Should I give to… analytical approach (2019)
Within any industry, organisations will range in quality. There will be those that set the standard (the leaders), those that are competent, and those that give the industry a bad name. The charity sector is no different – there are the star performers, those that do their job, and those that misuse funds for their own benefit.
In most industries, businesses will not survive if they do not deliver quality products or service to their customers. If you go to a restaurant that is overpriced, with slow service and terrible tasting food, it’s unlikely that you would return. It is this customer feedback that forces businesses to improve or shut their doors.
However, there is a feature of the charity sector that makes it infinitely more difficult to distinguish the leaders from the poor performers. That is: those that pay the charity (donors) do not receive the service.
Donors are not customers. When we give money, we do not get any feedback to know if the service was received, if the service was of a sufficient quality, or if it represented value for money. We give money in good faith, assuming that it will be helpful. The problem with this assumption is that right now there are tens of thousands of charities in Australia surviving (and in many cases, thriving) without satisfying the needs of those they wish to serve.
The Good Cause Co. recommends charities that are trustworthy and effective at delivering on their mission
The Good Cause Co. recommends charities that are both trustworthy and effective at delivering on their mission. We start all assessments by verifying that the charity demonstrates basic elements of trustworthiness. The assessment of trustworthiness is to ensure money is being spent as described. We then evaluate the charity’s social impact record (described later) to determine if the charity is effective and genuinely improving the lives of those that it claims to serve.
We start by making sure that the charity is trustworthy
In order to ensure we can believe what the charity is saying (and that they are unlikely to be misusing funds) we first make sure that the charity demonstrates a basic level of trustworthiness. To do this, we look at how the charity is managed and how funds are used. We critically review the information the charity publishes both on its website and with the regulator, the Australian Charities and Not-for-profits Commission (ACNC).
We believe a trustworthy charity has the following attributes:
• A clear financial model. Is it generally clear how the charity spends and receives money (i.e. its “business” model)? Do they break down how money is spent across different operational divisions (e.g. program delivery, administration, marketing and fundraising)? Can the charity show how much funding is directed to each activity area? Does the charity show where money goes geographically?
• A clear path for how donations are used. Does the charity clearly identify their ABN when collecting donations? For charities that are members of international organisations, do they outline if funds are distributed to other national members (or an international headquarters), or if they are controlled in Australia? For federated charities, is it clear how funds move between the national body and the States?
• Transparency over who is in charge. Who is accountable for the charity and ensures it delivers to its beneficiaries? Who are the individuals on the board and executive team and do they have relevant professional and/or personal experience?
• Clear roles and delegation.What is the role the board, the CEO and other members of the executive team? Does the governing body monitor the performance of the charity? For international organisations, is it clear how roles across country offices are delegated? For federated charities, is the role of the national body clear and distinct from the roles of the state/regional charities?
• Policies designed to minimise misuse of funds.Are there clear guidelines over how the board, executive team and employees manage conflicts of interest? Does the charity publicly disclose related party transactions, or contracts the charity has taken part in that have benefitted individuals on the board or executive? Is the charity clear about how the board and executive team are remunerated and if they receive any other benefits?
We then evaluate the effectiveness of the charity
There are a number of challenges in evaluating the effectiveness of a charity. It is these challenges (and many others) that have historically deterred any meaningful critical analysis of charities.
• Firstly, as highlighted above, those that pay for the service are not those that receive it. This means there is no direct feedback loop that informs the donor that the services they have paid for are well-received.
• Secondly, even if there was a feedback loop, many that receive the services are unable to speak for themselves. Charities often act on behalf of animals, the environment, young children or those that are illiterate. These groups are unable to complete a feedback form even if they wanted to.
• Thirdly, there is often a long lag between the time that the service was delivered and the time that the benefit was received. For example, I benefit immensely from anti-smoking campaigns that happened long before I was born, but the benefit of this campaign won’t be realised until I reach an age where I might have had lung cancer – that is, decades after the campaign. The time lag means that many benefits charities deliver are difficult to measure in the short term.
• Finally, the benefits of charitable work are difficult to quantify. Financial indicators (like administration cost ratios) presented in financial reports are poor indicators of actual performance. Just because a charity has a strong financial track record does not mean they are serving the needs of their beneficiaries. Other more direct quantitative indicators of activity (like number of people served, number of trees planted, etc) can be equally poor measures of the charity’s benefit. These indicators are often in direct conflict with, and can mask, the quality of the service delivered. For instance, metrics that measure number of people served will favour superficial activities (like distributing pamphlets) over meaningful services (like counselling).
However, times are changing. Over the last 10 years, there has been significant progress in techniques used to evaluate and measure the effectiveness of charities and charitable programs.
Charities can now demonstrate “social impact” in a meaningful way to donors
Charities demonstrate their social impact by presenting information that links the organisation’s mission to evidence that it is providing benefit to those they intend to serve. For the purpose of our evaluation, The Good Cause Co. calls this suite of information a social impact record. A complete social impact record will typically contain:
• overarching social/environmental objectives broken down into strategic work areas
• a list of activities
• results from activities (outputs) and broader program outcomes
• an evaluation framework that describes how results are collected and used to improve program delivery.
The more complete, consistent and free of bias the social impact record is, the better our recommendation. We look for:
• completeness– are all relevant elements of the social impact record published? Do we have enough information to ascertain that there is a coherent strategy? Are programs actually being delivered? What do the results look like? Is there is an evaluation framework in place?
• consistency - Is messaging and reporting consistent across documents? Are strategic objectives consistent across documents? Do listed activities and outcomes align with these strategic objectives? Are activities and outcomes reported in a way to demonstrate progress against the strategic plan?
• free from bias– are results presented in a way that gives an accurate impression of the results? Or are results cherry-picked and presented without context in order to make the organisation look good? Are links to evaluation reports provided? Do the evaluation reports show the method for evaluation? Can the charity show that it is using the results to improve service delivery?
The actual results of the social impact record are of little importance in our analysis. We just want to see that what they are doing is consistent with their mission and that they are taking steps to improve the outcomes for their beneficiaries. We don’t care if a charity has served 20 people or 20,000 people. Equally, we don’t care if a charity reports that they are creating $5 for every dollar donated, or $100. What we want to see is that results are collected and used in a meaningful way to track and improve the performance of the organisation.
We summarise our analysis in a simple recommendation
We provide one of three recommendations based on our analysis.
• Donate with confidence- the charity demonstrates they are both trustworthy and effective. We have confidence that donations are used are used to deliver on their mission.
• Donate- the charity demonstrates they are likely to be trustworthy and present some indicators of effectiveness. Donations are likely to be used to deliver on their mission.
• Do not donate- the charity does not demonstrate basic indicators of trustworthiness or effectiveness. We cannot verify that donations are used to deliver on their mission.
We consider only published information
We consider only published information. A charity can easily fool one person, but they can’t fool us all. We review only published information as it is able to be scrutinised by not only ourselves, but also the charity’s major stakeholders and beneficiaries.
We are “cause neutral” and focus on impact
The focus of our due diligence is to support you in finding the best charity that supports your giving goals. We have no interest in dictating what causes are important. We believe a charity’s mission should speak to your own personal values. We therefore do not judge a charity by the cause it is working on, but by its trustworthiness and effectiveness.
A note on our recommendations
Just as different investors will make different investment decisions based on their own individual analysis, our recommendation is based on our analysis of what we think is important. We have worked hard to design an evaluation approach that we believe fairly identifies those charities doing excellent work. However, we encourage you to do own research to supplement this analysis. If you think we’ve excluded something important, please let us know. Email us at email@example.com.
Note that our benchmark for “trustworthiness” is higher than that set by the ACNC. The ACNC requires that charities publish their governing document and annual financial reports. We go a step further and review the content contained within these documents.
We say “meaningful analysis”; cherry picked financial indicators (like administration cost ratios) or assessments of charitable reputation are poor substitutes for understanding the quality of an organisation.
Impact reporting techniques used to create these figures are not designed to be used to compare between charities so are irrelevant for our analysis. Social return on investment (SROI) or cost benefit analysis (CBA) techniques are generally designed to compare between investment options that have the same desired outcome.