An accountability and performance improvement incentive plan for nonprofit organizations.
The Nonprofit Reporter, Inc., a 501(c)(3) organization, was formed in March 2006 to strengthen the operations of American nonprofit organizations. Offices are located in Alexandria, Virginia, just outside Washington, D.C. Lisa A. Sales, Executive Director, may be contacted at the office at (703) 341-6566 and email may be sent to email@example.com.
The organization’s two objectives are:
- TO PROVIDE POSITIVE MOTIVATION FOR BETTER PERFORMANCE AMONG NONPROFITS.
- TO PROVIDE BETTER INFORMATION TO DONORS FOR THEIR CHARITABLE CONTRIBUTION CHOICES.
The Nonprofit Reporter was created to assist and encourage United States charitable organizations to improve accountability, transparency, and governance, and to spur the development and use of program performance measures. The organization will encourage positive donor choice about allocating capital among competing options.
Business investors have a wealth of information as they make decisions about the investments they make—rates of return, price-to-earnings ratios, growth data, ratings of all kinds, innovation potential, bond ratings, all of which can be used to make wise decisions. There are never any guarantees of success, but business investors have few excuses for ignorance.
The following statistics highlight a vast sector comprised of American nonprofit organizations and demonstrate the need for a national assessment system:
- According to the World Factbook, the asset base of the American nonprofit sector would make the “nonprofit economy” the sixth largest in the world – larger than the economies of Brazil, Russia, Canada, Mexico, and South Korea.
- There are 1.9 million nonprofit organizations in the United States, a figure that has doubled in the last twenty-five years.
- The Internal Revenue Service (IRS) reports that there are more than 70,000 new nonprofits formed annually.
- The collective assets of the nonprofit sector total nearly $3 trillion or the equivalent of the United States federal budget for one year.
- 9 percent of the workforce is represented by those in the employ of a nonprofit organization, MORE than the American finance, insurance and real estate industries combined.
- From 1987 to 2005, the number of charitable organizations in the United States experienced nearly triple the growth rate of the business sector, according to the Independent Sector’s “2006 Facts and Figures about Charitable Organizations”.
- In 2006, $295 billion was given to American nonprofits by individuals, corporations, charitable bequests, and foundations, representing 2.2% of American GDP. Adding in earned income, investment income, contracts and grants, etc. would approximate 10% of GDP, as reflected in Giving USA: The Annual Report on Philanthropy, published by the Giving USA Foundation and researched and written by the Center on Philanthropy at Indiana University.
Unfortunately, unlike business investors, social investors have almost no information with which to compare one nonprofit against another, one social investment choice against another. Although it is easy to acquire basic information about administrative, fundraising, and program costs for the roughly 250,000 nonprofits that file annual reports with the IRS, even these data are suspect—the rules governing the reporting are loose and auditing is rare.
As a result, social investors often rely on vague information at best, complete opaqueness as they choose among competing proposals and decide where to invest scarce resources for maximum impact. Once again, there are never any guarantees of success, but social investors have ample reason to wonder whether there might be some way to increase the knowledge base as they make some of the most difficult investment decisions in the world.
This is why the Nonprofit Reporter has embarked on an effort to measure the overall performance of nonprofits through a uniquely rigorous, evidence-based assessment system. This system will allow social investors to compare nonprofits on operational measures such as level of board engagement, quality of financial reporting and internal controls, measures of executive turnover and training, and so on down a long list of potential indicators.
More importantly, the assessment system will focus clearly on performance, focusing on both quantitative and qualitative measures of actual impact, and where appropriate, “customer” feedback from the social investor and the grantee, with an opportunity for comment or response by the organization being assessed—for example, commitment to results measurement and outcomes evaluation, reputation for excellence, and objective indicators of a commitment to impact. As this information system develops, the Nonprofit Reporter will expand its performance measurement tools to develop objective indicators of actual performance, which will produce social rates of return for social investments.
The Need for Assessment
Imagine for a moment the worst possible circumstances facing a social investor who wants to make the best investment possible:
- The investor would have little data beyond inputs such as budgets, and minimum adherence to a set of standards based on arbitrary estimates of reasonable overhead.
- The investor would have no way of acquiring or assembling information about the basic operations of competing nonprofits, whether in the form of basic knowledge about how given nonprofits are structured and staffed or their commitment to learning, innovation, and change.
- The investor would have to rely on assertions from rating organizations such as the Better Business Bureau’s Wise Giving Alliance or Charity Navigator based on suspect knowledge provided by the organization being rated.
- The investor would have no hope of calculating or inferring a social rate of return on investment (SROI), nor would he or she be able to assess the actual performance of a given nonprofit.
Unfortunately, this is not just a worst case for making social investments today. It is the actual case. Social investors have little knowledge on which to make thoughtful choices between nonprofits, let alone conduct due diligence on the actual operations of the organizations they support. Although they regularly assess the financial performance of each organization in terms of growth, deficits, possible diversification in revenue, and the strength of internal controls such as auditing and real-time budgeting, their investments are often based more on hunch and the salesmanship of a given organization than hard-nosed assessments of operations and impacts.
The Nonprofit Reporter believes there is a better way to make social investments, one based on deeper information assembled to provide accessible, real data on how a given nonprofit performs. Whether used as part of due diligence before making an investment, ongoing monitoring of the need for improvement of the social rate of return on existing investments, or assessing the potential strength of a group of organizations, an evidence-based assessment system could help investors make much better decisions as they move forward with critical decisions.
NOTE: All statistics on this page are from Giving USA, a publication of the AARFC Trust for Philanthropy, researched and written by the Center on Philanthropy at Indiana University, or from Independent Sector analysis of: Internal Revenue Service, Data Book, various editions and Statistics of Income Bulletin, various editions; U.S. Census Bureau, Statistical Abstract of the United States, various editions; U.S. Department of Agriculture, Economic Research Service and the National Center for Charitable Statistics, Dataweb, The Urban Institute: http://nccsdataweb.urban.org/.