This is not a happy time for charities and philanthropic foundations. On top of the drop in donations and resulting cutbacks in staff and programming that many have experienced, it is apparently now their turn to sit in the media hot seat and fight off the government regulators.
All at once, several events have brought foundations and other charities into an unwelcome spotlight:
— The California attorney general released a report showing that, on average, only 38 cents of every charitable dollar raised in the state by commercial fund-raisers actually goes to the nonprofits. It turns out that those dinnertime phone calls seeking donations to the local police charity league are not just annoying, they are also expensive. On top of that, the attorney general says, come the charities' own administrative expenses, so that some charitable dollars result in less than 20 cents going to those in need.
— Congress is now considering a bill mandating that charitable foundations spend more of their assets on actual programs. The law already requires that foundations limit their endowment buildup by spending at least 5 percent of their assets per year. Concerned by too much spending on salaries and administration, and too little giving, the new bill would require that at least 5 percent be spent on actual programs, not internal operating costs.
— A new study by former Sen. Bill Bradley and others in the current issue of Harvard Business Review suggests that $100 billion more could be pumped into charitable giving if the nonprofit sector operated more effectively. That sum is three times the annual giving of all charitable foundations in the U.S. combined, and would be enough to give every high school graduate a $40,000 scholarship.
While these are all valid concerns, we're not really talking about corporate scandal here. Nobody is cheating shareholders or employees while feathering his own nest. Yet in the heightened scrutiny of the post-Enron environment, regulators are lining up to fix this one. Before Congress adopts some kind of extensive (and expensive) Sarbanes-Oxley regulations for charities, maybe we should let the system we have in place work the problems.
Boards of charities, for example, armed with these new reports should be given a chance to act. They should become aware of how much it costs to raise each dollar and how much it costs to distribute it. The Bradley report estimates that it costs 18 percent to raise money nationwide, and that the figure could be reduced to 5-10 percent. Boards spending more than that should take a fresh look.
Donors should ask harder questions before voting with their checkbook. The next time I field a call from a telemarketer wanting a donation, I am going to ask whether he is a firefighter or policeman himself, or whether his firm has been hired to call. If the latter, I'm hanging up even faster than usual. Donors can and should ask to see documentation of the cost of fundraising and the administrative overhead for charities they support.
Existing laws should be used before new ones are enacted. In one case, folks are complaining that a foundation head was paid too high a salary while staff and donations were cut. The Internal Revenue Service already has the power to investigate that and issue sanctions for excessive compensation, including removal of the charity's tax-exempt status.
And maybe it's time to create some kind of seal of approval or rating for charities that donors can examine. Markets only work effectively when there is good information, and a rating of how efficiently charities raise and distribute money, and how much of their money goes to programs and people in need would be a helpful measure.
As Dorothy Riding, CEO of the Council on Foundations, said recently: "We may not like the stories that are attracting the interest of government or the media, but they serve as fair warning: Our field is under a new level of scrutiny, and it is up to us to question our practices."
The bar is high for charities — we expect them not just to do good, but to do it well. Perhaps these recent alarms will prompt improvement and avoid unnecessary and expensive government regulation.
David Davenport is a research fellow at the Hoover Institution. His email address is davenport@hoover.stanford.edu