Worth Reading: Lack of Data on Charities’ Effectiveness Hurts Support

Because so little information is available to rate charities’ effectiveness in solving social problems, most nonprofits struggle to attract the money they need to grow into large, successful organizations that make a difference in curing stubborn social ills like poverty. So argue Robert S. Kaplan and Allen S. Grossman, two professors at Harvard Business School, in the October issue of the Harvard Business Review.

Over hundreds of years, they observe, the corporate world has developed systems to support the exchange of information and capital between investors and businesses: Those systems include mutual funds as well as venture-capital and equity firms. While charities produce audited financial statements and other reports, the information in those materials reveals little or nothing about the group’s ability to achieve lasting social change, and donors are hard-pressed to get reliable data that offer comparable data on charities’ achievements.

“As long as this state continues,” the authors write, “American society as a whole will earn a low rate of return … on the more than $300-billion in annual investment in the [nonprofit] sector.” But, they write, some signs of change are appearing. Mr. Kaplan and Mr. Grossman outline a handful of organizations and programs that are identifying charities that achieve measurable improvements among the needy with the goal of funneling more money to those organizations. Among them:

• Since 1999, the Edna McConnell Clark Foundation has focused on supporting organizations that have proved their ability to help low-income youths. Three years ago, the foundation joined with other grant makers to create a $120-million pool that focuses on making longer-term investments in selected organizations with a record of success.

• The Robin Hood Foundation, a charity that fights poverty in New York City, requires the organizations it supports to provide measures of their results, such as the number of students they help graduate from high school or jobs they help people get. It uses those data to arrive at two measures: the increase in participants’ lifetime income and the growth in the number of years they live. That allows the foundation to compare hundreds of efforts that take different approaches and better steer money to organizations that do the most to increase income and longevity.

More corporations and other donors, the authors write, should follow such efforts and “insist on metrics of the social return from their charitable giving.” They add: “The ultimate prize is a social capital market that delivers real impact for the dollars donors contribute.”