Transparency Boosts Donations, Even for Struggling Charities, Study Finds

The Theory

Watchdogs often try to goad nonprofits into providing greater financial transparency. But is opening the books really a winning strategy with donors — especially if the news isn’t good?

The Test

To find out, authors of a recent study examined data provided by GuideStar, which evaluates charities based on the depth of information they provide in areas like impact reports, fundraising expenses, and governance. The researchers examined more than 14,000 nonprofit profiles collected by GuideStar to see if the increased transparency led to more donations.

The Results

About 16 percent of the researchers’ sample earned one of GuideStar’s three seals of approval — bronze, silver, or gold. (An additional platinum level has been added since their investigation.) In the year following their initial rating, charities received 53 percent more in donations. Increases in transparency, like going from a bronze to a silver rating, resulted in a 26 percent increase.

Dig Deeper

The researchers found that well-run, professional organizations tended to see the biggest increases in donations when they provided more information. However, even organizations that performed poorly saw an increase when they opened up. Erica Harris, one of the study’s authors, says that’s something to keep in mind for charities that are struggling with their finances or mopping up after a fraud scandal. “They have this idea that they should keep it under wraps,” she says. “But if they get out in front of the fraud, they can mitigate some of the downturn in donations.”

Find it

“Determinants and Consequences of Nonprofit Transparency,” by Erica Harris and Daniel Neely, was published in the Journal of Accounting, Auditing & Finance in December 2018.