A new study by behavioural scientists has recommended charities should tell donors they have no overheads costs because they’ve already been paid by a philanthropist. Although the numbers stack up, Ian MacQuillin argues that this is a very bad idea
In the past, I’ve postulated a scenario whereby a street fundraiser could say to passersby that, were they to sign up to a regular monthly gift, all their donation – all 100 per cent of it – would go directly to ‘the cause’ and none of it would be spent on overheads. In this example, the overheads would be paid by the previous person the street fundraiser had signed up to monthly giving.
Of course, I was joking – I don’t seriously advocate that any fundraisers massage their admin costs in this way. I was using it to show how easy it would be for any charity to magically make their overhead costs disappear.
However, just this scenario has now been proposed as a way of encouraging giving in a paper published in Science – ‘Avoiding overhead aversion in charity’ – by behavioural science researchers from the University of California San Diego’s Rady School of Management.
Based on a lab experiment and field trials, a study led by Dr Uri Gneezy concludes that more people will give if they are told all their donation will go to the cause because a major donor has paid the fundraising costs already (see the summary of this research in our ‘Knowledge’ post).
‘Just because fundraisers can use some particular nudge or other behavioural technique or insight, doesn’t mean that they should’
The paper’s authors note the tendency of donors to avoid charities with high overhead costs. There’s nothing particularly new or revelatory about this. There’s research from the 80s and 90s showing that admin and fundraising costs impact on people’s propensity to donate. One study found that charities that spent at least 60 per cent of their income on programmes received significantly higher levels of donations.
What is new in this study is that the authors actually recommend as a solution to this problem using donations from major philanthropists to cover admin costs and then telling other donors that this is what has happened. The recommendation is another example of the gap between research findings derived from behavioural economics and their application to professional practice, without sufficient consideration of the fundraising context in which they could be used. As I’ve written before on this blog, just because fundraisers can use some particular nudge or other behavioural technique or insight, doesn’t mean that they should.
Practical and ethical questions
There are practical and ethical questions about the proposed solution.
1 Where will overhead-funding donors come from?
Major philanthropists are as reluctant as everyone else to have their money spent on overheads, perhaps more so. There are tens of thousands of people happy to have their £10 a month go into unrestricted coffers, but far fewer major donor donors prepared to write an unconditional cheque for £100,000. The Bank of America US Trust Study of High Net Worth Philanthropy 2014 reports (see p69) that 81 per cent of high net worth households think it “very important” that a non profit “spend only an appropriate amount of your donation on general administrative and fundraising expenses” [my emphasis], even though 72 per cent of HNWI’s rate themselves as “knowledgeable” about charitable giving and philanthropy, and 14 per cent think they’re experts (p53). They are also prepared to take less risk with their donations than with their personal assets (p72). So the question of whether a major donor can be found to pay a charity’s admin costs is far from unproblematic.
2 Tracking restricted income
Mass appeals are usually aimed at raising unrestricted income, but money that came through appeals that promised all the donation would go to programme work is restricted income. So there is the question of coding and tracking the major gift to ensure that it really is used to cover the overheads of those donors who were recruited this way; or the flip side of this is to ensure the new donors’ money is allocated to programme work so that at any point, one of these donors can see the audit trail of where their £10 a month or $50 cash gift has been used. That’s a considerable increase to the existing administration of such gifts if they were unrestricted.
3 A question of sustainability
If a major philanthropist can be found to cover overheads, Bank of America’s pessimistic stats notwithstanding, what happens if s/he decides to withdraw funding? What happens if a replacement donor cannot be found? The charity will lose its core fundraising expenditure at a stroke and the individual donations cannot then be switched to replace this because they are now restricted income. If the charity has used this ‘overheads-free’ solution in its PR and marketing, it will need to backtrack and new donors who have bought in to the charity’s ‘overheads-free’ marketing will find that 100 per cent of their donation will no longer go to the cause as some of it will be spent on administration and fundraising instead. A question this also raises is, what if there are not enough such donors for every charity? How does the charity without a fundraising-friendly philanthropist present its 21 per cent, say, admin costs against a competitor that claims it is ‘overheads-free’.
4 A question of ethics
Finally, the ethical question – is there really such a donor? The Rady Business School study mailed 40,000 potential donors to an unnamed medical foundation, telling a quarter of them that overhead costs had been met by a philanthropist. But the paper doesn’t make clear if there really was such a philanthropist or if it was just an exercise. If there is not, then this whole exercise becomes moot. If the charity does not have a donor who has restricted his/her gift to cover the entire admin costs, or particular fundraising costs, then it would be highly unethical to pretend to donors that such an arrangement existed. For the record, the Rady Business School study does not recommend charities should do this, only that they find a donor to pay overhead costs.
Competitive advantage and the Dutch auction in overhead costs
Of course, the authors of the present study are right. People don’t like their donations to be spent on the electricity bill, paper clips, the receptionist’s salary or using a portion of that donation to raise even more money. But the answer to the problem of the ‘overhead myth’ is not to pander to public misunderstanding about how modern charities must operate professionally by pretending that someone else – but not you, dear donor – covers those costs. It is to engage with that mindset and change that perception.
Yet that is extremely difficult to do when some charities have been happy to undermine this co-operative endeavour by playing a kind of Dutch auction with their overhead costs, pretending that they don’t have them or that they are lower than they really are.
‘The reason the charity could tell the public in 2002 that every penny would go directly to the project was because the public of 1975 had already donated the admin costs.’
For example, US charity Smile Train (which repairs cleft palates in children in developing countries) began fundraising in the UK in 2006 with a series of press adverts that promised that 100 per cent of donations would go directly to the cause because the charity’s administration costs had all been covered by a coterie of “founding trustees” – exactly the same proposition as recommended by Dr Gneezy and his team.
In 2002, the Archie Foundation in Scotland ran a capital appeal to build a new wing at the Royal Aberdeen Children’s Hospital. The radio adverts urging people to support the appeal declared that every penny donated would go directly to the appeal. So how did the Archie Foundation meet the admin and fundraising costs of their capital appeal? They were paid for out of an unrestricted emergency fund held in reserve by the charity. This fund had been set up in the 1970s and raised through donations from the general public. So the reason the Archie Foundation could tell the public in 2002 that every penny would go directly to the project was because the public of 1975 had already donated the admin costs. It was a professional robbery of donor Peter to pay fundraising Paul.
And of course, the paradigmatic example of this is Comic Relief’s Golden Pound Promise*, which stated that for every pound it received from the public, a pound would be spent on programme work, although Comic Relief stopped this practice to conform to the revised IoF code of practice in 2006 (see below).
In 2004, the then ceo of the Institute of Fundraising, Lindsay Boswell, spoke out against Lions Clubs International’s pretence that it had no fundraising costs – Lions Clubs had conducted some market research that showed that 29 per cent of people (perhaps a surprisingly low number) said they would be more likely to donate if 100 per cent went directly to the cause. Lions Clubs then said that it did not deduct its admin costs from public donations.
“Any fundraising organisations that promote themselves at the expense of other charities and the reputation of the sector as a whole is acting highly irresponsibly…For too long charities have pandered to the view that fundraising and administrative costs are something to be ashamed of, when the simple fact is that it does take a professional organisation to deal with donations, and costs are an essential part of these processes. Every charity has a role to play in presenting this to its donors and it’s absolutely vital that charities take a unified approach, being open and transparent about their activities wherever possible.”
Lions Clubs International’s website still states that “not one penny is spent on administration as Lions Club running costs are funded by members“.
Even though there has been some progress – organisations that once directed donors to compare admin costs, such as Charity Navigator, now say this is poor way to evaluate charities, describing it as the ‘overhead myth‘ – this is still a live and important issue.
The reason is that presenting lower administrative costs than another charity (whether that is in actuality of via a piece of creative accounting) is a competitive advantage in the market of public opinion. Charities such as Comic Relief, Smile Train, and Lions Clubs International instinctively knew this and now Rady Business School at UCSD has provided the science behind it.
Should we punish ‘defectors’ from the common good?
Fundraising leaders have tried to change perception largely by appealing to charities to act for the common good, by being honest about their overhead costs. If everyone were to do this, then we would all be better off because we could present a united front in attempting to dispel the ‘overhead myth’. However, as we have seen, people who don’t join this co-operative endeavour give themselves a competitive advantage over those who are part of it.
What we have here is something like a Prisoner’s Dilemma. In a Prisoner’s Dilemma, two participants would be better off working together in a common aim (co-operating). However, if one of them were to leave this pact (‘defect’) while the other carried on co-operating, the defector would reap more rewards than the sucker who carried on working toward the common good (it’s more complicated than this, of course). Game theory posits that to regulate a Prisoner’s Dilemma, you should reward co-operation and punish defection – you need the carrot and the stick.
In the charity overhead game though, we have neither sticks nor carrots. For a short while though, there was a stick.
Partly in response to the debate cause by the activities of the likes of Lions Clubs and the friction in the profession generated by the Golden Pound Promise, in 2006, the Institute of Fundraising revised its Accountability and Transparency Code of Practice to say that fundraisers:
“OUGHT not to make statements such as ‘All of your £1 goes direct to the cause’ or ‘Our fundraising does not cost us anything’ or imply that fundraising does not cost anything.”
In the context of the code, ‘ought’ means it is mandatory on IoF members. Therefore to breach the code by using something like the Golden Pound Promise would leave a charity liable to investigation by the Fundraising Standards Board. However, when the IoF condensed its 29 separate codes into a single code in 2012, this requirement was moved from the code to the guidance, which now only says that “it is best for charities to avoid” such statements. (It doesn’t even say they ‘should not’ which is IoF-speak for not mandatory but recommended anyway).
What this means is that while the recommendation made by the Rady Business School team would (probably) have been in breach of the IoF code of practice in 2011, now it would be compliant, on a strict reading of the code, and practices such as the Golden Pound Promise are now, in theory, all back on the table. In fact, BBC Children In Need was using a version of it this year, explaining how overhead costs are paid for out of investment income and Gift Aid.
In October 2011, professor Adrian Sargeant issued a formal call for whistle blowing against American charities that claimed to have zero fundraising costs, which he described as “blatant manipulation”. Reporting on a summit of leading US non-profit personnel that was “emphatic” in its recommendation that no non-profit should claim no fundraising costs, Sargeant said that if they persisted in doing so, they should be “called out and held accountable for the damage that they do to public trust” (see recommendation 11).
Yet until we have such a mechanism, I find it hard to see how we are going to prevent some charities pandering to public opinion by engaging in a race to the bottom over their overhead costs, especially now that behavioural scientists are providing them with a sound scientific rationale for their actions. The result will be that we’ll go on encouraging fundraisers to rob Peter to pay Paul.
And as with all such cases, Peter eventually runs out of money.
- Ian MacQuillin is director of Rogare – The Fundraising Think Tank.
* Comic Relief’s ‘Golden Pound Promise’
“Comic Relief promises that for every pound of Red Nose Day cash we get from the public, a pound will help tackle poverty and promote social justice in the UK and Africa. Comic Relief does not spend any of the money raised on its running costs. We are able to keep this promise because the costs of running Comic Relief are met in cash or in kind from all types of organisations, including Government, corporate donors and individual suppliers, as well as through the interest generated on our funds.”
The promise often appeared on BBC materials in a ‘distilled’ version of just the first line. This version was found, for example, on BBC press releases and the information for schools section of the Comic Relief website.