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Growing Philanthropy: Building Greater Trust in the Sector (Part 2 of 3)

Charitable giving is estimated to be only 2 percent of average household disposable (after tax) income in the U.S. This number has remained unchanged on average for the past 40 years. A new report called “Growing Philanthropy,” based on a recent summit of nonprofit leaders, offers ways to change how nonprofits approach fundraising. AFP will present the recommendations in a three-part series.

(Nov. 15, 2011) Trust and confidence in the nonprofit sector is paramount. We need to empower the public to have high expectations of charities, and ensure that each organization reports accurate and meaningful information.

Based upon the comments of the participants in the Growing Philanthropy Summit held in Washington, D.C. this past June, Adrian Sargeant and Jen Shang of Indiana University first recommend that the nonprofit sector ensure that there is universal public reporting of nonprofit performance.

Recommendation: Regulators should be empowered to enforce 100 percent filing of Forms 990 and nonprofits should be held to a high standard in reporting accurate information

“Despite their weaknesses, in the U.S. the new forms 990 do offer a window onto the performance of nonprofit organizations and we recommend that all nonprofits be compelled to file, with action taken to ‘call-out’ the organizations who fail to do so,” explain Sargeant and Shang.

Nonprofits need to shift their emphasis from efficiency to effectiveness. A greater narrative requirement in the Form 990 would encourage nonprofits to explain what long-term impact they are having instead of focusing solely on such measures as overhead and fundraising cost ratios, the scholars suggest.

Recommendation: Blow the whistle on organizations claiming to have zero costs of fundraising

Reporting is a matter of quality as well. In the absence of a well-regulated reporting regime for nonprofit performance, there is evidence that some organizations exaggerate their performance, the report notes. Scholarly research has shown, for example, that charities report greater program spending on their 990 than they do for state regulatory filings, thereby misleading the public.

Furthermore, the summit participants were emphatic that no nonprofit reporting public donations should claim to have zero costs of fundraising. If they did so, they should be called out and held accountable.

“It is well established that fundraising and administration ratios provide no meaningful basis for comparison between nonprofit organizations,” note the authors. “Fundraising ratios will be a function of variables such as the nature of the cause (some are more appealing to the public than others), the age of the nonprofit, the nature of the fundraising undertaken, the split between donor recruitment and donor development undertaken, the interpretation of various accounting conventions, and the size of the organization’s fundraising program (i.e., there are substantive economies of scale in some forms of fundraising).”

In short, while the process of reporting performance and transparency is critical, it is also important to educate the public about the measure that matters most—end results. Inaccurate or exaggerated reporting by charities destroys public trust.

Further recommendations for developing greater public trust and confidence in the nonprofit sector include the following.

Recommendation: Fund the development of a website in the United States to educate the public, boards and other stakeholders

Sargeant and Shang recommend the creation of a U.S. website to educate our stakeholders about the realities of charity costs. Such a site would dispel myths about the sector, provide detail in respect of fundraising costs, presents case studies of successful campaigns, and a ‘who can speak on what’ list of speakers for journalists wanting to explore any of the issues raised by the site. It would also prompt supporters to ask the right questions when selecting nonprofits for support.

Recommendation: Encourage nonprofits to develop complaints schemes

Mistakes are inevitable in the domain of fundraising and while they should obviously seek to minimize them, nonprofits must also give supporters the opportunity to have any issues resolved, the report notes. Supporter complaints and criticism must be actively encouraged. Complaint schemes give supporters a voice, increase trust, can lead to service innovation, and dramatically increase supporter loyalty.

Recommendation: Develop new and more appropriate measures of performance

Categories and sub-categories of nonprofit must create their own range of performance metrics. Rather than continuing to bemoan an inevitable focus on efficiency measures the sector must take ownership of the issue and develop its own response. However, better measures will not in themselves build the public’s trust. Equal attention must be paid to the specification of what might constitute appropriate standards of performance and educating the public accordingly.

The recommendations of the report Growing Philanthropy in the United States are based on a summit held in Washington, D.C. in June 2011 with 35 leading U.S.-philanthropy experts, including nonprofit leaders, technology suppliers, consultants and executives from foundations and associations. To download the full report, click here.

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