Professor of economics argues fixation on impact accounting could undermine non-profit groups' ability to help
For many philanthropists, it only makes sense to ask charities how their donations were used. After all, it’s an effective way to ensure their contributions are actually making an impact.
But according to Dean Karlan, professor of economics and finance at the Kellogg School of Management at Northwestern University, it’s actually better for donors not to hold non-profit foundations so accountable for their spending.
“For many nonprofits it is genuinely impossible to answer how exactly their efforts are different with those extra $10 or $1,000,” Karlan said in a column published by the Wall Street Journal.
While an additional $100 received by the charity may be allocated towards buying food for the food pantry, he said that does not mean spending on food overall went up by $100. Some of that amount, he argued, could go towards improving the quality of their program by hiring an additional employee to manage food selection and delivery.
“Such expansion decisions are best left in the hands of the charity, not in the hands of the donors,” he said.
Those who demand a detailed accounting of the impact of donations, Karlan suggested, effectively do not “embrace and respect the expertise of nonprofit leaders on how to optimize their programs.” Donors, he maintained, should be ale to trust that the charity is doing its best to achieve its stated mission.
A fixation on using every dollar for impact, he added, can hamper charities’ ability to effectively manage their resources through good times and lean times. During economic downturns like what 2020 has brought about, donations tend to decline; citing a survey conducted by CAF America a few months ago, he said 73% of 880 non-profits polled have experienced reduced donations this year even as many others have seen more contributions.
“We ought to want nonprofits to save resources when times are good and expend resources when times are tough and needs are greatest,” he said. Citing an academic paper titled Nonprofits in Good Times and Bad Times, he said an analysis of millions of tax returns from U.S. non-profit groups reveals that they are partly able to smooth expenditures relative to income in ways that they typical for-profit company cannot.
Rather than focus on how each dollar was spent, Karlan said donors ought to look at the impact of a nonprofit as a whole. While donors may understandably concentrate on buying food for hungry children, he said charities also have to account for administrative, legal, and staff expenses. That means any attempt to account for a donor’s individual contribution is bound to leave some miffed at the notion that they paid for printer toner.
“[W]e must demand evidence from charities on what they are accomplishing … when such evidence is viable and appropriate to gather,” he said. “But this evidence should be on the projects they run as a whole, or even the entirety of the organization.”
