Big Nonprofits Capture Increasing Share of Charitable Dollar

Salvation Army

In the twilight of his career as a mentor to captains of industry, Peter Drucker turned his focus to what he called the “social sector.” Americans, he feared, had lost the generosity of spirit so abundant when he and his wife, Doris, arrived in 1937 as refugees from Nazi Germany. Only nonprofits, he argued, could restore the country’s “sweetness.”

Early in his work, Mr. Drucker came to a startling conclusion: Some leaders of America’s charities were better managers than their corporate counterparts. Many nonprofits, he wrote in 1989, were “practicing what most American businesses only preach.” He would later declare the Salvation Army “by far the most effective organization in the U.S.”

In 1991, a year after Mr. Drucker published a book on nonprofit management, The Chronicle of Philanthropy compiled its first Philanthropy 400. The Salvation Army topped the list as the nonprofit that had raised the most private support the previous year. (United Way would have been first, but it did not yet total the fundraising of its affiliates.) Other Drucker darlings on the ranking included the American Red Cross (then No. 3) and the American Heart Association (No. 10).

The Philanthropy 400

Philanthropy’s past, present, and future are presented together in this year’s Philanthropy 400, the 25th edition of our ranking of charities based on the private support they raise.

Mr. Drucker died in 2005, but many of his favorites remain firmly entrenched in the upper tier of the Philanthropy 400. This year’s ranking, the 25th edition, looks much like the first. More than 220 organizations that appeared on the list in 1991 are there today, including the Salvation Army (No. 3), the Red Cross (No. 21), and the American Heart Association (No. 33)

There’s been change, of course, including the skyrocketing growth of donor-advised funds, a surge of international relief groups, and slippage among private universities. [See “Who’s Up? Who’s Down?”] Still, the big dogs of nonprofits are a familiar pack. Among the charities in our top 100 in 1991, 55 are still lodged there. Corporate America, by contrast, has been turned inside out; only 26 of the top 100 companies on the Fortune 500 list today could boast of that 25 years ago.

What to make of this? Smart people will disagree on whether the Philanthropy 400 should churn more. But one thing is clear: Collectively, the giants among nonprofits are getting bigger and more dominant. According to analysis by William Suhs Cleveland, a researcher at Indiana University, the Philanthropy 400 groups in the past decade have swallowed up an increasing share of America’s giving. Today they collect about $1 of every $3.70 donated to charity in America.

Such a concentration of resources at the top raises worrisome questions, particularly for small and midsize groups that want to grow and may even dream of a day when they, too, might be giants.

The Old Guard

If you look back over the past quarter-century, the staying power of the big nonprofits is remarkable. America has gone through two wars, two recessions, four presidents, the world-shaking emergence of the Internet, and the shift from a manufacturing economy to a knowledge-based economy, which is now tipping toward a “sharing economy.” What’s more, scandal has befallen several organizations that still claim top rungs on the Philanthropy 400, chief among them the United Way and Red Cross.

Smile Train

At the same time, Mr. Drucker’s “social sector” has ballooned in size, with the number of charities more than doubling. Each new entity is vying for America’s charitable dollars, which, when adjusted for inflation, have grown little over the past decade.

That much of the old guard has stood fast amid such competition and upheaval troubles Ken Stern, former chief executive of NPR. In his 2013 book With Charity for All, Mr. Stern found an alarming contrast between the fluid Fortune 500 and the static Philanthropy 400. Market forces had created a robust dynamism in for-profit America, he concluded; as manufacturing companies like Bethlehem Steel fell, tech upstarts like Google and Microsoft stepped into their place, ensuring the U.S. economy’s continued growth.

The Philanthropy 400, meanwhile, appeared stagnant. Some charities continued to top the list not because they were the best or most inventive, argued Mr. Stern. Rather, they had familiar, comfortable brands that fundraisers smartly deployed to reel in gifts.

It’s not healthy for philanthropy that big organizations so easily maintain their size, Mr. Stern says. Small nonprofits, not big ones, are experimenting with promising new models of management and giving. Yet the giants don’t leave enough room for the little guys to grow. “For all the good they do, the top groups suck up most of the energy and money,” he says.

Research by Bridgespan, a consultant to nonprofits, offers a few numbers that back Mr. Stern’s argument. In a 2012 study, the group found that of the more than 200,000 nonprofits created from 1975 to 2008, only 201 — about one-tenth of one percent — had grown to at least $50 million in annual revenues.

Bridgespan researchers did find positive trends and encouraging signs in the ascension of a few fledgling groups. Recent years have seen such organization as Teach for America (founded in 1989), Smile Train (1999), and Wounded Warriors (2003) become household names and join the Philanthropy 400. Still, this handful of rising stars doesn’t represent the churn that Mr. Stern wants to see.

Mr. Cleveland, who’s researching large nonprofits as a doctoral student at the University of Indiana’s Lilly Family School of Philanthropy, doesn’t worry that stasis will squelch innovation. He sees an analogy between charities and the beer industry, in which three national brewers — Anheuser-Busch, Miller, and Coors — came to dominate in the 1970s and 1980s. The result: The market exploded with innovation as thousands of microbreweries sprang up.

The real victims of increasing concentration of resources in the big nonprofits may be their midsize counterparts, Mr. Cleveland says. “My preliminary analysis suggests they are disappearing. What’s happening to these charities? Are they merging with larger organizations? Or are they shrinking? Are we going to be left with the Anheuser-Busches and the microbreweries but no middle class?”

Is Bigger Better?

Interestingly, charity leaders from the turn of the 20th century might see the dominance of America’s philanthropic giants as ideal. The Progressive-era reformer Josephine Shaw Lowell and others believed bigger was better, says Benjamin Soskis, a philanthropy historian at George Mason University. Efficiency would be best served, they claimed, if resources were funneled to large organizations, which would then offer an array of services.

Such thinking, though challenged over the years, remains strong, Mr. Soskis says. The status quo’s hold on the Philanthropy 400 “is in some ways the culmination of a vision that’s at least a century old.”

To many big organizations, the steady flow of contributions over years, if not decades, reflects a vote of confidence in their work and impact.

In a blog post on the country’s inequality, Joseph Maciariello, a colleague of Peter Drucker’s and a professor at the Drucker School of Management, argued that Americans tend to support charities in a self-perpetuating cycle of effectiveness. “There is a torrid love affair between the American people and the Salvation Army. Why? Because it is effective in its social programs, and that can become self-feeding. Results produce contributions, and contributions, in turn, can help produce results.”

At least some stasis at the top of the nonprofit pyramid is to be expected. Businesses may rise and fall because of market forces and new products that leave charities untouched. Slackened demand for buggy whips or land-line telephones may depress a company’s fortunes, but the societal ills that keep many nonprofits in business will, with few exceptions, always be with us.

Large nonprofits also have built-in advantages, among them, the resources to pay top dollar in the hunt for scarce fundraising talent. What’s more, many names at the top of the Philanthropy 400 are fixed in the public mind as trustworthy stewards of money and good works, deservedly or not. “Legacy brands may have a longer half-life in philanthropy than they might in business,” says Amy Schiller, a philanthropy scholar and fundraising consultant.

Eve Edelheit/Tampa Bay Times/ZUMA Wire/Newscom

Nowhere does a brand name matter more than in higher education, where academic reputation and prestige generally correlate with fundraising, says Bruce Flessner of the Bentz Whaley Flessner consulting firm. Harvard, which ranked No. 6 on the first Philanthropy 400, has been in the top 25 every year since.

“In 2020, the list will not look dramatically different than it does now,” Mr. Flessner says.

Like it or not, philanthropy looks like America, with haves and have-nots, says Eileen Heisman, who heads the National Philanthropic Trust (No. 25), a donor-advised fund. “The inequity of the capitalistic economic structure we live in, where the rich get richer and those who go to Harvard have better connections, is absolutely reflected in the charitable sector.”

“Is it fair? It’s not fair,” she says. But a philanthropist’s decision about where to give money “doesn’t reside on a fairness quotient. It’s about what donors know, what they’re comfortable with, and who they want to give to personally.”

Change Ahead

Could new donors and new models of giving emerge to empower the little guy and break the Philanthropy 400 status quo? Perhaps. Technology and social-media-fueled giving are a powerful new accelerant for growth; in the international-relief field, digitally focused groups such as GiveDirectly (founded in 2008), Charity: Water (2006), and Kiva (2005) have made short work of the often long journey from start-up to midsize player.

“In the old days, their ramp-up would have taken a lot longer,” says Jeremy Barnicle, chief development officer of Mercy Corps (No. 313). “Does it matter that you’re a big brand in the way it did before? I’m not so sure.”

The Salvation Army, Mr. Drucker’s favorite, is not blind to the threat of such change. The charity recognizes that its powerhouse brand isn’t a magnet for cause-driven millennials, says the group’s spokesman, Lt. Col. Ron Busroe.

Officials also know that bureaucracy, not innovation, is more typical of big organizations. “We have this discussion internally all the time with our national board,” says Colonel Busroe. “Sometimes they’re not sure if we’re nimble enough.”

Even as the charity celebrates its 150th anniversary, it is shifting to measure impact more than outputs — how many people it helps reach self-sufficiency, for instance, rather than how many shelter beds its fills, says Colonel Busroe. The organization’s 7,500 centers are hubs of innovation, he adds. They adapt every day to the changing needs of their local communities. That work, Colonel Busroe says, is what donors reward with strong giving today, just as they did in 1991 and for decades before that.

Still, big, venerable charities may be at an inflection point in their history. The Salvation Army has grown only 9 percent in the past decade when its annual fundraising totals are adjusted for inflation; that compares with a 66-percent rise in its first decade on the Philanthropy 400. United Way, meanwhile, is down 20 percent.

Kimberly Churches, vice president for development at the century-old Brookings Institution (No. 297), says many hallmark nonprofit names were built on the faithful, unquestioning generosity of a generation whose influence is now waning. The next generation is changing the longstanding terms of how philanthropy operates, she argues, and no one should rest easy.

“You don’t want to be part of the Roman Empire.”

Clarification: An earlier version of this story stated that scandals at the United Way and Red Cross have been “akin to what brought down Enron.” The reference to Enron has been removed.