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Category: Analysis

Practical donating part 3 – how to choose a charity

Welcome to our five-part series on how to decide where to donate effectively. We’re going to go on an in-depth journey through the psychology of donations, the best ways to tell whether a charity is good at what they do, and how to actually give most effectively.

  1. What drives donations
  2. Choosing a cause to support
  3. Good ways to choose a charity
  4. Bad ways to assess charities
  5. The best ways to give

Give if you want to

What we are about to outline is an intensely rigorous approach to choosing which charity to donate to. Realistically, it is a lot of work. So let me lead with a simple maxim – you should give to a charity if you want to. If a friend of yours asks for a donation because they’re running a marathon backwards or something and you want to support them, don’t let this article hold you back. Donate to the cause and enjoy doing so.

Why would I say this, when the entire point of this series is to teach you how to be more effective and thoughtful in your donations?

I say it because no matter which charity you donate to, your donation will likely do some good. Not only will you feel happier after donating, you will certainly do more good for the world than if you spend the money on, say, biscuits. Some charities will do more good than others, for sure. But they will all do more good than you spending the money on yourself.

This guide is to help you decide how to decide between charity A and charity B. But if it’s a choice between giving to charity A and buying some biscuits, just give. The last thing I want is for anyone to read this article and donate less.

A simple maxim

I’m a big fan of Michael Pollan’s food rules (eat food, not too much, mostly plants). They’re a simple summary of some complex ideas. So, in that vein, here are some rules for donations:

  • Donate to charities.
  • Not based on ratios,
  • But on if they measure their impact.

Let’s explore each of these in turn.

Do not pass go

But first – have you decided that the cause that you most care about is human poverty? If so, I have good news! You don’t need to do any of the following steps, because some amazing organisations have done it already for you.

Go visit Givewell, look at their recommended charities, and you’re set. Givewell have spent a substantial amount of time and effort to identify charities that do amazing work and will mean that your donation will help organisations leading substantial change.

Everyone else, let’s get practical.

Photo by Glenn Carstens-Peters on Unsplash

Narrowing down to a shortlist

Even once you’ve chosen your cause, a brief Google search or even a look around ChangePath will reveal a huge number of charities working in that space. So before we start looking deeply into individual charities, let’s set some broad filters to get down to a shortlist.

What size charity are you looking for?

Think about whether your cause benefits from scale. For some causes, it can be sensible to donate to larger charities as they have the resources to make an impact. Medical research is like this – it costs at least $100,000 to fund a single research project, and grants often run into the millions of dollars. Smaller charities can be stuck in a situation where they can’t fund research at all. Whereas there are other causes where being small is good – for instance a cause focused on a local area or cultural group. Being small can provide focus.

What should the charity do?

How do you wish to affect your cause? Causes can be affected in myriad different ways. Take heart disease for example – one charity might focus on prevention, helping to educate school kids and make sure they do exercise. Another might focus on medical research, hoping to save lives in future. Both are entirely valid ways for a charity to spend its efforts, and it’s up to you which you would prefer. This may come back to your preference for helping people now vs later, which we discussed last post.

Make sure it’s a charity

First, you should do some basic due diligence. Check that the charity is registered with the ACNC. If it isn’t, it isn’t a charity. It’s also worth checking that it is up-to-date on its reporting to the ACNC.

Though, importantly, being registered as a charity doesn’t automatically mean it is tax deductible. You will need to check the ATO ABN lookup page for that.

What makes a good charity?

Be warned, there is no easy answer. Finding a good charity is more than star ratings. There are a lot of very difficult questions to investigate.

Now that you’ve chosen a cause, you want to find an organisation that will make the biggest impact on that cause. So how do you tell if an organisation will have an impact?

Photo by Chris Liverani on Unsplash

Checking the evidence base

The first way to identify a good charity is by the evidence base behind what it does.

Why is that important? Let’s take an example – a charity that wants to reduce the number of people that binge drink. They decide that one of the ways that they can do that is by putting up posters in bars talking about the evils of binge drinking. To try and get additional funding for their ‘posters in bars’ program, the charity runs a trial. They want to see how effective it is. So they run an experiment, where they test how much people drink in bars with and without the posters.

This is a real study, done by the Drinkaware Trust in the UK. What they found was that having the posters up in a bar didn’t mean people drank less.

They drank more.

Why? The study (1) doesn’t say. Perhaps people are just naturally belligerent. Maybe talking about binge drinking is a prompt to do so. Regardless, it goes to show that what you would assume is a normal, straightforward intervention just doesn’t work. As it turns out, changing human behaviour is difficult. Really difficult.

Another, more famous example is the Scared Straight initiative in the US. They took ‘bad’ kids, took them to prisons, and showed them how terrible it was. The idea was to make them too afraid to commit crimes.

The effect was the opposite – kids that went on the program committed more crimes than equivalent kids that didn’t. (2)

In fact, one meta-study found that 90% of studied educational interventions either had a weak effect or none at all. (3) As it turns out, we are very bad at predicting what works.

This is why evidence is so important. The absolute gold standard for charity evidence is the randomised controlled trial, which attempts to test the intervention by holding all other factors equal.

If a charity is running a program that has been scientifically proven to be effective, you are much more likely to create impact by donating to them than you are to a charity whose interventions are untested.

Evidence isn’t everything

Of course, the same reason that many interventions don’t work is also a reason to be cautious about how to interpret these studies. Humans are complex. Randomised controlled trials work off the assumption that the two groups are the same except for the intervention. Not only is that a big assumption, in order to get groups that are vaguely the same you need to exclude complex cases. There are also good arguments that an over-emphasis on evidence privileges certain western forms of thinking and makes it harder for Indigenous charities or methods to be funded.

There’s also the fact that running trials is exceptionally expensive. Running a full trial can cost millions of dollars in some cases. So there’s a lot of charity work that doesn’t have an evidence base because there isn’t the money to invest in it.

What’s more, reliance on evidence means that you’re ignoring new and innovative techniques. It’s entirely possible that the best ways of solving a problem are not the ones that we already have – instead we should be investing in new interventions or doing more research.

Finally, there are causes where requiring evidence doesn’t make a lot of sense, like the arts – imagine an evidence-based ballet.

So if proven programs aren’t always a reliable way of telling whether a charity is any good, what should we use instead?

Photo by Dawid Małecki on Unsplash

Measurement and evaluation

As we outlined above, our instincts about what works and what doesn’t are often wrong. This makes it essential that charities measure and evaluate their own programs to make sure that they are actually accomplishing anything. Put simply, if a charity doesn’t measure what it does, it doesn’t know if it works.

Unlike with corporates, there’s no obvious measure of how good a charity is or how effective it’s being. If you’re a business, you can tell whether you’re making something that people want by how many people want to buy it or how much money you’re making. Measuring the effect of a homelessness program, for example, is far more difficult – you need to invest in figuring out what the short and long term outcomes are.

Unfortunately, measurement and evaluation isn’t particularly exciting. Many charities skimp on it because they figure the money is better spent on actually helping people, because they ‘already know’ the program works. Donors, too, are often sceptical – measurement falls into the dreaded bucket of overhead that people get wrongly angry about (more on that in the next article).

Yet a charity with the best of intentions can accomplish nothing if it doesn’t measure what it does. More than that, even if they do have a good program, it can never improve if they don’t identify which aspects work best.

So what you’re looking for are charities that have a solid measurement and evaluation plan in place – they can prove they are measuring the short and long term outcomes of the work they do. This can be quite difficult to find out, so you will need to read through websites and annual reports. But it’s a very important predictor of whether your donation will truly have a long-term impact.

Core predictors

Beyond measurement and evaluation, there are a few key indicators of good charity governance that will increase the likelihood that your donation will be well managed.

Transparency

A charity that is transparent is one that gives you all the information you need to make a decision. It shows they have confidence in the work they do and their approach.

Look for:

  • Publicly available annual and financial reports
  • Publicly listed board members
  • Admitting of mistakes
  • Privacy policy

Track record

While past performance does not always predict future success, a charity that has been historically poorly managed has more of a burden of proof than one that has been well managed. Of course, charities that are transparent enough to reveal their past failures (rather than having them dragged out by the press) are to be lauded as well.

Look for:

  • Previous successes (and failures)
  • History of good measurement and evaluation
  • History of good financial management

Governance

A well-governed charity has checks and balances to make sure it continues to use money wisely and keeps the end beneficiary always in mind.

Look for:

  • Board independence – is the board comprised mostly of staff? Are there representatives of the people the organisation is trying to help on the board?
  • Board skills & diversity
  • ACNC reporting – are they up-to-date?
  • Audited financial statements (once the charity is beyond a certain size)

Skills and expertise

Charities that have a strong skill base and a good self-reflective culture are more likely to make less mistakes and learn from the mistakes they make. The involvement of end beneficiaries is especially important, as without it charities may solve for the wrong problem or not deal with all the relevant issues.

Look for:

  • Responding to success and failure
  • Self-assessment and self-skepticism
  • Industry experience or lived experience

Strategy

Charities should have a strategy and follow it. This will not only ensure sustainability but also it will also give you a clear idea of where they are hoping to go in future.

Look for:

  • Well-developed strategic plan
  • Following of previous strategic plans
  • Sustainable fundraising strategy

Values

Finally, a strong set of values can help ensure that a charity is aligned with all its staff and mission.

Look for:

  • Well-defined values that match with the aim of the organisation

Finding good charities

You will probably have noticed that none of the metrics above are simple, or easy to judge. It takes significant time and effort to assess even a single charity. Surely there is a simple way to find the best charity? Sadly, there isn’t. Changing the world is a difficult, messy exercise, and finding charities where you will definitely be impactful is hard.

Unfortunately, this difficulty means that a lot of people are searching for an easy answer. This has led to some rather terrible metrics being used to decide which charity to donate to. That’s a topic for the next article. And how do you actually implement these recommendations in a way that makes sense? Well, that’s a topic for our final article on how to give, which will tie it all together.


Practical donating part 2 – Choosing a cause

Welcome to our five-part series on how to decide where to donate effectively. We’re going to go on an in-depth journey through the psychology of donations, the best ways to tell whether a charity is good at what they do, and how to actually give most effectively.

  1. What drives donations
  2. Choosing a cause to support
  3. Good ways to choose a charity
  4. Bad ways to assess charities
  5. The best ways to give

To understand how to choose a cause, we need to grasp why we choose the causes and charities we do.

There are two schools of thought on this – passion and impact.

If you choose a cause based on passion, you donate to the causes that speak to you most personally. The disease your loved one died from, the local community you live in, the people and animals who have affected your life.

If you choose based on logic and pragmatism, you donate to causes where you can make the most impact, where we can improve the world the most. This is difficult, as to do this we need to somehow rank causes. But what’s more important – humans, animals, or the environment? Is it better to reduce suffering now, or save lives later? Do we save lives close to us, or further away? Fortunately, we’re not the first to grapple with these problems, and organisations like 80,000 hours have created frameworks to help us make these decisions (though they are still contentious, as they speak to very fundamental issues of moral philosophy).

You would assume, therefore, that it is the logical ones that make the biggest impact on the world. However, this isn’t necessarily the case. Donating to causes that you’re passionate about has a multiplicative effect – you are more likely to give, and give regularly, to causes you are passionate about. Not only that, you are more likely to tell others, to think deeply about the best ways to influence that cause, and to fundraise from your friends.

It follows, then, that there is a balance to be struck. The cause that you choose should be something that you’re passionate about, but also a cause where you have a real chance to create genuine impact on people’s lives. This makes where to donate a deeply personal decision.

Understanding your core beliefs

What you value and what you believe have a key role to play in deciding where to donate. To my mind, there are three main factors:

  • Whether you think people, animals, or the environment are most valuable. There are some people who value human lives over all others. Others argue that animals are innocents unable to speak up about the horrific things we do to them, so perhaps they deserve protection more. Still others would argue that without an environment to live in both humans and animals would be in a very bad way.
  • Valuing the present vs the future. Would you prefer to save lives now, or lives later? That’s essentially the choice you’ve making when you decide between present-focused charities (such as drought aid) and future-focused charities (such as medical research).
  • Nearby vs far away. Do you value nearby things more than those living far away? Do you value the lives of people in Australia more than those in Iraq? If you’re like most humans, you probably do, but may not want to admit it.

These core beliefs help to shape which cause you might want to support, when combined with your passions. But in most cases they won’t be enough to narrow down exactly where you should donate.

Photo by Alexander Andrews on Unsplash

Narrowing down your cause

How do you actually take your shortlist of causes and make a decision? Thankfully, organisations like 80,000 hours have been thinking about this, and have come up with three main metrics.

Scale

What’s the magnitude of this problem? How much does it affect people’s lives today? How much effect will solving it have in the long-run?

Solvability

How easy would it be to make progress on this problem? Do interventions already exist to solve this problem effectively, and how strong is the evidence behind them?

Neglect

How many people and resources are already dedicated to tackling this problem? Are they well allocated? Why aren’t markets or governments already making progress on this problem?

You may need to do some research to get a good answer to some of these questions. And that’s OK. It’s worth doing, especially if you’re going to ‘set and forget’ your donations for a while. This is also where personal passion is helpful, as if you are already knowledgeable on a subject it will mean you have a better idea about how solvable the problem really is and where you can make a difference.

So, you have a cause. But how do you decide which charity to actually donate to? In our next article, we’ll talk about good ways to decide which charities are most likely to impact on your cause.


Practical donating part 1: What drives donations

Welcome to ChangePath’s five-part series on how to decide where to donate effectively. We’re going to go on an in-depth journey through the psychology of donations, the best ways to tell whether a charity is good at what they do, and how to actually give most effectively. The articles will cover:

  1. What drives donations
  2. Choosing a cause to support
  3. Good ways to choose a charity
  4. Bad ways to assess charities
  5. The best ways to give

ChangePath exists to help people make decisions about where to donate. But where to donate is a surprisingly complex question. To truly understand it, we need to dig deep into psychology, the nature of suffering, and the intricacies of the world we live in.

On the face of it, deciding where to donate seems relatively straightforward:

  1. Choose a cause,
  2. Pick the best charity within the cause,
  3. Give them money.

Of course, nothing is ever quite that simple. Do most of us sit down and think deeply about the charities we donate to? Does the average person do hours of meticulous research before deciding on exactly how to allocate their charity budget for the year? Of course not. That’s not really how people work. So how do we actually decide where to donate?

Photo by Daiga Ellaby on Unsplash

Why we donate to anything

From a completely dispassionate point of view, the fact that we donate at all is somewhat odd. Why give money with no expectation of return? Economists and psychologists, who spend their lives attempting to understand why humans behave in completely baffling ways, have a few theories. When you break it down, there are two different questions – why do we give at all, and why do we give to the specific causes we do?

Why we give at all

There’s a lot of research exploring why we behave altruistically. The simplest explanation, and one that holds a fair amount of weight, is that giving simply feels good. Professors Elizabeth Dunn & Michael Norton found not only did people who gave away money feel happy about it, they felt happier about spending $5 on someone else than spending up to $20 on themselves 1. There are a number of other studies that have shown that giving activates the reward centres in the brain.

But it’s not just about feeling good ourselves. We are social creatures. So even when we think our motivations are pure, there’s often a social aspect to our behaviour. We will donate more when we are asked to give by someone we know 2. If we see someone give a large donation directly before us, we are more likely to give a larger donation ourselves. This even works if you don’t know the person – having a famous person recommend a charity can dramatically increase donations.

Of course, not everyone has the same motivations for giving. Some are motivated by social recognition – research by economists Amihai Glazer and Kai Konrad shows that donors are most likely to give the minimum amount to get the maximum amount of recognition (e.g. if you need to give more than $1,000 to be a ‘Gold’ sponsor, most people in that category will give exactly $1,000) 3. They say this suggests that people donate partly to signal their wealth.

Yet many people donate anonymously or feel uncomfortable when their donation is announced, so that can’t be a motivating factor for everyone. Indeed, research has shown that wealthy people give for different reasons to everyone else, based on their personal beliefs. Wealthy people were more likely to donate when the ad emphasised what an individual could do, rather than a collective call to action 4.

You’ll notice a common thread – none of these reasons for donating are particularly rational. Donations are, by and large, emotional decisions.

Photo by Mohamed Lammah on Unsplash

Why we give to the specific causes we do

Because donations are driven by emotions, the way many people choose which cause to donate to aren’t particularly rational either.

For more than 85% of charitable donations, people donate simply because someone asked them to. Which makes sense given what we know about the social motivations of giving – it seems like we are far more likely to be altruistic when someone else can see it or we have a friendly face to acknowledge it.

But it’s not just that many people aren’t intentional about their giving. No, it’s far weirder than that. Because we give based on emotions, this has a huge number of odd flow-on effects, including:

  1. Charities that show a single, identifiable beneficiary (often a sad child of some type) get more donations than those that use statistics about the problem. People know, intellectually, that saving many people is better than saving one person. But donations are emotionally driven, so the less people you have on your poster, the more likely people are to donate. Indeed, researchers found that adding one more child to the poster reduced the amount of money given 5.
  2. The more futile a problem seems, the less people will give, even if you’re helping the same number of people. When people are told they can save 1,000 people, whether they donate is dependent on what proportion of the overall group they can save. The higher the percentage, the more likely they are to donate. For instance, people were more willing to donate if they could save 1,000 out of 5,000 people than 1,000 out of 10,000, even though you’re saving the same number of people for the same amount 6.
  3. Thinking about money decreases altruism. When researchers prompted people to think about money (by, say, having inexplicable monopoly money on the table) they gave less money than those that didn’t 7.

But here’s the real kicker, especially for those of us who are trying to drive more effective donations.

Advertising which emphasises how effective a charity is does not increase giving. Indeed, evidence suggests that the effect of this information can actually be the opposite 8.

So charities that base their campaigns on how much impact they have will actually get LESS donations than those that don’t. Indeed, there is some evidence that charity impact scores are used by donors as an excuse not to give, rather than a reason to justify giving 9.

And yet, this flies in the face of what donors actually say they want. Donors are constantly asking for a better understanding of the impact they have. Research shows that two-thirds of donors say understanding their impact would influence them to give more 10. But it doesn’t.

What’s the conclusion to all this? It’s that the reasons that people donate, and the drivers to get them to donate, are emotional and complex.

Let’s bring it back to the original question – how should you, personally, decide where to donate? If you are to donate wisely, you should be aware of your own mental biases and try to overcome them. Are you looking at charity ratings as a way to talk yourself out of donating? Then don’t. If you want to put a lot of thought into where to donate, then you should.  

The core belief that underpins donations

Beneath all of the superficial reasons for donating, there is a single truth. One thing that we must believe in order for us to donate at all.

We donate because we believe that we can change the world with our actions.

We donate to causes we believe can bring the world closer to what we believe it could be.

Donations are an intensely personal choice about what you want to accomplish in the world. How you think the world is broken, and how you think it should be fixed.

In our next article, we’ll talk about exactly how to use that motivation, and the experiences that you’ve had, to choose a cause to donate to.


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.

 

Sources:
http://probonoaustralia.com.au/news/2016/03/political-leaders-to-blame-for-loss-of-charity-costello/
http://probonoaustralia.com.au/news/2014/07/fewer-aussies-giving-more-to-charity/
http://www.philanthropy.org.au/tools-resources/fast-facts-and-stats/
https://www.qut.edu.au/research/research-projects/giving-australia-2015-2016
http://www.roymorgan.com/findings/5657-fewer-aussies-donating-to-charity-201406300152
http://australiancharities.acnc.gov.au/wp-content/uploads/2015/11/Australian-Charities-Report-Summary-FinalWeb.pdf

 

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.

 

night-television-tv-theme-machines

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?

 

money

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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