Monday, August 11, 2014

Big Fish in an Inefficient Pond

        A recent opinion piece in The Chronicle of Philanthropy urged the media to stop making a big deal over big donors.  See "America's Press Needs to Stop Fawning Over Big Donors."  According to Eisenberg, the danger is that the media praises a giver as good based upon how much he/she has given rather than upon what impact his/her dollars have had.  The real danger is that the most urgent global problems of our times are not being addressed effectively despite the number of dollars donated annually.  There is adequate funding but inadequate progress.  The UN has stated, “Millions still live in extreme poverty, yet the world has enough money, resources, and technology to end poverty.” Donations of wealthy donors often end up in the hands of US and non-US charities, and no one is asking systematically what these charities are accomplishing.

        Earlier this summer, I had a conversation with Eric Thurman, CEO of Geneva Global, a firm that provides research and grant management for philanthropists internationally, about who should be considered the best givers.  He remarked that buying a lot of stock does not make one a great investor. If someone owns stock, they look to see how their stock is performing.  In the nonprofit world, often the givers who have contributed the largest amounts are the most celebrated regardless of the social impact achieved from their donations.  If donors treated their donations more like investments, progress could be made toward ameliorating some of the most pressing humanitarian and global problems of our times. (For more information on Thurman’s viewpoint, please see "Performance Philanthropy," Harv. Int’l Rev., Apr. 2006, at 18).

        A problem with the charitable market is that funding does not flow toward effective charities and away from ineffective charities.  In an efficient market, private sector investors use information available at the time of investment to receive returns; these returns generally do not exceed average market returns because the same information is available to all investors.  Succinctly stated, it is difficult for an investor to beat the market.  In the inefficient charitable market, the market is easily beaten; the donor simply gives to a charity that a reputable rating organization recommends. A donor will receive more measurable social impact for his/her buck in giving to a recommended charity versus a non-recommended one.  However, pervasive questions still linger.  How many donors are using a thorough rating organization?  Are the rating organizations asking charities the right questions?

        In a forthcoming series of articles, I have set forth the concept of an efficient charitable market or one where collective charitable investment ends up in the hands of charities that will put it to its most productive use.  One of the reasons inefficiency exists in the charitable market is because donors currently cannot easily differentiate between effective and ineffective charities. Granted, it is no easy task to make this distinction, but it is possible.  If this became a crucial question for charities and donors, perhaps the media would report on the good accomplished rather than on the number of dollars donated.

 

Khrista Johnson

http://lawprofessors.typepad.com/nonprofit/2014/08/a-recent-opinion-piece-in-the-chronicle-of-philanthropy-urged-the-media-to-stop-making-a-big-deal-over-big-donors-httpphi.html

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