Charity Standards Proposed by Watchdog Group Are Deeply Flawed

When the BBB Wise Giving Alliance proposed new guidelines earlier this year aimed at improving charities’

accountability and performance, it moved far from the Better Business Bureau’s traditional role as a consumer watchdog. In so doing, the alliance is trying to cover too much ground with too few resources to be effective and fair. In the long run, charities will suffer.

To understand why the proposals are misguided, a bit of history is in order.

The Wise Giving Alliance was formed in 2001 by the merger between the National Charities Information Bureau and the Council of Better Business Bureaus’ Foundation and its Philanthropic Advisory Service. The proposed guidelines are the result of attempting to merge the standards of the two organizations. When adopted, the standards would serve as the basis for reports that the alliance produces on national charities, as well as reports that local Better Business Bureaus issue on local groups.

The National Charities Information Bureau focused on governance of charities, while the Philanthropic Advisory Service paid more attention to the content of solicitation materials. The proposed guidelines pursue both objectives but take them far beyond their predecessors. In doing so, they place significantly greater burdens of performance and paperwork on charities under review. Yet they do not necessarily provide the public with more-useful information than before.

Of all the Wise Giving Alliance’s proposed guidelines, the most questionable is the one that seeks a new, more stringent standard for charities’ program costs.

The former standard set by the Council of Better Business Bureaus’ Foundation and its Philanthropic Advisory Service suggested that at least 50 percent of total expenses should be spent on programs. The former National Charities Information Bureau standard was 60 percent. The alliance now seeks a guideline of 65 percent, an unreasonable benchmark that many worthy charities would not meet.

In a recent study by the Center for Effective Philanthropy, in Boston, the chief executives of foundations expressed nearly unanimous concern about using measures of administrative costs to evaluate performance. If the major foundations are expressing doubts about using such an approach, how can the Wise Giving Alliance justify using it?

The answer is that the alliance sponsored a consumer survey that found public support for a program-spending test. The survey asked the rather leading question, “In general, what percent of a charity’s total spending do you think should go toward charitable programs, as opposed to fund-raising or administrative costs?” Survey participants were asked to choose among five percentages, from 50 percent to more than 80 percent. “Don’t know” was not offered as a choice.

Forced to choose among a range of percentages, respondents, not surprisingly, tended to pick the highest figure for programs (more than 80 percent) and the lowest for fund raising (less than 10 percent).

But such figures don’t really show much beyond the fact that few members of the public know what program or fund-raising percentages are reasonable. Program spending that is more than 80 percent of total expenses is far from common.

Large numbers of organizations would fail the new test.

Here are some examples, based on an analysis of current Forms 990 obtained from GuideStar, an Internet database of nonprofit groups: More than two out of five art and history museums fall below the proposed 65-percent guideline for program spending. One in four of the fund-raising arms of hospitals and other health institutions, one in five Christian groups, one in six fund-raising arms of educational institutions, and one in 10 centers for the elderly also would fail to meet the alliance’s standard.

Those figures suggest several things. First, a single numerical standard for program expenditures is not appropriate. Second, stating that 65 percent of total expenses should be spent on programs will unfairly stigmatize many legitimate charities. And third, the Wise Giving Alliance’s fixed standard would push many nonprofit groups to divert attention from management to accounting concerns. Just as with for-profit businesses, the pressure to “make the numbers” would become a distraction from the mission of the organizations.

Besides setting unreasonable spending standards, the alliance proposes to require charities to perform an internal organizational review in the form of a written report to their boards at least every two years. The standard is based on trends toward performance evaluation that many consider a good practice. But the alliance wants to take this good idea and turn it into a “checkoff box” format that would be of little or no value.

The alliance also wants nonprofit groups to make their budgets, and not just their annual reports, available to the public. That would mean that organizations would need to recast their internal budget documents for public consumption. Budgets frequently contain confidential information about fund-raising plans and expectations, along with information about personnel changes.

In addition, the alliance proposes to include an “opt out” provision that would make lists of donors’ names, used by charities in direct-mail appeals, less effective. The proposal could especially hurt charities whose causes rely heavily on the sharing of mailing lists.

And the alliance proposes brief but fairly detailed standards for marketing alliances between charities and businesses. Those standards differ markedly from a 1999 proposal by 16 state attorneys general.

What’s more, the nonprofit world needs a broader consensus on what, if anything, is wrong with such business deals before corrective standards can be proposed. At present, the issue does not seem to raise strong concerns among the public.

The Wise Giving Alliance’s proposed standards are just one aspect of an intensive charity-review process by the organization. The alliance says it is asking charities to submit “hundreds of pages of materials,” such as sample grant proposals, fund-raising contracts, bylaws, direct-mail appeals, and scripts of telephone solicitations. Smaller groups are finding that responding to these inquiries is a significant burden, adding to their administrative costs and distracting them from their missions. And the process of review by many independent Better Business Bureau chapters around the nation raises concerns of consistent application and quality control.

All in all, the Wise Giving Alliance’s decision to shift its focus from fund-raising solicitations to review of management practices and financial results will be confusing to the public and potentially damaging to charities. And as always, illegitimate and questionable charitable solicitors will simply fail to respond.

With for-profit businesses, the Better Business Bureau provides a consumer service of informing the public about complaints by other consumers. The organization does not attempt to tell the consumer which firms are managed better than others. No evidence exists that the BBB Wise Giving Alliance can effectively perform such an evaluation for tens of thousands of charities nationwide.

Dan Prives is a nonprofit consultant in Baltimore. His e-mail address is deepriver@avagara.com

FAILING THE TEST