance, and transparency standards; create reporting and review procedures; and periodically evaluate the operations of charities.

Though the idea is attractive, a serious downside is that such an entity would need to be politically independent, something that is probably not possible in today’s ultra-politicized environment.

All indications are that in the years to come, America’s nonprofits will increasingly be taking on more and more of the burden of meeting the nation’s health, education, and welfare needs and protecting the environment.

This makes it imperative that we find ways to enlist nonprofit experts — motivated solely by their concern for the common good — to start running an independent evaluation system. Their job would be to get rid of the charities that are doing a poor job so they don’t gobble up resources from those that are performing so admirably under so much strain. 

Irwin Stoolmacher advises nonprofits on fundraising and strategic planning.