A good friend recently asked me several questions about selecting a charity. As I was considering how to respond, he asked, “Isn’t it a lot like selecting an investment?”
There are obvious differences between making an investment and supporting a charity. Primary amongst these is that charities are generally chosen to align with one’s belief system (religious/philosophical, social/cultural, medical/scientific, educational, etc.) while investments are generally, albeit not always, belief-agnostic. Aside from this, however, there are a number of similarities between supporting a charity and making an investment.
For example, all of the professional investors I know work hard to validate their assumptions prior to making an investment. This practice can also apply when considering a charity such as, for instance, validating a charity’s non-profit status as well as its tax status prior to making a donation or volunteering time. Web-sites such as GuideStar (https://www.guidestar.org/Home.aspx) can be useful in such efforts, but internet searches are only a first step. On-site due diligence should be conducted prior to offering support, which could include inspecting a charity’s official documentation, and confirming it is both up-to-date and in good-standing with the authorities.
Attention could then turn to evaluating the managers of a charity, which is just as important as evaluating the managers of a publicly held firm. Two key managerial behaviors are candor and transparency.
Candor is “the quality of being honest and straightforward in attitude and speech and the ability to make judgments free from discrimination or dishonesty.” Candid nonprofit managers honestly explain what their charity’s mission and objective is, and then they honestly report how their actions have advanced their mission over time.
Financial transparency pertains to visibility in the ways managers spend their supporters’ (or, in the case of a stock, shareholders’) money. A transparent charity is one that both thoroughly discloses how it intends to spend its supporters’ donations, and then reports in detail how it spent those donations over a given timeframe.
Superior charities, like superior publicly held firms, are led by managers who are both candid and transparent. One without the other is not necessarily “bad,” but it may mean the presence of risk. To understand why, consider the charity that my friend is considering.
This particualr charity is managed by people who very candidly explained both their mission as well as their policy of not disclosing how their supporters’ donations are spent. My friend was concerned about this, and asked if it sounded “right” to me. I answered that it did not, but as I am not an expert in the area of charities that I would look into it.
As part of my research I spoke with an experienced charity supporter. When I profiled my friend’s situation to this person he stated, “Without transparency it is impossible to assess the return on your support for a charity.” I had not heard the term “return” used in a nonprofit context before, and the person I was speaking to must have picked that up as he continued: “By return I mean the impact your donation/time had on advancing the charity’s mission, whatever that may be. If you are not able to assess that, how do you know if your money and/or time has been well-spent? Also, if you do not have some sense of return, how will you be able to compare and contrast the various charities you likely want to support?”
I noted that the charity my friend was considering stressed that it wanted to be completely trusted by its supporters. The expert immediately replied, “As Ronald Reagan used to say, ‘Trust but verify.’”
TO LEARN MORE about various charities and to choose one that aligns with your donating philosophy: ACT NOW