Trust & Efficiency at Non-Profits

Though dominated by discussion of for-profit, publicly-traded corporations, Business Ethics is not limited to that topic. Business Ethics is really the study of ethics in organizations of all kinds, whether they be for-profit or not-for-profit, publicly-traded corporations or customer-owned cooperative. Hence the relevance here of this story about the charitable organization Mothers Against Drunk Driving, featured in Saturday’s Toronto Star: MADD’s ‘exorbitant costs’ anger charity’s volunteers

People who donate to Mothers Against Drunk Driving are told by the charity that most of the $12 million it raises annually is spent on good works — stopping drunk driving and helping families traumatized by fatal crashes.
But a Star investigation reveals most of the high-profile charity’s money is spent on fundraising and administration, leaving only about 19 cents of each donor dollar for charitable works.

How charities spend their money is crucially important, especially to the donating public. Everyone wants to think that every penny of their donation is going to fight the good fight. But every charity has expenses — from office paper, to rented office space, to TV ads, to paid telemarketers — and so charities basically never spend 100% of the money they collect to promote the causes they advocate for. What’s crucial is the percentage of money taken in that gets spent on such expenses. Very efficient charities boast expenses as low as 10% (i.e., they are 90% efficient at turning donations into good works.) For the least efficient charities, the ratio is reversed: up to 90% of what’s taken in gets burned up on expenses, with only 10% left over for doing good stuff. (In cases of truly corrupt — rather than merely inefficient — charities, sometimes less than 1% of what’s taken in actually goes to doing good.)

Part of the reason MADD’s numbers are in dispute is that there’s disagreement over whether the efforts of MADD’s paid telemarketers should count as a pure expense or as part of the charities good works: critics say that’s just a fundraising expense, while management at MADD says that their telemarketers aren’t just fundraisers, they’re also serving as educators — and educating the public about the dangers of drunk driving is big part of the charity’s mandate.

At any rate, the criticism is hitting home. The Star published this update yesterday: MADD suspends fundraising

MADD Canada has stopped fundraising across the country pending an internal review of allegations that most donor money stays with professional telemarketers and door-knockers.
But leading volunteers with the anti-drunk driving charity say that’s not enough. They want chief executive officer Andrew Murie to bring in an outside firm to scour the $12 million-a-year charity’s books.

Here’s MADD Canada’s response, in the form of a letter to the Editor. The letter starts out:

Mothers Against Drunk Driving (MADD Canada) is disappointed and offended by the Toronto Star’s recent series of one-sided, misleading and inaccurate stories….

One thing’s for sure: this story is bound to hurt MADD’s fundraising efforts (and the Christmas season is crucial for MADD, as it is for many other charities.) The truth is, charitable organizations depend almost entirely on their good reputation for their livelihood. (Michael McDonald, Wayne Norman and I wrote about this in our 2002 paper, Charitable Conflicts of Interest.) Charities not only have to run a tight ship, they have to be seen as running a tight ship. A charity that doesn’t earn and maintain the public’s trust will soon see its coffers run dry.

Related Links:
From MacLean’s: It’s a mad, MADD world: A uniquely powerful charity suddenly finds itself on the defensive

[Thanks to Garrett for suggesting this topic.]

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