American families donated more than $286 billion to charities in 2017 -- a fairly impressive total. But there are so many good causes and so many amazing organizations, and it can be difficult to decide which ones you personally want to support. Fear not: Your Motley Fool Answers podcast hosts have recruited some expert help. In this episode, Robert Brokamp and Alison Southwick are joined by Phil Buchanan, president of The Center for Effective Philanthropy and author of Giving Done Right: Effective Philanthropy and Making Every Dollar Count.
In this segment, he takes a wide look at the factors that you can use to narrow down your charitable choices. And in particular, he explains why one common metric for judging nonprofits -- the amount they spend on overhead and executive salaries -- is actually a poor way to grade their effectiveness and worthiness.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 7, 2019.
Robert Brokamp: Let's say someone listening says, "That's all great news. I would love to support some sort of charity." How does someone go about choosing the right charity for them?
Phil Buchanan: There's no formula. I think people want a formula and there isn't one. It's about figuring out what matters to you. There's a lot of debate about whether all goals are equally worthy. Should you just follow your heart? I think you should use your heart and your head. What are you really passionate about [and] where do you have the opportunity to do good?
There's a guy named Peter Singer, a philosopher at Princeton, who is the father of what's known as "effective altruism." He would argue that it's immoral to give to the museum when a few hundred dollars could significantly improve or even save a life through malaria prevention in a developing country.
I think it's important to wrestle with those questions. I don't agree with him that it's immoral to give to the museum but think about where you can really do good. What's important to you? That might include giving internationally and also locally, which is a big tug for most people. They want to give back in their community.
So figuring out the goal. You're passionate about helping foster kids have better life outcomes. Or you're passionate about the environment and preserving habitats for wildlife. Whatever the issue is, that's the first part. And then, of course, you have to figure out which organizations to support.
Brokamp: And then that comes down to evaluating the various organizations and that's kind of tricky. It used to be -- and even to a certain degree still is -- that one of the first things people would look at is overhead.
How much of my donation is going toward the CEO's salary and how much is going to the actual beneficiaries? That was very popular for a long time and still is, to a certain degree, but you think that's misguided.
Buchanan: I basically do. Obviously there are examples at the extremes where you would say the budget being allocated in that way just doesn't make any sense. But I think often investment in overhead -- if what we mean by overhead are things like the rent needed to provide the space for the food pantry, or the salaries needed to pay the people you need to attract and retain to do a good job, or technology that might be needed in order to deliver services or programs more effectively -- these are crucial investments an organization makes.
I think if you know enough about an organization to trust them, then you should trust them to allocate their budget. And the question becomes not how they allocate their budget, but what their results are relative to their overall budget. Of course, that's a much tougher question to answer, but I don't think in general that overhead, which actually still is widely used by some of the charity-rating websites, is a particularly good measure.
In fact, a woman named Caroline Fiennes in the U.K. -- a very smart consultant in philanthropy -- did an analysis of a set of international organizations working on things like malaria prevention. She saw a correlation between more overhead and better results in terms of their work, so it should be about results.
Brokamp: When you talk about results, here at The Motley Fool we're investors, so we might think we're going to go into this with an investing mindset. But that's another situation that you would think could get a little dicey because you can't really evaluate a business in the same way you evaluate a philanthropy.
Buchanan: Exactly. I do believe that business and nonprofits are different and that giving is not quite like investing. And it's for exactly the reason that you said, Robert, which is that there isn't a universal metric. I mean, you and I can compare our investments by their returns even if they're in completely different industries.
It's not so easy in philanthropy. The right metrics are not the ones that are captured in the financial statements. They're the ones that have to do with the pursuit of the mission and the goals. Even if we were somehow able to know that one nonprofit had contributed significantly or even was solely responsible for improving graduation rates by 10% in a particular city -- and another nonprofit had been responsible for reducing CO2 emissions in a particular city -- an aside is that it's a really hard thing to actually know. What is the contribution of one organization when, in fact, many organizations are usually working on an issue?
But even if you knew that data, what's better? You can't put them into a common unit of measurement and, of course, sometimes your positive outcome will be my negative outcome. So performance measurement is crucial, but it has to be done in the context of the particular goals and strategies of the particular nonprofit organizations.
Brokamp: In your book you cite many examples of people who are very successful in business. Facebook is an example and they often think, "If I do this, I then can use my money to improve schools in Newark," as an example.
Buchanan: For instance.
Brokamp: And it often doesn't work out that way.
Buchanan: No, it doesn't. I think particularly in Silicon Valley -- I don't wish to caricature this too much -- but there's a tendency that goes a little bit like this. "I made my money through some breakthrough innovation and all we need is a breakthrough innovation to disrupt education or disrupt poverty," as if that was as simple as Uber disrupting the taxi business. Not that that was simple, but it was simpler, for sure.
So you see mistakes like those made in Newark. I would say the Gates Foundation has a similarly checkered record in education where the initial emphasis was to break large high schools into small high schools. That will yield better outcomes. Nope, that didn't work. OK, let's focus on teacher evaluation and teacher effectiveness and tie that to pay. That didn't work. OK, Common Core. That's what we're going to do. Let's see if everyone can adopt a common curriculum and that will lead to great outcomes.
The reality is that these problems defy a single, disruptive intervention because they're so complicated and interconnected and one way to understand that is to really engage the people who are closer to the ground. The teachers. The parents. The kids. This is a difficult thing for folks with a lot of wealth to do because they reside in a bit of a bubble.
So sometimes in certain areas, like global health, it is a little bit more the case that we know what works and we just need to do it. If we vaccinate people against certain diseases they won't die of those diseases. A little bit more of a top-down approach can actually work, although it's not easy there, either. But in an area like education, which is so complicated, it's just foolish to think that there is going to be one thing that's going to dramatically alter outcomes.
Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Robert Brokamp, CFP owns shares of FB. The Motley Fool owns shares of and recommends FB. The Motley Fool has a disclosure policy.