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Thinking about Australian charity

Category: Analysis

Where charity money goes

Most of us haven’t worked in charities, which makes their inner workings seem somewhat mysterious. So it’s natural to ask where donations actually go.
The implied question is ‘does the money I donate actually go towards the cause’? The problem is that this question is neither easy nor straightforward to answer, and before we answer it we need to dive into what a charity actually is.


What charities aren’t

It’s easy to picture charities as a kind of money funnel – collecting money from the general public and directing it to where it’s needed most, be that cancer researchers or African orphans. You put cash in, and good results pop out the other side. The charity then takes a cut of the money in the process for providing this service. The seductive simplicity of this model means that, when you start thinking about finding the “best charity”, it seems that the charity that takes the smallest cut of your money must be the best one. Surely that means that the most of your hard-earned dollar is going to the people who really need it, right?
Well, no, not really. Let’s take a step back and think about what charities actually do and how.


What charities are

Charities are, fundamentally, very similar to businesses. They employ people to do tasks, and spend money to achieve their goals. The only real difference is that charities, instead of aiming for a profit, aim to change the world for the better.

In every other aspect they’re the same – they need accountants, and receptionists, and IT staff, and everything else. None of these things are frivolous or unnecessary – running a large charity without an accountant is not being frugal, it’s a recipe for disaster. In a very real sense, the accountant is just as essential to the charity achieving its aims as the scientist in the lab doing research.

The exact distribution of how their money is spent depends, obviously, on the charity. Some charities will give out grants to other organisations to achieve specific goals . Others will spend money on advocacy, or in-house researchers, or field work, or providing services. This depends on what the charity wants to achieve, of course, but also how it has decided to reach those aims. Two charities with the same goals might have very different means to reach them .

Let’s take an example – heart disease. It’s a serious problem, the number one killer of people in developed countries. A number of charities have been set up to tackle it. But how? Charity A aims to reduce deaths from heart disease, and gives grants for medical research to create better treatments. Charity B has the same aim, but believes that prevention is also important. So perhaps they set up an education program, teaching children about the risk factors for heart problems and encouraging them to exercise. Charity C also wants to reduce deaths from heart disease through prevention, and evidence shows that adults aren’t exercising enough and that better bike paths help. So they work to convince the government to install them.

Which of these charities is ‘right’? They will all probably reduce deaths from heart disease in different ways. Medical research takes a long time, so Charity A might not see results for a decade or more, but could help people around the world rather than locally. Educating children has even longer term results – those children wouldn’t get heart disease for another 20 or 30 years. So which one is best? That’s a question for the academics and strategists.

So the answer to the question ‘Where charity money goes’ is a simple and rather unsatisfying one. It goes where the leaders of that charity think will have the most impact. The good thing is that you can find out what they believe by reading their annual report. It should tell you in some detail what the charity is spending money on and, more holistically, what it considers important.


But what about charity waste?

Of course, charities don’t always make the right decision with where to spend money. Most charities are very good at spending money effectively, and it’s a very rare bad egg that spends it deliberately poorly. A charity might spend money on an unsuccessful advertising campaign, or on an ill-fated fundraiser, or on an inefficient intervention. Sometimes this is done in bad faith, but more often it is simply because charity workers are not omniscient and make poor decisions sometimes. Unfortunately, aside from in exceptional circumstances, it’s almost impossible to tell how many good or bad decisions are made in a charity. All you have is the outcomes, and sometimes (like our heart disease example earlier) you might not even have those for a decade or more after the fact. Telling which of our heart disease charities is ‘most efficient’ is about as difficult as telling which one is ‘best’.

Of course, there are a number of things incorrectly regarded as ‘waste’, such as paying CEOs. This is a common refrain against charities, but remember that large charities are very similar to businesses. You want that charity to be run well, and to do that you need a CEO who isn’t terrible. And finding CEOs that are both capable of doing a good job and will work for low pay is rather difficult. This is a small part of a larger discussion about how and how much charity workers should be paid, and there are no simple answers as to how much is the right amount. But it seems like the right amount is definitely more than nothing.


Deciding where your money should go

Behind the question is an anxiety – a desire to have your donations make a difference. You want to look inside the black box of charity to see what your donation actually does. Of course, the simplest answer to this is to read what the charity itself says. If there’s a charity you’re interested in, have a read of their annual and financial report to get a sense of where they’re putting their money and what they consider priorities. If that’s not enough, contact them and ask what they’re doing. It is very unlikely that they’re putting it in some kind of Scrooge McDuck-style vault for their CEO to swim in.

This blog post won’t tell you who you should donate your money to. Donations are a personal choice, and made in line with personal beliefs as much as with raw data. If, after reading through a charity’s annual reports, you don’t like the way they distribute their funds, then don’t donate to them. If you do, then do.
There is obviously more to it than that – some charity approaches are genuinely more cost-effective than others, and depending on the field you’re interested in there may be a substantial amount of literature on exactly what works best to solve that particular problem. The more you read, the better informed your choices will be, and the more likely that your donation will have a substantial impact.

Financials, charity health, and World Vision

At ChangePath, we rely heavily on financial statements to assess the financial health of a charity. Our methods are relatively simplistic, and they aim to give a very basic metric for understanding if a charity is being managed well or poorly. Given these limitations, we shouldn’t fall into the trap of thinking that financial statements give us the whole picture.

Let’s look at a case in point: World Vision Australia. Tim Costello, the CEO, has talked about how Australian giving is waning and that “this has been the worst time of my life in 12 years at World Vision” 1. Last year, World Vision laid off 89 staff out of around 500 full-time, blaming the falling Australian dollar and the fact that child sponsorship has dropped from 80 per cent of the organisation’s revenue to 43 per cent in just over a decade 2. According to Tim Costello, this is an exceptionally tough time at World Vision.

And yet, a superficial glance at the financial statements appears to tell a different story. Revenue has steadily increased over the last four years, from 343m (2012) to 370m (2013) to 380m (2014) to $424m (2015). Donations are similarly rising slowly, from 287m to 307m to 309m. The balance sheet is healthy, and they have been relatively good at keeping expenses in line with revenue. While they did lose $1m in 2013, World Vision Australia posted a $21m surplus in 2014. A brief look at the numbers appears to show a charity in great financial health.

When finances and words diverge

So what’s going on here? Is Tim Costello lying? This seems very unlikely – charity CEOs don’t lay off staff without very good reasons, especially when it represents almost a fifth of all full-time employees. People are expensive to hire and train, and layoffs are terrible for morale. Occam’s razor would suggest that World Vision Australia is telling the truth and is indeed going through tough times 3.

More likely, what this illustrates is a few key problems with using financial statements to understand charities. First and foremost, you’re only looking at a snapshot back in time, often quite far back. When Tim Costello was quoted as saying it was the ‘worst time’, the most recent financial statements available were from the end of September 2014, nearly two years earlier. This is because you can’t write the financial statements until the end of the financial year, and it generally takes a few months for the final statements to be written and approved. So there’s close to a year-and-a-half gap between what’s actually going on and the financial information we have. The Australian dollar didn’t start its latest fall until just after that report was published, in October 2014, and the effects wouldn’t have been felt until sometime in 2015 at the earliest.

Even now in March 2017, a full year since the original news article, we’re still not much wiser about what exactly was happening in early 2016. The latest annual report available (as of March 2017) only gives figures until September 2015. Even then, there were a few mentions of hard times – the Board Chair’s report refers to it as a ‘challenging year’, which speaks volumes when you consider the rarity of hearing negative news in the introduction.

Another important point is that three years and the headline figures aren’t always enough context to see long term trends. While donations have been rising slowly for the last three years, to understand the strategic direction of World Vision you need to go back five, maybe 10 years and look at the trends.
Finally, it illustrates how relying on the big picture numbers can lead you to miss important events and get a warped understanding of the health of an organisation. If you just looked at the headline revenue figure in the 2015 financial report, you’d think World Vision was a picture of health, with steady revenue growth from the previous year. Yet a bit of digging reveals worrying trends. Child sponsorship income, by far the largest single income source and an important source of recurring funding, declined from $194 million to $186 million. This was masked by a significant uptick in donations of goods and in grants. Yet as the report notes on page 28, “the future for grant income remains uncertain”, and given that grant income generally funds specific projects rather than the running of the charity itself, it can create significant issues.

Of course, as with any media story, the way it is pitched is important. Look at the way they have phrased it – ‘child sponsorship had dropped from 80 per cent of the organisation’s revenue to 43 per cent’. This says nothing about the absolute numbers, only the relative numbers. Are donations falling and other types of revenue are taking up the slack? Or are donations rising but other forms of fundraising are rising faster? Without analysing the financials for ten years, it’s difficult to say.

It will be very interesting to see what the 2016 financial statements show when they’re released. I’ll update this article once they’re available.




Face to face fundraisers and why charities hire them

We all see the charity fundraisers in the streets, trying to attract your attention as you desperately stare at your phone in a vain attempt not to be noticed.

Opinion polls suggest high levels of public hostility towards street fundraisers, also known as “chuggers” (a portmanteau of “charity mugger”), with as many as 80 per cent of those interviewed being against them. Even I’ll confess to not liking them, and I’ve worked in charities for years.

Recent articles, like this one, have come out swinging against these fundraising tactics. Not only that, but these services are famously costly for the charities. This is a reputational risk for the charity as well as a monetary loss.

So if they annoy donors, are hugely expensive, and give the charity a bad name, why on earth do they keep being hired?

The chugger balancing act

For charities, street fundraisers represent a tradeoff. They know that face-to-face fundraising isn’t well liked, and it does put a bit of a dent in their reputation. But it’s very effective, especially at finding people willing to give a recurring donation.

It’s long-term sustainable revenue like that (people giving a few dollars a month) that allows charities to plan for the future slightly better. Most charity revenue is one-time – an event, a fundraiser, a day, or a bequest. This means that one rained out event, or one cancelled fundraiser, has the potential to seriously dent the numbers. Recurring donors, by contrast, give charities a fairly stable stream of money which they can then allocate to research, advocacy, or whatever they choose.

People with recurrent donations also give more – one study found average recurring donor will give 42% more in one year than those who give one-time gifts. Cynics would argue that donors forget about the recurrent funding and thus spend more on the charity than they would if you asked them for a lump sum, but it’s also intimately tied in with the psychology of how humans value money now vs money in the future.

Donors with recurrent funding are rarely donors for life, but they last much longer than ‘one-time-only’ donors. The average length of time they maintain their donation is 4 years. “Over 70% of people that we recruit into organizations never come back and make another gift,” says Dr. Adrian Sargeant, Professor of Fundraising at the Lilly Family School of Philanthropy at Indiana University. Whereas 80% of monthly giving donors are still there a year later.

And donations aren’t the only factor. Street fundraisers also help to raise awareness of a charity, though this is somewhat counterbalanced by the slightly negative associations with chuggers.

Effectively, the simple fact is that charities wouldn’t employ these fundraisers if they didn’t believe the tradeoff was worth it. Indeed, I know a number of charities held off on doing face-to-face because they were worried about the reputation damage. But then they, like a lot of other charities, realised that they were simply ceding donors to other charities who were willing to do it.


The numbers don’t lie

To look at just how influential face to face and recurrent donors are, you need to look deep in the bowels of charity financial reports. Most charities won’t pull out their face-to-face numbers but thanks to the Charitable Fundraising Act (1991), NSW charities have to provide some details on where their fundraising comes from. After a quick trawl through some annual reports I’ve found two that actually give broken down numbers: Cancer Council NSW and Amnesty International. They tell different but related stories.

Amnesty International is, thanks to its ‘sponsor a child’ program, one of the most heavily weighted towards recurring donations. Looking at the Amnesty International financial breakdown (Note 19, page 31), you can see just how heavily they rely on regular giving. Of their $25m in fundraising revenue, a full $21m is regular giving.

Looking at the Cancer Council figures (note 22, page 39), you can see that face to face revenue is not as significant ($15m in revenue out of $83m) but it’s still the second-largest source of funds after bequests. By comparison, Daffodil Day raises less than $3m.

Of course, we’re confusing two very different issues here – recurrent donations are not only raised from face-to-face fundraising. Most charity websites now offer a ‘regular donor’ option, and often irregular donors will be contacted to try and get them to upgrade to being more recurrent. Yet face-to-face remains a key part of the fundraising mix and the one of the most successful at getting regular donors.

I do feel for the poor fundraisers. I’ve worked with several face-to-face fundraising organisations during my time at charities, and they’re generally full of young, friendly people. It’s a thankless, soul-sucking job, and they’re actually doing a better job for charities than most people realise. Of course, you’d be far better to donate directly to a charity on a regular basis, thus cutting out the middleman, but in the absence of everyone doing that they will continue to walk the streets.

Shane Warne, spin, and what we can learn from an ugly situation

Shane Warne’s charity hit the news some months back. Following revelations around poor financial management and intense media scrutiny, the charity folded in January. What lessons does this hold for donors and charities?

The story seems straightforward, yet a closer look reveals some useful lessons for donors and charities alike, and they’re not the lessons you might expect. First, we should have a quick recap on what happened:

  • The Shane Warne Foundation raised money for other charities using high-profile, high-cost events such as poker tournaments and dinners.
  • It was poorly financially run, losing money four out of the last five financial years, and had a series of 3 CEOs in that time. It did not make public its annual or financial reports.
  • The foundation donated to charity 16 cents of every dollar raised between 2011-13, and 24 cents of every dollar it raised in 2014-15.
  • Warne’s brother Jason was paid an $80,000 annual salary in a year that the foundation donated $54,600 to charity.
  • Consumer Affairs Victoria (CAV) began making inquiries into the foundation’s operations in July 2015 before renewing its fundraising licence. Concerns had been raised about its expenses, level of donations to beneficiaries, and the amount of money it was holding in reserve, according to a CAV statement.
  • The foundation was voluntarily shut down in January 2016. An audit ordered by consumer watchdog concluded in March that the foundation complied “in all material aspects” with the law, though the CAV has, as yet, not issued a statement on the audit result.

Of course, that’s not all there is to tell, otherwise this article would be rather boring. For the full story, you can read the SMH article as a good starting point as well as the Age and the ABC. However, as I’ll touch on later, keep your sceptical hat on as you read. This reporting is telling a story, as all media does, so it can be hard to separate out the truly relevant from the gossip and inference 1.

So, a poorly run charity that was losing money was shut down after media scrutiny uncovered the state of its finances. A fairly unremarkable story, spiced up by the involvement of a well-known celebrity. What could we possibly learn from it, other than ‘don’t be like those guys’? A fair amount, as it turns out.

Lessons learned

Transparency should be a non-negotiable when picking a charity

An obvious (and rather self-serving, for a transparency promotion organisation) point is that this story illustrates just how valuable transparency is in the charitable sector. The foundation didn’t release financial statements, a fact that was used against it in reporting. Had they released them, these problems would have come to light before they got so substantial, and potential donors would have had a far better understanding of where their money was going. We’ll never know how this would have affected the eventual outcome, but it’s hard to believe it wouldn’t have been better for both donors and the charity itself.


Big events are actually not great fundraisers

Glitzy, high-profile events are a staple of many large charity’s fundraising arsenals, but they have a guilty secret: compared to most ways of raising money they’re actually startlingly inefficient. The reason is obvious – luxurious events are not, by definition, cheap. Putting on a proper black-tie ball can be a staggeringly expensive proposition. Entertainment, venues, three-course meals, decorations, staffing, it adds up remarkably quickly 2. Not to mention high-risk – most costs need to be incurred ahead of time, with no certainty that the event will get enough donors to break even, much less make a good return for the charity.

Choice has pointed this out previously – “[Event costs] can mean less than half of your ticket price goes to the actual cause asking for money. In 2005, just eight per cent of proceeds from a fundraising dinner for the Children’s Cancer Institute of Australia for Medical Research made its way to actual cancer research, due to poor turnout.” For larger charities, this can still be a good investment – it allows them to gain a lot of promotion and get close to their more high-worth donors. But basing a foundation around doing nothing but big events makes budgeting a constant tightrope walk. With the benefit of hindsight, the Shane Warne Foundation’s fundraising model was a high risk, low reward proposition from the start.



The media are a double-edged sword

Charities and the media have an interesting relationship. When you donate to a charity you generally don’t get anything in return aside from a fuzzy feeling and perhaps a letter of thanks. This is obvious, but it means that the reputation of the charity is absolutely paramount – if you don’t have absolute trust in the charity, you’re not likely to donate to them. This is why services like ChangePath are in such demand. But it’s also a critical factor when dealing with the media, the main source of most people’s information about charity. For not-for-profits, unlike P.T. Barnum, not all publicity is good publicity. An article that’s critical of a charity can be immensely damaging to its ability to fundraise.

And yet, charities need the media. Not only because advertising is expensive and media coverage is a cheap way to get exposure, but also thanks to the legitimising aura of major media outlets. If it isn’t being featured in newspapers, on television and in other areas, a charity is cut off from a large potential donor base it couldn’t reach in other ways. Social media is changing this to an extent, but the power of the media remains strong.

The Shane Warne Foundation is a powerful example of how influential the media can be. Far more than the investigation by Consumer Affairs Victoria, it was media coverage of the problems of the charity that led to its eventual closure. This reporting has been not exceptionally kind – the media love a good story about a charity’s downfall, especially when a celebrity is involved. The combination of moral righteousness and schadenfreude is too good to ignore. Yet this leads to reporting that could be alleged to be biased (Shane Warne certainly felt so).

Mostly it is a subtle lack of context – say, reporting that KPMG found that cash couldn’t be accounted for, ignoring the vital context that this statement is true of almost all charities and is a standard boilerplate text found in many charity annual reports. Similarly, this reporting that a former personal assistant of Shane Warne’s won one of the charity auctions, while only in the 5th paragraph was it acknowledged that this didn’t break any laws and there was no allegation of wrongdoing. This kind of reporting is pervasive throughout the discussions of the foundation, and it makes it difficult for the general public to pull aside the curtain of moral outrage to the actual facts. It also serves to reinforce some unfortunate misperceptions about charity donations that I’ll talk about a bit later.


The power of celebrity

Celebrities have a minor superpower – they generate news simply by existing. Otherwise mundane events, such as going out on a date or being injured, get written up in breathless prose by reporters and are lapped up by the public.

This has led to many charities bringing on ‘celebrity ambassadors’ to help increase the media coverage of their work. Running a campaign against a major disease? Boring, nobody is going to write an article about it. Running a campaign against a major disease and someone famous is at the opening? Journalists will knock down your door. This is perhaps overly cynical, but it is difficult to argue with the ability of celebrities to capture media space. Celebrities also bring a host of other benefits, such as their connections to influential donors, name recognition, and pulling power for events.

There is another side to the relationship, however. As much as people want to see celebrities doing good, they want to see them doing evil more. That means that any potential wrongdoing will be amplified and broadcasted, which can have substantial repercussions for the associated charity. How many small charities are there out there that are doing the same (or worse?) than the Shane Warne Foundation, but the media never had any interest in reporting them?



The toxicity of charities spending money

The media coverage of this debacle reveals a lot about how the media perceives charity spending, which in turn shapes the way the general public thinks about it. While this is an extreme case, the general sense that charities shouldn’t spend money on administration (or indeed anything that isn’t ‘the mission’) pervades all the coverage of this incident. This is despite long-term and repeated calls to stop fixating on charity administration and costs.

The phrase ‘only 16c out of every dollar was donated to charity’ is used in most articles about the scandal, but is delivered completely devoid of context. Is that bad? How would we know? As we saw earlier, a similar fundraising event only raised 8 cents in the dollar. Administration ratios are a notoriously terrible way to assess whether a charity is doing a good job. While 16 cents is certainly not a great total, without a more nuanced understanding of the charity’s accounts it’s impossible to say whether this was due to waste, poor management, or simply the costs of hosting the events.

Similarly, much of the reporting focused on the fact that Shane Warne’s brother was paid $80,000 as CEO. While I don’t condone nepotism (it is possible, though highly unlikely, that he was the best man for the job), we need to get over our collective fear of paying charity CEOs a competitive salary. It’s something I’ll come back to in a future article, but the phrase ‘if you pay peanuts, you get monkeys’ applies 3. With the context that the average pay for a charity CEO in Australia is $100,000, $80K seems more reasonable. As always, context is important.

Giving and giving up

The fundamental problem with many of the issues raised with the Foundation is that we don’t have a counterfactual. There’s no crystal ball to tell us what would have happened if different decisions had been made. If the Shane Warne Foundation hadn’t existed, would more money have been donated to charity, or less? The charity gave (by its own estimates) nearly $4m directly to charity over 11 years. Even if we assume that’s a bit optimistic, it’s still a very substantial amount of money. A Canadian survey found that only 19% of donors decide in advance how much money they’re going to donate over the course of a year, meaning that the amount that most people give is dependent on circumstances. If donors hadn’t been at the Shane Warne Foundation fundraising events, it’s doubtful they would have ‘replaced’ that donation by giving money elsewhere. It seems likely 4 that the Shane Warne Foundation was a net force for good while it existed, even if an inefficient and poorly run one. Perhaps there was a way for it to survive the drubbing it received and reform into a better, more efficient organisation. Perhaps not. Regardless, in its very public sinking it has lessons we should all learn.

What do you think? Are there additional lessons to take from what happened to the Shane Warne Foundation?

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