Excerpted from the Hardcover Edition
When the Frenchman Pierre L’Enfant laid out his plans for the new District of Columbia in 1791, he designed Sixteenth
Street to be one of the grand avenues of the new capital. Two hundred and twenty years later, his vision has been mostly realized. Sixteenth Street rises from the foot of the White House, runs north past luxury hotels, rows of embassies, the blank façade of the national headquarters of the Freemasons, through parks and the prosperous leafy neighborhoods of Washington’s Gold Coast, up past Walter Reed Hospital, before reaching a tired ending among the down-market strip malls and mini-marts of Silver Spring, Maryland. At key points, it commands sweeping views not only of the White House but of the Washington Monument and the Jefferson Memorial beyond.
Living in the Mount Pleasant section of Washington, I frequent a stretch along this storied street. From my home, it’s a fifteen-minute walk along Sixteenth Street to our local grocery store. Along the way, I pass some of the landmarks of the neighborhood: the All Souls Unitarian Church, the Little Flower Montessori School, the Scottish Rite Temple, a dormitory for Howard University students. In a span of about eight blocks, I pass no fewer than sixteen nonprofit organizations: five churches, four educational institutions, five social service organizations, one credit union, and one fraternal organization.
Most people would be hard-pressed to name sixteen charities, but in fact my little trip is not that unusual. Every day our lives are touched by the charitable sector. To the extent that we think about charities, we tend to associate them with services for the poor and the dispossessed. But the charitable sector is much more than that. It educates our young; it takes care of our old and infirm; it fields the teams that we cheer for on Saturdays and serves up spiritual sustenance on Sundays; it provides much of the intellectual and cultural nourishment for this country. The nonprofit community occupies some of the most sacred real estate in our public square and cushions some of our most important private and intimate moments. We entrust our children and our parents to it, and it is often the first and most important responder in times of crisis—whether those crises are personal in nature or global in reach.
There are approximately 1.1 million charities in this country—not local chapters, but unique, full-fledged organizations. Stop and think about that number for a moment. It means tens of thousands of charities in every state, thousands in every county. And the number grows by more than fifty thousand every year, in good times and in bad. The charitable sector employs approximately thirteen million people. In addition, more than sixty-one million Americans volunteer for charities, adding about eight billion hours of effort to charitable causes—roughly the equivalent of another five million full-time employees. Charities take in over $1.5 trillion each year in revenues and have assets approaching $3 trillion. Charitable activity accounts for 10 percent of the economic life of this country. And this percentage is certain to grow as the challenges of our society multiply and government proves unable to respond in a meaningful way.
Almost all of us are engaged in the charitable sector in direct ways: as employees, as volunteers, as donors, or as customers and clients. And even those few not so involved are indirectly entangled as taxpayers and citizens. While considerable funding for charities comes from purely private sources, our governments—federal, state, and local—provide hundreds of billions of dollars in direct grants each year. A figure for total government support of the nonprofit sector is difficult to calculate, but most estimates put direct charitable revenues from government at roughly $500 billion a year. These same governments also provide an enormous amount in indirect support by exempting charities from income and property taxes and providing deductions for charitable donations. Even in this age of multitrillion-dollar government budgets, that indirect support is significant. If we chose to eliminate or even cap just these exemptions, our public coffers would swell by tens of billions of dollars yearly—in line with the entire federal appropriation for housing and education.
The charitable sector is one of the anchors of American public life. Its vast scope makes any quick catalog of its functions incomplete, but it includes areas as diverse as education, global health services, shelter for the homeless, preservation of public and private land, athletics, arts and culture, and some of our most important scientific research. We support this broad array of services because absent a robust charitable economy, these functions would either cease or devolve to government—an unpalatable option in a time of rising public debt and dwindling faith in the efficacy of government. In effect, we have privatized these public functions in the belief that charities can perform these tasks better and with greater efficiency than government. The public—and private—investment in the social sector is one of the critical elements of the American social compact, yet it is one of the oddities of public life that each year we renew this investment without ever pausing to ask the same questions that we ask of every other public and private investment: What are we getting in return, is the investment structured correctly, is the money going to the right places? Remarkably, we don’t think much about the nonprofit sector at all. Our attention to it is largely scandal-driven (think of the United Way and ACORN) and ephemeral, due to a web of factors including the cloaked nature of the public investment, the fact that the public rarely perceives the millions of disparate charitable businesses to be a unified industry, and the fact that the sector includes sacred institutions of American life such as churches and schools.
We live in a society that is obsessed with results—from businesses, from government, from sporting events. Markets are endlessly debated, scrutinized, reduced to reams of data. Governments rise and fall on issues of accountability and results. Managers are fired, players traded, teams dismantled if a squad falls short of the expectations of ownership or of fans. Yet in this results-obsessed country, the public rarely demands measures of how effective charities are in implementing their services and meeting their service goals. And, as we shall see throughout this book, when the public generally and funders more specifically do not press for results-oriented organizations—and indeed value qualities that are inversely related to effectiveness—charities respond accordingly.
The implications are extensive, not just for the prudent use of resources, but for how we as a society tackle our most challenging problems and how we serve the poor, the infirm, the hungry, the homeless, and others who do not have full voice in our public life. This book’s story of charitable ineffectiveness is not one of greed or incompetence—though there are chapters on that—but one of misguided incentives and failed market structures. And it begins with one of the most venerated names in American charity.
With Hurricane Katrina bearing down on New Orleans in August 2005, the American Red Cross geared up for action. For the Red Cross, born in the blood of the American Civil War and tested through countless disasters, this was its Super Bowl, the biggest challenge of the new century. Contingency plans were activated; shelters opened; tens of thousands of meals, bottles of water, and other necessary supplies pre-positioned; thousands of volunteers drafted. Relief trucks began to roll even before the storm hit. The action, coordinated from the Red Cross’s emergency operations bunker in Washington, D.C., had all the hallmarks of military precision, not surprising given the Red Cross’s propensity to hire retired military supply-chain experts. And the size of its effort has rarely been seen outside a military operation. In many ways, it was the largest peacetime call-up in American history, ultimately activating 250,000 employees and volunteers across a thousand miles of the southern United States.
The Red Cross’s brethren at the International Committee of the Red Cross (ICRC) also sprang into action, dispatching about eighty of its best disaster-recovery experts to support this mobilization. Among them was Thomas Riess, a veteran logistician from Germany. What Riess, used to working with relatively few resources in third-world countries, found upon arriving at the Red Cross site in Mobile, Alabama, astonished him. The human resources and material aid were tremendous, but the system of quality control was in absolute tatters. Volunteers were assigned to tasks without adequate training or any attempt to match their skills to the work. Goods poured into the Mobile warehouse, but often without regard to need. Included in the supply flow were Uno card games, stale Danish pastries, buns marked “perishable” that had to be destroyed, and radios without batteries. Whatever came in was shipped out to the field, regardless of its usefulness to the relief effort. Riess reported a lack of centralized planning and communications and a lack of accountability and record keeping: goods coming into the warehouse were not registered or recorded; pilfering was common. His colleagues observed similar chaos. Mike Goodhand, head of logistics for the British Red Cross, described the American Red Cross efforts in Mississippi as “amateurish.” He noted one case where a Red Cross vehicle manager admitted to him that he had no idea as to the whereabouts of his entire fleet of more than a hundred cars and trucks.
The disorganization Goodhand and Riess witnessed was replicated across the region. Shelters were under- or incorrectly supplied, goods rotted in warehouses, the wrong things went to the wrong places, cash disappeared, supplies walked away. Too many key management positions were occupied by volunteers who were ill prepared and ill equipped to handle the flood of challenges. Rental cars, generators, air mattresses, and computers disappeared. At one point, it was reported that fully half of the goods supplied to the Red Cross could not be traced to confirm that they made it to their intended destination. The Red Cross supply-chain and inventory control management systems cracked. In the end, the British Red Cross and the ICRC characterized the effort as a “dangerous combination of ignorance and arrogance.”
The Red Cross failures during Katrina unfortunately do not stand out in any way. Not only did these failures largely duplicate the Red Cross’s shortcomings after 9/11, they mirror, on a much larger scale, the inefficiencies and ineffectiveness displayed by hundreds of other nonprofits seeking to respond to the disaster. Katrina was a gold rush for the nonprofit community; hundreds of organizations descended on the Gulf Coast, hoping to aid in the relief and rebuilding of the area and share in the billions of dollars washing through. But many of them lacked the capacity and expertise to contribute significantly to the recovery, and their uncoordinated efforts ultimately led to confusion, delay, and the thinning of finite resources. These problems were magnified by the policies of the IRS, which fast-tracked more than four hundred new Katrina-related charities in the wake of the storm, in some cases granting tax-exempt status within hours of receiving an application. Not surprisingly, the vast majority of those new charities, organized during a flood of good intentions, have since failed, disappeared, or been diverted to other purposes.
It was neither the government nor the nonprofit community that reacted most effectively to Katrina. It was the private sector. Private companies were on the ground with disaster relief efforts before the American Red Cross, FEMA, and even the U.S. military. Walmart proved especially effective during Katrina, moving tens of millions of dollars in emergency supplies into the area, creating fast-action distribution centers, and rapidly responding to local conditions and needs. Its advantages were numerous: it had the scale and staffing to quickly mobilize a two-hundred-person emergency response center that could coordinate efforts around the clock; the company had the expertise in supply-chain management to move the right goods to the right places, and it had unrivaled local knowledge from its operations in three thousand communities around the country. In many places, Walmart was the first on the ground with goods and services, and its reports from the field became critical to government responders. At the time, Sheriff Harry Lee of Jefferson Parish in suburban New Orleans said, “If [the] American government would have responded like Walmart has responded, we wouldn’t be in this crisis.”6 Later, reacting to both internal and external criticism, the Red Cross announced its intention to redesign its supply-chain management system, this time to be driven by the expertise of businesses like Walmart.
It’s tempting to shrug off this story as unrepresentative, the product of one unlikely-to-be-rivaled event. Katrina was a flood of biblical proportions that exposed the failings of numerous institutions, both inside and outside the charitable sector. Unfortunately, the modern history of the Red Cross is marked by the same type of organizational breakdown (and post-event confession of failures) across many major disasters. Those breakdowns have not affected every part of the enterprise, however; its fund-raising ability, especially during crises, has been nothing short of spectacular. Within weeks of the 2010 Haiti earthquake, for example, the Red Cross raised more than $450 million in the United States and more than $1 billion in total across its worldwide network.
But the more difficult task for the Red Cross in Haiti has been spending. Two years after the Haiti earthquake, the Red Cross was still sitting on more than $150 million in unspent and unallocated donations, a surprisingly large amount given the acuteness of Haiti’s needs and the fact that most of the distributed funds went to intermediate organizations such as the United Nations, Habitat for Humanity, and the International Organization for Migration.
On the surface, it is hard to figure out why the Red Cross fails so consistently. It is among the most storied and best resourced charities in this country. The organization’s staff is handpicked from the top levels of business, government, and the military, and though slow-footed and devoutly bureaucratic, it has avoided many of the pitfalls and scandals that have tripped up other charities. Rather, the roots of the Red Cross’s failures during Katrina and other crises lie in its inability—a failing shared by virtually all charities—to make the necessary internal investments that are the hallmark of all good organizations, be they for-profit businesses, charities, or government agencies.
This inability was clearly illustrated in the days after 9/11. As in Katrina, the Red Cross during 9/11 proved unable to respond quickly and effectively. Resources were not adequately deployed, and blood and relief supplies were not moved quickly enough from place to place. In an acute embarrassment to the organization, the Red Cross proved unable to support the Pentagon victims, even though the scene of the attack was only about two miles from Red Cross headquarters and its emergency response center. Bernadine Healy, then president of the Red Cross, was aghast to find on September 12 that no volunteers or supplies had gone to the Pentagon—no specialized teams, no emergency response vehicles, not even cots or food for the firefighters. Yet despite the organizational limitations of the Red Cross, as during Katrina, money poured in via the Liberty Fund, set up by the Red Cross to aid the victims. All in all, more than $543 million was donated to the fund, a remarkable outpouring of support by the American public and an amount that quickly far outstripped what the Red Cross could reasonably spend on the relief needs of what was ultimately a finite pool of victims of the attack. Recognizing that the Red Cross’s failures during 9/11 reflected poor infrastructure, inadequate telecommunications, and insufficient supply-chain management, Healy made the understandable judgment to help the next victims by using excess funds from the Liberty Fund to build the capacity of the Red Cross to respond to large-scale disasters, and to increase the available blood supply from its then-depleted levels—so that in a future crisis, the Red Cross would not duplicate its failings. When that decision became public, however, a huge outcry ensued, with many in the public, the media, and Congress insisting that all the Liberty Fund money had to be spent on the 9/11 victims, regardless of the actual need. At the inevitable public hearing, members of Congress shouted down Healy when she tried to explain the decision, and within days she resigned amid speculation about possible fraud prosecutions. The point was not lost on her successors, who hastily reversed course, announcing that Liberty Fund dollars would be spent only on victims of 9/11 and appointing the former senator George Mitchell to oversee the process and calm the waters.
The widespread fury was both predictable and misguided. Healy’s goal of investing in infrastructure in order to avoid a repeat of the 9/11 failures was entirely understandable, but the dismay over the spending plans reflects a bedrock and simplistic assumption that has long shackled the charitable world: that money spent on direct services is the only worthy use of charitable funds, while money invested in organizational effectiveness is to be kept as close to zero as possible. It is an equation widely accepted by the donating public, by the press, by charity watchdogs, by government regulators, and by most charities themselves. To keep overhead costs down, charities forgo necessary investments with devastating and sometimes deadly results. When Katrina came four years after the 9/11 hearings, the results were entirely predictable: telecommunications failed, inventory and supply-chain management fell apart, the same antiquated systems bent and broke under the stress of the crisis. Equally predictably, many of the same pundits and members of Congress who decried the liberation of the Liberty Fund excoriated the Red Cross for its Katrina failings, never acknowledging or perhaps even recognizing that the failure to invest in 2001 had direct implications for the breakdowns in 2005.
The overhead imperative is so deeply ingrained in the charitable world that it is hardly ever questioned, even though the causal link between overhead spending and organizational effectiveness is probably the inverse of what most people assume. Organizations that invest effectively and fully in infrastructure, technology, training, strategic planning, building new programs and initiatives that mature over time, research, and self-evaluation will almost certainly bring the most value to their communities of interest. Yet the demands of the donating public ensure that the number of such organizations is kept to a minimum. When even the highest-revenue charity in the country is bound together by rubber bands and duct tape, it is a sign of profound misunderstanding of how to build effective charities.
The struggles at the Red Cross are representative of, yet probably understate, the challenges within the charitable sector as a whole. Compared with virtually every other American charity, the Red Cross is well resourced, strategically focused, and outcome oriented. Most American charities, by contrast, struggle with lack of resources, muddled strategies, operational challenges, and lack of clarity around impact; even the most doe-eyed defender of charitable institutions would hesitate to dispute these facts. But it is only now becoming clear how much charities are being weighed down by market forces—of which the low-overhead imperative is just one—and how few can demonstrate measurable success.
The difficulty of identifying effective charities is well captured in the creation story of a New York–based charity evaluation organization called GiveWell. In the summer of 2006, eight friends working in the financial services industry decided to pool their efforts and make a common commitment for their end-of-year charitable giving. All of them were single, in their twenties, and doing very well financially for having relatively little professional experience. They worked for a publicity-shy hedge fund called Bridgewater Associates, a company little known outside the clubby financial world but one of astonishing reach and wealth. Bridgewater, now reputed to be the world’s largest hedge fund, manages about $160 billion in assets—a number roughly equivalent to the combined gross domestic product of Kuwait and Bulgaria. The group of friends, informally headed by two recent Ivy League graduates, Elie Hassenfeld and Holden Karnofsky, agreed to research and share information on different charities. Given the mind-numbing number of charities, they decided to focus on one industry per person (Karnofsky chose New York educational charities; Hassenfeld picked water charities in Africa) and limit themselves to charities awarded three or four stars by Charity Navigator, a reputable rating agency. They thought it would be easy; this was, after all, what they did every day for a living—research, analyze, and recommend the best investment opportunities.
Throughout the late summer and fall, the group met regularly in a conference room at Bridgewater to discuss their findings; in between sessions they searched the Web for data and called and asked for information from a vast number of charities. They discovered that the Charity Navigator rankings were unhelpful, as they were based largely on ratios of overhead to programmatic spending that they quickly realized had no correlation to organizational effectiveness and impact. They also found out that even if they wanted to rely on these ratings, it was unwise to do so because Charity Navigator depended on self-reports from the charities, which could easily, and frequently did, game the ratings. They read annual reports and IRS filings. They were mailed glossy brochures full of vivid pictures and stirring anecdotes. UNICEF even sent an oral rehydration package as proof of its good work—along with a donor card. None of the materials, from dozens of organizations, hinted at what they were trying to find out: Do the charitable programs effectively solve the targeted social problems? Their frustration wasn’t for lack of trying, on the part of either the Bridgewater 8 or the staff of some of the charities they contacted. When pressed for more information from the Bridgewater group, the charities often furnished their own confidential internal reports and data—the inadequacy of which led the group at Bridgewater to understand that the charities themselves did not know whether they were helping or hurting a given situation. In a small number of cases their inquiries were met with hostility tinged with paranoia. As part of his inquiry, for instance, Karnofsky contacted Smile Train, a prominent charity that sponsors cleft palate surgery for third-world children. He was looking for basic information on effectiveness: In what parts of the world was Smile Train operating? How many of the Smile Train children come from financially disadvantaged families? Was Smile Train able to track the children after surgery to assess the impact of the operation? Smile Train staff refused to provide any of the answers, eventually telling Karnofsky that he would have to pursue the questions directly with the organization’s president. Eventually, he received a call from the Smile Train CEO, who told him that no donors had ever sought this information before and openly accused him of spying for Operation Smile, a rival medical charity. Needless to say, Karnofsky never received any of the requested information. After six months of inquiry, the Bridgewater group found itself no closer to identifying effective charities than when they had started. In the end, they threw up their hands and made the best guess possible with their year-end charitable gifts, an unfulfilling outcome perhaps but one that closely tracks the thought process behind billions of dollars in giving each year.
The exercise, frustrating as it may have been, was a revelation to the Bridgewater group; they concluded that there had to be a better way of evaluating charities and helping donors find effective outlets for their contributions. In the summer of 2007, Karnofsky and Hassenfeld left Bridgewater to set up GiveWell, an organization dedicated to identifying demonstrably effective charities where donor money could be put to good use. Their approach was based upon the methodologies they had learned at Bridgewater: in-depth, research-driven evaluations supported by facts and data, not formulas and marketing brochures. By its nature, it is slow and handcrafted work that cannot be mass-produced, certainly not by a team that originally comprised only two people. Hassenfeld and Karnofsky determined to focus their work on a few charitable segments where they figured there would be reliable data (HIV, malaria prevention, water, and education, to name a few) and only on top-tier charities willing to provide access to relevant data.
Over the past five years, GiveWell, by now expanded to seven employees, has produced over five hundred investment grade reports, both on entire charitable sectors and on individual charities. After all this work, it has identified only eight organizations that can fully demonstrate material and effective impact and efficiently use additional funds. This is not to say that each one of the other 98.5 percent of charities is a failed organization, but it is to say that none of these charities can concretely demonstrate that they can effectively deliver promised results. In 2009, the GiveWell group decided to rate only charities that met a minimal standard of transparency—that the charity published on its Web site some meaningful self-evaluation. There was no requirement that the self-evaluation be positive, simply that the charity offer some proof of its commitment to making results publicly accessible. Only fifteen out of more than four hundred charities reviewed passed over this low bar—even though the organizations they targeted for review were culled from lists of the most respected and prominent charities in America. When Hassenfeld and Karnofsky dug deeper, they met resistance from startling quarters. Many nationally prominent charities simply refused to share relevant data with them. The Harlem Children’s Zone and the Carter Center—organizations with outsized reputations for being effective, businesslike, and data-driven—both stonewalled the GiveWell team. Heifer International and the Millennium Villages Project required confidentiality and then still provided no pervasive research. This projects a deeply unsettling image of many of the stars of the charitable world—Geoffrey Canada (Harlem Children’s Zone), Jimmy Carter (Habitat for Humanity), and Jeffrey Sachs (Millennium Villages Project)—as unable or unwilling to show whether their organizations are effective. It is hard to know what is worse, that Karnofsky and Hassenfeld can only find a handful of highly effective charities after years of intensive effort or that the organizations that failed their test are among the best that the charitable world has to offer.
The GiveWell staffers are not muckrakers. It is not their purpose to expose the failed, the muddled, the hopelessly un-strategic; rather, it is their goal to drive donations to the most measurably effective charities and create incentives for other charities to adopt similar standards of evaluation. In this, they have a long way to go. As we shall see, the market incentives of the nonprofit world push charities toward happy anecdote and inspiring narrative rather than toward careful planning, research, and evidence-based investments, to crippling effect.
I experienced some of these skewed incentives in my own work in the charitable sector. I joined National Public Radio (NPR) as chief operating officer in 1999 and became its chief executive officer in 2006. During my nine years running the company, NPR more than doubled its audience, despite the general national decline in radio listening, and more than tripled its revenues. We launched numerous successful digital initiatives, ranging from NPR’s satellite radio channels to the award-winning NPR Music site. From the outside and by all reasonable measures, NPR was a high-performing organization, one doing almost uniquely well in a difficult media environment. On the inside, however, I found myself endlessly embroiled in diplomatic logjams with the NPR board and the public radio stations that controlled the board.
Public radio was in the midst of a media revolution, a transformation almost as profound as that brought on by the printing press. I knew that NPR needed to change just to survive. I wanted to see results demonstrating how NPR was reshaping itself to be more competitive in the digital age, results that were not merely anecdotal but specific and measurable: the reach of NPR to tens of millions of people, the growth of online and digital services, the impact of new programming to reach more diverse audiences, the financial health of the organization. We implemented a strategy to broaden NPR’s reach beyond radio to the Internet, mobile phones, satellite radio—to meet and serve the audience wherever it was going to be—and to expand the historic definition of NPR’s audience by creating new programming for younger audiences and audiences of color. In many ways, this clashed with the historic view held by many public radio stations that NPR should be an organization that served public radio stations first, with other activities viewed as either irrelevant or threatening. The NPR board was sympathetic to that view. The board was made up of donors and public broadcasting system politicians—station managers elected by their peers. They were not indifferent to measures of the organization’s health, but they valued system peace over anything else. The results didn’t matter as much for them.
This book is not my story. This is a story about how the charitable sector has lost its way. The NPR board, as it turns out, was far more in tune with the culture of the nonprofit world than I was. As a country, we direct enormous resources to and place substantial social responsibilities on the charitable sector, yet the vast majority of nonprofits can’t demonstrate any commensurate return on this investment. The glossy fundraising brochures, the moving videos, and the carefully crafted inspirational anecdotes often mask problems that range from inefficiency and ineffectiveness to outright fraud and waste. There is little credible evidence that many charitable organizations produce lasting social value. Study after study tells the opposite story: of organizations that fail to achieve meaningful impact yet press on with their strategies and services despite significant, at times overwhelming, evidence that they don’t work. These failures are often well known within the nonprofit community but are not more generally discussed because the studies either are buried or tend to be so organization—and issue—specific that broader sector-wide conclusions are easy to avoid.
It’s no joy to write these words, no fun to suggest that hundreds of thousands of people may be toiling in vain, but it is critical to ask how this can be, how the well-intentioned efforts of so many can result in so little concrete progress toward common social goals. The answer starts with the absence of market mechanisms that reward good work and punish failure. Those mechanisms are missing because the funders, the true customers of charitable organizations, are generally indifferent to results, for a number of reasons we shall explore. And even when donors do care, there is little available to guide them in their funding decisions. Few charities even try to measure their results in a meaningful way, and neither government regulators nor online charity monitors provide useful alternatives.
This could have been a bleak book. My early research was not promising. I found story after story of organizational and service failure, of charities that refused to evaluate their programs or, worse, swept unfavorable results under the rug. But over time, another story began to emerge, of a nascent movement to rethink how the charitable sector works, to build market mechanisms to reward effective charities and discourage the ineffective ones, and to create tools that will allow people to turn themselves from donors to investors. It is a small movement, operating in the millions at the edges of a trillion-dollar industry, but it’s a sign of what the charitable sector can become. This book begins with the story of charitable failure, a narrative of systematic shortcomings, but it ends with a glimpse of those who are beginning to reshape the charitable world and show us what it can be.