Paul Brest’s Thoughts on the Overhead Myth

– By Paul Brest, professor of law, emeritus, Stanford Law School –

In the Overhead Myth campaign, Art Taylor, Jacob Harold, and Ken Berger outline the pernicious consequences of relying on the overhead ratio as a proxy for a charity’s performance. Coincidentally, in the days preceding their blog post, the Nonprofit Quarterly featured two writers taking the opposite view. Brian Mittendorf, an accounting professor at Ohio State University, acknowledges that overhead is not a proxy for impact, but argues that such accounting metrics are more reliable and comparable than impact metrics. William Schambra, director of the Hudson Institute’s Bradley Center for Philanthropy and Civic Renewal, asserts that donors’ desires to have as much money as possible go directly to recipients rather than to indirect costs reflects their laudable emotional connection to the objects of their charity.

Paul Brest
Paul Brest

Mittendorf concedes that reliance on overhead is at most a second best solution—in his words, looking for the lost keys under the proverbial lamppost. Even so, given the extent to which nonprofits manipulate overhead data (as shown in the Taylor-Harold-Berger letter), the lamp is pretty dim.

Schambra extolls donors’ common sense rejection of performance metrics, an interest that he disdainfully attributes to “experts.”  Putting to one side his antipathy toward experts, Schambra’s point about donors’ empathy with their intended beneficiaries is a plausible explanation for their antipathy to overhead. But for donors who care about actually improving their beneficiaries’ lives, overhead is not merely an unreliable heuristic but often a counterproductive one. For just one example, an increasing number of charities use performance management systems to provide better outcomes for their clients; yet the costs of building and maintaining these systems all count as overhead.

I think that Schambra demeans ordinary donors when he implies that they don’t care about the impact of their gifts. The Hope Consulting Money for Good I study, which he approvingly cites, reports that 85% of donors say they care about nonprofit performance but only 35% do any research to learn about it. Given how frustrating it is to learn about performance from the charities themselves and most of the on-line rating services, 35% seems a pretty high number. In any event, there are improvements in sight, due in large part to BBB Wise Giving Alliance, GuideStar, and Charity Navigator.

Robust impact metrics are available only for a tiny number of organizations. However, BBB Wise Giving Alliance and GuideStar, together with Independent Sector, have promoted a new suite of proxies for impact that are far superior to reliance on overhead alone. Their Charting Impact standards ask organizations to answer five basic questions:

1.     What is your organization aiming to accomplish?
2.     What are your strategies for making this happen?
3.     What are your organization’s capabilities for doing this?
4.     How will your organization know if you are making progress?
5.     What have and haven’t you accomplished so far?

While an organization’s ability to answer these questions is no guarantee of impact, its inability to answer them makes any pretensions to impact dubious. Without abandoning accounting measures, Charity Navigator’s CN 3.0 adopts a similar scheme, and it also takes account of an organization’s feedback from its beneficiaries.

Neither Charting Impact nor CN 3.0 is a substitute for knowledge about actual impact, and neither provides anything as simple as a single number. But they are great steps forward in helping wean donors from a metric that, alone, provides a distorted view of an organization’s success in improving people’s lives—which is what charity is ultimately all about.

Paul Brest is professor of law, emeritus; and former dean of Stanford Law School. He currently teaches in the Law School and Graduate School of Business, and is faculty co-director of Stanford Center on Philanthropy and Civil Society; From 2000 to 2012, he was president of the William and Flora Hewlett Foundation. This post can also be found on the GuideStar Blog:

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