Beruflich Dokumente
Kultur Dokumente
C H A P T E R 5
Accountability and
Performance Measurement
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116 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
treating staff without discrimination, and filing IRS (Internal Revenue Service) reports as
required. But that might seem to be a minimal standard to expect. Perhaps we might look
for something more—not just following the law but also going beyond the requirements of
law to follow best practices in governing and managing the organization, in other words,
doing the right things as well as not doing things that are wrong.
But does even a definition of accountability that expects nonprofits to do the right things
really go far enough? For example, the board may meet regularly, the budget may be invari-
ably balanced, the staff may be happy and motivated, and there may be a written strategic
plan. But that does not ensure that clients are recovering, the symphony is achieving artis-
tic excellence, or public attitudes on the environment are being changed. Thus, perhaps
accountability needs to include more than just avoiding transgressions and exhibiting model
behavior. It may need to encompass demonstrated effectiveness in achieving the purposes
for which the nonprofit exists. That requires not only that the resources entrusted to the
nonprofit not be misused but also that they be used to maximum benefit in pursuing the
organization’s mission. As we will see, however, this component of accountability turns out
to be the most complex, since there is not always consensus on how results should be mea-
sured, or even on how they should be defined.
Concern about the accountability of nonprofit organizations has a long history. As early
as 1918, the National Charities Information Bureau was created to educate the public about
nonprofit organization behavior in order to reduce the incidence of charity fraud. But con-
cern about accountability became heightened in the 1980s and 1990s. The widely publicized
misuse of United Way funds by the then president, William Aramony, for which he was con-
victed and served jail time, shocked the nation. Again after September 11, 2001, accusations
that some charity fundraising appeals were misleading and questions about the use of the
funds given to help victims of the terrorist attacks further undermined the public’s confi-
dence in the integrity of the sector. The misdeeds of management at Enron, WorldCom, and
Tyco exacerbated concern about corruption and fraud throughout American society. By the
mid-2000s, the U.S. Congress had turned its attention from corporate scandals to the non-
profit sector, and the national spotlight was focused on the need to make nonprofits more
accountable.
Requirements of Law
Chapters 2 and 3 covered some of the legal requirements facing nonprofits, but let’s review
some key points. Nonprofits must comply with laws at both state and federal levels. State
governments grant nonprofits their charters, and state attorneys general and state courts
have the authority to take action against law-breaking nonprofits. This can include the
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removal of board members who violate their fiduciary responsibilities and possibly even
revoking of the organization’s charter. Most states also have laws regulating the behavior of
nonprofits in specific areas—for example, requiring that they be registered in order to solicit
gifts from the general public.
At the federal level, regulation of nonprofits is carried out primarily by the IRS’s Division
on Tax-Exempt and Government Entities. IRS has the authority to impose intermediate sanc-
tions and to revoke an organization’s tax exemption, eliminating its ability to raise tax-
deductible gifts. Nonprofits that receive federal funds above certain amounts are also
subject to additional rules with regard to their use of the federal dollars. Organizations with
revenues greater than $25,000 (except religious congregations) are required to file an annual
Form 990, 990-EZ, or 990-PF with the IRS. Form 990 provides a summary of an organiza-
tion’s financial and program data, and it is selectively audited by the IRS. In 2007, the IRS
released for comment a draft of a revised Form 990 that would make it an even more effec-
tive vehicle for increased transparency. The proposed new Form 990 includes questions
related to governance as well as finances and programs. Beginning in 2008, small nonprof-
its that are not required to file Form 990 will however be required to electronically file Form
990-N, also known as the e-Postcard (www.irs.gov).
In 2002, Congress passed the Sarbanes-Oxley Act, responding to corporate governance
scandals. While Sarbanes-Oxley (or “SOX,” as it is commonly called) pertains primarily to
publicly traded corporations, two of its provisions—those regarding protection for whistle-
blowers and destruction of documents—also apply to nonprofit organizations. Some states,
including California, have passed legislation directed at nonprofits that essentially incorpo-
rates Sarbanes-Oxley-type requirements (Nonprofit Integrity Act, 2004). Many nonprofits,
especially larger organizations, have voluntarily adopted Sarbanes-Oxley provisions as a
way to assure their donors that they are operating with high integrity, transparency, and
sound governance. Even though most aspects of Sarbanes-Oxley do not apply to nonprof-
its, it has nevertheless established standards against which nonprofits are often judged
today.
In 2004, concern about nonprofit accountability prompted the Finance Committee of the
U.S. Senate to hold hearings and consider proposals for significantly increased regulation
of the nonprofit sector at the national level. At the committee’s request, Independent Sector
formed a Panel on the Nonprofit Sector to develop recommendations. The Panel’s report
was presented to the Congress in June 2005; it suggested increased enforcement of exist-
ing state and federal law, increased reporting by nonprofits, and some additional legislation.
But its emphasis was on the importance of maintaining the sector’s independence and on
its capacity for self-regulation (Independent Sector, 2005). The Panel on the Nonprofit Sector
continued its work into 2007, focusing on the development of principles for good gover-
nance and ethical conduct. Students are encouraged to seek updated information to learn
what changes may have occurred since this book was written.
While much of the legislation proposed in 2005 was not passed into law that year,
there is likely to be continued debate and discussion about the need for more federal
action, and the subject of nonprofit accountability is unlikely to disappear from the pol-
icy agenda. The Independent Sector Web site is an excellent resource on the status
of public policy issues related to the sector. It also provides detailed information on the
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118 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
120 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
PREFACE
The BBB Wise Giving Alliance Standards for Charity Accountability were developed to assist donors
in making sound giving decisions and to foster public confidence in charitable organizations. The stan-
dards seek to encourage fair and honest solicitation practices, to promote ethical conduct by chari-
table organizations and to advance support of philanthropy.
These standards replace the separate standards of the National Charities Information Bureau and
the Council of Better Business Bureaus’ Foundation and its Philanthropic Advisory Service that were
in place at the time the organizations merged.
The Standards for Charity Accountability were developed with professional and technical assistance
from representatives of small and large charitable organizations, the accounting profession, grant mak-
ing foundations, corporate contributions officers, regulatory agencies, research organizations and the
Better Business Bureau system. The BBB Wise Giving Alliance also commissioned significant indepen-
dent research on donor expectations to ensure that the views of the general public were reflected in
the standards.
The generous support of the Charles Stewart Mott Foundation, the Surdna Foundation, and Sony
Corporation of America helped underwrite the development of these standards and related research.
Organizations that comply with these accountability standards have provided documentation that
they meet basic standards:
These standards apply to publicly soliciting organizations that are tax exempt under section
501(c)(3) of the Internal Revenue Code and to other organizations conducting charitable solicitations.
The standards are not intended to apply to private foundations, as they do not solicit contributions
from the public.
The overarching principle of the BBB Wise Giving Alliance Standards for Charity Accountability is
full disclosure to donors and potential donors at the time of solicitation and thereafter.
However, where indicated, the standards recommend ethical practices beyond the act of disclo-
sure in order to ensure public confidence and encourage giving. As voluntary standards, they also go
beyond the requirements of local, state, and federal laws and regulations.
In addition to the specific areas addressed in the standards, the BBB Wise Giving Alliance encour-
ages charitable organizations to adopt the following management practices to further the cause of
charitable accountability.
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• Initiate a policy promoting pluralism and diversity within the organization’s board, staff, and
constituencies. While organizations vary widely in their ability to demonstrate pluralism and
diversity, every organization should establish a policy, consistent with its mission statement, that
fosters such inclusiveness.
• Ensure adherence to all applicable local, state, and federal laws and regulations including sub-
mission of financial information.
• Maintain an organizational adherence to the specific standards cited below. The BBB Wise
Giving Alliance also encourages charities to maintain an organizational commitment to
accountability that transcends specific standards and places a priority on openness and ethi-
cal behavior in the charity’s programs and activities.
1. A board of directors that provides adequate oversight of the charity’s operations and its staff.
Indication of adequate oversight includes, but is not limited to, regularly scheduled appraisals of the CEO’s
performance, evidence of disbursement controls such as board approval of the budget, fundraising
practices, establishment of a conflict of interest policy, and establishment of accounting procedures
sufficient to safeguard charity finances.
2. A board of directors with a minimum of five voting members.
3. A minimum of three evenly spaced meetings per year of the full governing body with a major-
ity in attendance, with face-to-face participation. A conference call of the full board can substitute
for one of the three meetings of the governing body. For all meetings, alternative modes of par-
ticipation are acceptable for those with physical disabilities.
4. Not more than one or 10% (whichever is greater) directly or indirectly compensated person(s)
serving as voting member(s) of the board. Compensated members shall not serve as the board’s
chair or treasurer.
5. No transaction(s) in which any board or staff members have material conflicting interests with
the charity resulting from any relationship or business affiliation. Factors that will be considered when
concluding whether or not a related party transaction constitutes a conflict of interest and if such
a conflict is material, include, but are not limited to: any arm’s length procedures established by
the charity; the size of the transaction relative to like expenses of the charity; whether the inter-
ested party participated in the board vote on the transaction; if competitive bids were sought and
whether the transaction is one-time, recurring, or ongoing.
(Continued)
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122 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
(Continued)
Measuring Effectiveness
An organization should regularly assess its effectiveness in achieving its mission. This section seeks
to ensure that an organization has defined, measurable goals and objectives in place and a defined
process in place to evaluate the success and impact of its program(s) in fulfilling the goals and objec-
tives of the organization and that also identifies ways to address any deficiencies. To meet these stan-
dards, a charitable organization shall:
6. Have a board policy of assessing, no less than every two years, the organization’s performance
and effectiveness and of determining future actions required to achieve its mission.
7. Submit to the organization’s governing body, for its approval, a written report that outlines
the results of the aforementioned performance and effectiveness assessment and recommendations
for future actions.
FINANCES
This section of the standards seeks to ensure that the charity spends its funds honestly, prudently and
in accordance with statements made in fundraising appeals. To meet these standards, the charitable
organization shall:
Please note that standards 8 and 9 have different denominators.
public accountant is sufficient to meet this standard. For charities whose annual gross income is
less than $100,000, an internally produced, complete financial statement is sufficient to meet this
standard.
12. Include in the financial statements a breakdown of expenses (e.g., salaries, travel, postage,
etc.) that shows what portion of these expenses was allocated to program, fundraising, and admin-
istrative activities. If the charity has more than one major program category, the schedule should pro-
vide a breakdown for each category.
13. Accurately report the charity’s expenses, including any joint cost allocations, in its financial
statements. For example, audited or unaudited statements which inaccurately claim zero fundraising
expenses or otherwise understate the amount a charity spends on fundraising, and/or overstate the
amount it spends on programs will not meet this standard.
14. Have a board-approved annual budget for its current fiscal year, outlining projected expenses
for major program activities, fundraising, and administration.
124 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
(Continued)
b. providing a clear, prominent and easily accessible privacy policy on any of its websites that
tells visitors (i) what information, if any, is being collected about them by the charity and
how this information will be used, (ii) how to contact the charity to review personal infor-
mation collected and request corrections, (iii) how to inform the charity (e.g., a check off
box) that the visitor does not wish his/her personal information to be shared outside the
organization, and (iv) what security measures the charity has in place to protect personal
information.
19. Clearly disclose how the charity benefits from the sale of products or services (i.e., cause-
related marketing) that state or imply that a charity will benefit from a consumer sale or transaction.
Such promotions should disclose, at the point of solicitation:
a. the actual or anticipated portion of the purchase price that will benefit the charity
(e.g., 5 cents will be contributed to abc charity for every xyz company product sold),
b. the duration of the campaign (e.g., the month of October),
c. any maximum or guaranteed minimum contribution amount (e.g., up to a maximum of
$200,000).
20. Respond promptly to and act on complaints brought to its attention by the BBB Wise Giving
Alliance and/or local Better Business Bureaus about fundraising practices, privacy policy violations
and/or other issues.
Source: BBB Wise Giving Alliance (2003). Copyright 2003, BBB Wise Giving Alliance.
Since the BBB has a long history and an established reputation as a watchdog that acts
to protect consumers against unethical business practices, the Wise Giving Alliance stan-
dards for nonprofits are among the best known and most widely cited in the news media.
For example, the Wise Giving Alliance made news in 2001, when it temporarily dropped the
American Red Cross from its list of organizations meeting its standards, in the wake of con-
troversy concerning the organization’s post–9/11 fundraising. (Its approval was subse-
quently restored.) Beginning in 2003, the Wise Giving Alliance offered charities that meet
its standards the use of a “BBB national charity seal” in their promotional and solicitation
materials.
The BBB standards are based on best practices; that is, they prescribe what accountable
nonprofits should do in the areas of governance and oversight, measuring effectiveness,
finances, fundraising, and informational material. They require that organizations have a
mechanism for measuring results that involves the governing board, but they do not pre-
scribe the specific standards that organizations must apply. They require that organizations
“have a board policy of assessing, no less than every two years, the organization’s perfor-
mance and effectiveness and of determining future actions required to achieve its mission.”
And the organization must submit “to [its] governing body, for its approval, a written report
that outlines the results of the aforementioned performance and effectiveness assessment
and recommendations for future actions” (BBB Wise Giving Alliance, 2003). But aside from
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a couple of key financial ratios, which we will discuss below, the BBB does not advocate
specific methods for measuring effectiveness or performance.
Many nonprofit organizations have accepted the idea of best practices, adhere to one or
other of the recommended standards, and have sought some type of accreditation or certi-
fication. In a 2005 study by Salamon and Geller, 65% of organizations surveyed were par-
ticipating in some type of best-practice accreditation program and identified several benefits
of doing so, including improved staff and board knowledge, improved accountability and
governance, and enhanced staff attention to the organization’s mission (pp. 10–11). It may
be that in addition to the potential threat of negative publicity, the widespread acceptance
of voluntary standards reflects, as Light (2000) suggests, institutional theory at work (p. 18).
Enunciated standards become a part of the conventional wisdom of what constitutes ethi-
cal or sound practice and are increasingly adopted by organizations that seek recognition for
being consistent with the norms of the subsector or profession within which they operate.
But the question remains, Does doing the rights things ensure that the organization is
effective in accomplishing its mission? Is there some mechanism that automatically leads
from best practices in governance and management to an effective organization? Light
(2000), and others, conclude that the connection is tenuous:
Even if one could develop hard measures of finance, mission, record keeping, and
operations, [funders of nonprofits] would be hard pressed to demonstrate a link
between any single measure and overall organizational effectiveness. There is no
evidence, for example, that having a merit pay system for staff is related to
organizational effectiveness, or that holding a strategic planning process is
somehow going to improve outcomes. (p. 52)
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or attain inputs-cost ratios,” whereas effectiveness “is measured by comparing the results
achieved with the results sought.” As Kelly further observes, “Although efficiency may help
an organization be more effective, the two concepts are not interchangeable” (p. 428).
Indeed, some argue that an emphasis on efficiency may in fact work against the effective-
ness of organizations by discouraging investment in capacity, a topic that will be discussed
in greater detail in the next chapter.
Another important distinction is between program effectiveness and the effectiveness or
performance of an organization. Program evaluation is a method that many nonprofits use
to determine whether specific programs are effective in achieving their goals and objectives.
A program “is a set of resources and activities directed toward one or more common goals,
typically under the direction of a single manager or management team.” Program evalua-
tion is “the systematic assessment of program results and, to the extent feasible, systematic
assessment of the extent to which the program caused those results” (Newcomer, Hatry, &
Wholey, 2004, p. xxxiii).
Organizational effectiveness looks at the broader question of whether the organization
as a whole is effective in achieving its mission. Of course, for a small nonprofit with a sin-
gle program, the distinction may not be very meaningful. For larger, more complex orga-
nizations with broad missions, the difference may be significant. For example, a university
might have a very effective basketball team, one that frequently wins championships, but
it may not be a very strong university overall. However, some argue that program outcome
evaluations can be aggregated at the organizational level as a measure of the organization’s
overall effectiveness (Murray, 2004, p. 357). Again, evaluating the organization’s overall per-
formance could include factors in addition to its effectiveness, such as efficiency, financial
results, and others.
Two of the most emphasized ratios are the cost of fundraising and the percentage of
expenditures that go for overhead rather than for programs and services. The BBB standards
do not in general emphasize financial ratios, but they require that an organization’s spend-
ing on fundraising be no more than 35% of the funds raised. However, the BBB also permits
an organization to offer a justification for higher ratios, an accommodation to individual
realities that some raters do not make. The Maryland standards establish a 3:1 ratio for fund-
raising costs (i.e., expenditures should be no more than about 33% of gift revenue), and they
also permit some flexibility:
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5 & 6. Primary Revenue Growth & Program Expenses Growth: Measures a charity’s
average annual growth of primary revenue or program expenses over its three to
five most recent fiscal years. (higher is better)
7. Working Capital Ratio: Determines how long a charity could sustain its level of
spending using only its net liquid assets, as reported on its most recently filed
Form 990. (higher is better) (Charity Navigator, www.charitynavigator.org/
index.cfm/bay/content.view/catid/2/cpid/182.htm, accessed February 21, 2006)
Indeed, organizations that spend too much on overhead or fundraising may be making
inefficient use of donor funds or perhaps may be spending too lavishly on salaries and
other overhead costs. Very high fundraising costs may suggest the possibility of ineffi-
ciency, or even unethical or fraudulent behavior. But, critics argue, rating organizations
based on their overhead and fundraising costs may create perverse incentives. For
example, this approach may simply encourage organizations to engage in creative account-
ing to allocate costs to programs rather than administration. Insisting on low fundraising
costs also may place young organizations at a disadvantage. They often need to invest sub-
stantial amounts in developing a database of regular donors that will ultimately produce
continuing revenue at lower costs. And low fundraising costs may not be realistic for an
organization that advocates unpopular causes or lacks a constituency of major donors
(Fremont-Smith & Cordes, 2004).
Others critics argue that “the fundraising efficiency standard is not a measure of effi-
ciency at all. [Rather,] it documents the sunk costs associated with cultivating donors” (“The
Pros and Cons of Financial Efficiency Standards,” 2004, p. 3). In other words, looking at just
this year’s fundraising costs ignores the substantial amounts that the organization may have
spent in earlier years to develop relationships with donors who now make larger gifts,
lowering the per-dollar cost of fundraising today.
Some argue that high program-spending ratios are not a measure of organizational effec-
tiveness, and indeed, they may even work against building effective organizations, by
encouraging organizations to “value thrift over excellence.” Trying to maintain a low ratio
may cause an organization to invest too little in “good governance, planning, compliance
and risk management, collection of data for service performance evaluations, and staff
training” (“The Pros and Cons of Financial Efficiency Standards,” 2004, p. 4).
Financial ratios do provide one perspective on the operations of an organization. But,
despite the ease of their use, they may not present the complete picture. It may even be the
case, as some critics charge, that “the undue emphasis on financial ratios diverts attention and
resources from the development of more meaningful measures that address performance
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against mission and program objectives” (“The Pros and Cons of Financial Efficiency
Standards,” 2004, p. 4).
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local factors, benchmarking may be better used as a tool for learning than for evaluating.
If used (or perceived) as a technique for evaluating the performance of specific departments
or staff, it also may come to be manipulated; that is, individuals may try to game the
system by selecting peers that offer the most favorable comparisons.
Financial accountability is just table stakes. You have to get that right first. But,
ultimately, the American public should hold our sector accountable for delivering
on our missions. . . . We should be asked to report concrete results that are tied
directly to our missions, not just the level of activity we produce.
One obstacle to measuring success in accomplishing the mission is the loftiness and
vagueness of many mission statements. For example, the mission of one organization serv-
ing the needs of older people is to enable them “to live with dignity and independence.” One
educational institution includes as a part of its mission “fostering a love of learning.” But how
are “dignity” or “love of learning” to be defined or measured? And if they are defined and
measured and found to exist, how can the organization be sure that its programs are indeed
what created them? In other words, what is the organization’s impact on the measured
changes, since there are many factors that influence the lives of older people and students.
An instructive example is provided by the experience of The Nature Conservancy (TNC)
in the 1990s. TNC was struggling with the question of how to measure its performance
against its ambitious mission “to preserve the plants, animals, and natural communities that
represent the diversity of life on Earth by protecting the lands and waters they need to sur-
vive.” For 50 years, it had measured its success by looking at two figures that were readily
available, the amount of money it raised and the quantity of land this money enabled it to
protect—what became known as “bucks and acres.” But these two measures really reflected
the means TNC was using, not the ends it was committed to achieving. In other words, if the
mission was ultimately to preserve biodiversity on Earth, how could TNC be sure that the
means it was employing—the acquisition of money and land—was indeed having an
impact on the achievement of that purpose? (Sawhill & Williamson, 2001).
Possibly a better measure of TNC’s effectiveness in achieving its mission might have been
to count the number of species existing on the planet each year—to measure biodiversity.
But even if it were practical to take an annual global inventory, the number continues to
decline every year, despite TNC’s efforts, for reasons way beyond TNC’s control. The impact
of its programs is small compared with all the other forces affecting the survival of species
on Earth. Indeed, using that figure as an indicator of effectiveness in achieving the mission
would doom TNC’s performance to be assessed as a continual failure because that figure
inevitably declines. Moreover, it would be meaningless as a measure of TNC’s own results.
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After considering the problem, TNC adopted a family of measures, including the number
of species existing on land it controls. Easier to count than all the species on the entire
planet, and more reflective of TNC’s own efforts, this intermediate number could provide
a realistic and feasible proxy for the organization’s impact on the Earth’s overall biodiver-
sity. This approach thus requires developing
The challenge is greater for some organizations than for others. Let’s consider an orga-
nization with the simple mission of “providing a hot meal every day to homeless people.”
It is hard to improve on a simple count of the number of meals served—and perhaps a mea-
sure of the food’s temperature—as a way to measure effectiveness in delivering that
straightforward and uncomplicated mission. But take a more complicated mission, say that
of the American Cancer Society: “Eliminating cancer as a major health problem by prevent-
ing cancer, saving lives, and diminishing suffering from cancer, through research, education,
advocacy, and service.” (www.cancer.org, accessed February 11, 2006). Unfortunately,
many variables affect the incidence of cancer and cancer death rates—individuals’ life
styles, environmental factors, and the availability of medical care, among others. Just mea-
suring the national cancer rates, whether they are found to be increasing or declining, would
not tell the American Cancer Society much about the effectiveness or ineffectiveness of its
efforts. But research has demonstrated that screening and educational programs are effec-
tive in reducing cancer incidence and mortality; thus, the American Cancer Society can
make a sound theoretical link between the effectiveness of its screening and educational
programs, which can be more easily evaluated, and achievement of its larger mission, the
prevention and eventual elimination of cancer (Sawhill & Williamson, 2001). Obviously,
however, the validity of any microlevel indicator as a measure of effectiveness toward
achievement of a broader mission depends on the soundness of the logic model behind it—
that is, the chain of theoretical reasoning that explains exactly how the organization’s efforts
lead to the desired larger result.
Program Outcomes
The outcomes approach to measuring program effectiveness has gained wide acceptance
through the efforts of United Way of America, which applies it in evaluating its supported
organizations. It also has been adopted by many foundations and government agencies for
measuring their grantees’ effectiveness. It is a method for evaluating programs and may not
address the effectiveness of the organization, although again, the distinction may be small
for organizations that operate only a few or a single program.
The United Way outcomes model is illustrated in Table 5.1, which highlights the key vari-
ables: inputs, activities, outputs, and outcomes. Inputs are the resources dedicated to the pro-
gram, including money, staff, volunteers, facilities, equipment, and supplies, as well as the
constraints imposed by the external environment. Activities are what the program does—for
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132 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
example, tutoring children, feeding the homeless, or providing job training. Outputs are the
direct products of the activities and are often relatively easy things to measure—for example,
the number of children tutored, the number of homeless fed, and the number of individu-
als trained in employment skills. But measuring outputs does not make the connection to the
program’s goals, which are generally to change in some way the individuals it serves and to
make a lasting difference in their lives. Outcomes are the changes that occur in the individ-
uals as a result of their participation in the program—for example, new knowledge, expanded
job skills, or a better position in life.
Outcomes may be measured immediately after the individual completes the program
(initial outcomes); after a longer period has elapsed, say a few years (intermediate outcomes);
and after an even longer period of time (long-term outcomes.) Thus, it may be found that
students who participate in an after-school tutoring program improve their grades, but are
they still succeeding academically two years later? Do they go on to complete college in larger
numbers than students who do not participate in the program? Are they more likely to be
employed a decade after their participation in the program? Obviously, measuring outcomes
Resources dedicated What the program The direct products Benefits for
to or consumed by does with the inputs of program activities participants during
the program to fulfill its mission e.g. and after program
e.g. e.g. activities
• number of
• money • feed and shelter classes taught e.g.
• staff and staff homeless • number of • new knowledge
time families counseling • increased skills
• volunteers and • provide job sessions • changed
volunteer time training conducted attitudes or
• facilities • educate the • number of values
public about educational • modified
• equipment and
signs of child materials behavior
supplies
abuse distributed
Constraints on the • improved
• counsel • number of hours condition
program
pregnant of service
e.g. • altered status
women delivered
• laws • create • number of
• regulations mentoring participants
• funders relationships for served
requirements youth
over the longer term can require considerable effort and expense, perhaps involving the
tracking of former clients and follow-up surveys. That can be difficult for organizations that
serve clients who are highly mobile and difficult to reach—for example, homeless people.
But as mentioned earlier, monitoring outcomes is not the same as evaluating programs.
In other words, it is one thing to establish that outcomes have occurred, but evaluating the
program requires determining that these outcomes were in fact caused by the program
(Kopczynski & Pritchard, 2004, p. 650). That requires developing a sound and plausible logic
model—that is, a theoretical explanation of the links all the way through the process from
inputs to outcomes. Figure 5.1 depicts the logic model of a program offering tutoring to at-
risk teens. It shows how the organization believes the process works. To justify using school
graduation rates as an outcome measure for its program, the organization would need to
explain how the mentoring experience causes students to complete their homework and
attend school more regularly and how homework and attendance affect graduation rates.
Otherwise, the rate of students’ graduation from high school cannot be a useful indicator of
the tutoring program’s outcome. One obvious problem in developing such logic models is try-
ing to identify the external influences that can cause the outcome in addition to the activi-
ties associated with the program. This becomes more of an issue the higher up in the model
one ascends. For example, students’ grades and graduation rates may be positively affected
by the tutoring program, but they also could be affected—either positively or negatively—
by students’ experiences at home or in the community where they live (Poister, 2003, p. 38).
The program outcome model offers a significant advantage over some other approaches
to measuring effectiveness that we have discussed, since it does not suggest arbitrary stan-
dards but rather permits each organization to develop its own in relation to its mission. For
instance, in our earlier example, TNC’s bucks and acres were really inputs to its program.
Shifting the focus from bucks and acres to biodiversity reflects outcomes thinking.
To emphasize again, however, the outcomes model overlooks other important aspects of
organizational performance. For example, it is possible to conceive of an organization that
is delivering effective programs but whose sustainability as an organization over the long run
is imperiled by financial imbalances. It could also be possible to achieve positive program
outcomes, but at a very high cost; in other words, the organization could be very inefficient.
And measuring program outcomes does not tell us anything about the organization’s ability
to learn and adapt to change. In sum, the outcomes model measures the effectiveness of pro-
grams but cannot by itself provide a complete picture of organizational performance.
Balanced Scorecard
The balanced scorecard is a concept developed by Kaplan and Norton (1992) as a way for
businesses to obtain, as the term suggests, a balanced perspective on performance by com-
bining financial data with other considerations. It has since been adopted by some nonprofit
organizations and government agencies as a way to combine financial ratios and other data
in measuring organizational performance. The balanced scorecard looks at an organization
from four perspectives:
134 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
s
e
m At-risk teens achieve At-risk teens meet district
passing grades. attendance requirements.
o
c
school regularly.
At-risk teens complete
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homework regularly.
Outputs
Paton (2003) offers a variation of the balanced scorecard designed specifically for
nonprofits, which he calls the dashboard. His model seeks to answer two fundamental
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questions: Does it work? In other words, “do the different activities, services, and programs
achieve broadly the results intended?” (pp. 139–140). And is the organization well run? Paton
notes that there may be a relationship between how well run an organization is and the effec-
tiveness of the programs it delivers but that the two are separate matters and both need to
be measured in order to obtain a complete picture of the organization’s performance:
Paton’s (2003) dashboard thus looks at the organization from five perspectives, encom-
passing short-term, medium-term, and long-term measures:
A number of variations on the balanced scorecard have been developed and are used, but
this approach also has its critics. For example, Meyer (2002) notes that the balanced score-
card really measures very different things—for example, financial results and customer
satisfaction, numbers that must be looked at alongside each other rather than combined.
He suggests instead the idea of identifying correlations between measures. For example, do
good financial results always go along with customer satisfaction? If so, there is no need to
measure customer satisfaction directly, since it can be assumed from the financial results.
Using this approach, he offers what he calls activity-based profitability analysis as a simpler
alternative to balanced-scorecard approaches.
136 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
(REDF), a venture philanthropy fund based in San Francisco, pioneered the concept of social
return on investment (SROI) as a way to put a dollar figure on—that is, to monetize—the
social value created by nonprofits. The idea was to add social return to financial return in
order to generate a single number—in dollars—that could be used as an indicator of the
organization’s performance.
As a venture philanthropy fund, REDF approaches giving as a form of investing in a select
group of nonprofits, called its portfolio organizations. And, like other investors, REDF seeks
to measure the return on its investments. Financial return is easy to understand: If you invest
$100,000 and receive $10,000 in income, that’s a return of 10%. But how do we measure
the less tangible social benefits created by a nonprofit’s programs? SROI provides a method
for measuring those social benefits in dollar terms so that they can be compared with
expenditures to produce a single number as simple to understand as the rate of return on
a philanthropic investment.
REDF’s SROI methodology evolved from cost-benefit analysis, a technique drawn from
applied economics and most often used to evaluate government programs. As Kee (2004)
explains it,
The advantage of this approach is that it produces a ratio that can be used to compare
programs against programs. But putting a dollar value on social benefits—that is, monetiz-
ing them—can be a challenge. As an example, let’s consider a program that offers job train-
ing, helping people move from welfare to work. The benefits may include the new income
taxes paid by the people who become employed, savings through lower welfare costs, less
need for homeless shelters, and perhaps savings in the cost of policing as fewer people are
on the streets. These benefits can be given a dollar value and summed to find the SROI in
the nonprofit’s job-training programs. But that does not include, for example, the very real
benefits of reduced fear and social tension resulting from the decrease in crime. Though
real, that is hard to measure, especially in dollar terms. Moreover, costs are incurred to sup-
port the program today, but many of the benefits may not be realized until long in the future.
For example, one benefit of an after-school tutoring program that helps young people com-
plete high school may be their higher wages after graduation. That is, at least theoretically,
easily stated in dollar terms. But increased education also may lead to healthier and
happier lives through their lifetimes. That is harder to capture and harder to monetize (Kee,
2004, pp. 526–527).
Although SROI has been adopted by a number of organizations, especially social enter-
prises that worked with REDF and other venture philanthropy funds, REDF no longer uses
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While SROI, cost-benefit analysis, and REDF’s OASIS system provide results that may be
easy to interpret, their shortcomings include the practical limitations that many organiza-
tions face in collecting and analyzing complex data on an ongoing basis.
Blended Value
With the increasing focus by nonprofits on financial results and the growing corporate con-
cern about social responsibility, many observers note a blurring of the nonprofit and for-
profit sectors; in other words, they argue that nonprofits and business firms are becoming
more alike and that it should therefore be possible to define some common measures of
performance that could be applied to all organizations across the sectors. But this approach
still faces a number of challenges.
Baruch and Ramalho (2006) analyzed a variety of scholarly articles, some reporting
research on nonprofits and some research on for-profits. They found some common ground
in the measures that those various studies used to measure organizational effectiveness. But,
as they observed, “all measures seemed to correspond to broadly diffused concepts” (p. 58).
In other words, organizations in different sectors can be compared using similar measure-
ments, but only at a very high level and in very general terms. Corporations and nonprofits
do have characteristics in common, since both are organizations. But limiting the study of
effectiveness to their common characteristics may require a level of generalization that is
simply not informative. For example, both dogs and cats might be evaluated by their effec-
tiveness in winning their owners’ hearts, as well as eating, drinking, and sleeping. But none
of these qualities would be related to their effectiveness in catching mice or guarding a junk-
yard, tasks for which cats and dogs are generally superior, respectively.
One interesting approach to defining common measures across sectors is offered by
the advocates of blended value (“Blended Value Map,” 2006). In the past, corporations have
worked to maximize economic value, while nonprofits have tried to maximize social value—
that is, to increase SROI. But, the blended value theorists say, value should be thought about
as having three components: economic value, social value, and environmental value. Both
companies and nonprofits should be measured by how much of all three they create—in
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138 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
total. Thus, companies may create considerable economic value, but through socially
responsible behavior they may also create some social value. For example, companies earn
profits for their owners but also create jobs for the less well-off. Nonprofits may be high as
creators of social value and lower than companies in creating economic value, but many
now operate revenue-generating enterprises, and they may also earn profits and contribute
to the economies of their communities. Both companies and nonprofits may affect the envi-
ronment, in positive or negative ways. “The central premise of the blended value proposi-
tion is that value itself is a ‘blend’ of economic, environmental, and social factors, and that
maximizing value requires taking all three elements into account” (“Blended Value Map,”
2006). In other words, the blended value advocates call for “breaking down the silos” and
developing a single measure to evaluate for-profits and nonprofits in terms of the total
benefits, or value, that they create (“Blended Value Map,” 2006).
Although the use of blended value to measure organizational performance across the
nonprofit and business sectors is intellectually intriguing, there are several challenges to its
wider acceptance. For one, there are some critics who challenge the very concept of cor-
porate social responsibility, one of the silos across which blended value measures would be
built (Doane, 2005), There are strong incentives for business corporations to maximize
financial returns, including the ratings of financial analysts and the pressure of sharehold-
ers seeking to maximize the financial returns on their investments. And, of course, there
remain the inherent difficulties of defining and measuring social impact in both sectors.
• Forty-one percent of the funders said that they are requiring more performance
data from their grantees.
• Over half of the funders did not provide their grantees with funds to cover the
costs of the evaluations.
• Sixty percent of the funders said that they provide their grantees with advice on
evaluation, but interestingly, only 38% of the grantees said that they had actually
received any.
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The last point is interesting, indeed provocative, especially since funders have been a
strong voice encouraging the greater use of performance measurement by their grantee
organizations. As Murray (2004) recommends, additional research is needed to determine
to what extent the emphasis on performance in today’s nonprofit literature and discussion
reflects real change and how much is rhetoric. Research also is needed to determine the
extent to which measurement is actually influencing the management of organizations in
positive ways.
Efforts to develop common performance indicators are continuing. For example, the Web
site of the Urban Institute (www.urban.org) offers material on the Outcomes Indicator
Project and is an excellent resource for students interested in following new developments
in the field.
140 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
will gain more importance than the important work their organizations are committed to
performing:
In other words, too much emphasis on measuring performance may create a “Dilbert
world,” in which the passion and commitment of the professional staff and volunteers
becomes replaced by caution, even skepticism, which might undermine the nonprofit cul-
ture and its traditional strengths.
Writing in the Chronicle of Philanthropy, Kennard King (2006) raises similar concerns
about the risks to nonprofit values in an excessive focus on performance:
When Americans want to preserve and promote values other than making a buck,
they come together in nonprofit organizations. When they want to solve problems
they see in society, they come together in nonprofit organizations. When they aspire
to make the world a better place, they come together in nonprofit organizations. And
that points to the real danger of the overzealous application of outcomes thinking:
By undermining the value of our aspirations, we take away the purpose and
meaning of the work of nonprofit organizations.
The middle position, which Paton (2003) finds to be the “proper one,” is to be “realistic
about the range of possibilities,”
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to engage constructively with measurement while being very alert to its limitations
and misuse, and to approach the performance agenda positively while also being
fully aware that every valid and useful method can also become an occasion for
goal displacement by being pursued inappropriately or excessively. (p. 165)
CHAPTER SUMMARY
There is an increasing demand that nonprofit organizations be accountable—that is,
responsible for their actions. For some, this has a narrow meaning of following legal and
ethical requirements; others include the requirement that nonprofits follow recommended
best practices in governance and management. A still broader definition includes the
responsibility to demonstrate that the organization is achieving results, that the resources
entrusted to it are used not only ethically and legally but also efficiently and effectively.
Accountability is enforced by state and federal laws, but the nonprofit sector also has
established methods for self-regulation. These include standards of best practice and pro-
grams through which nonprofits can gain accreditation or certification indicating their
adherence to such standards. Charity watchdogs and raters, private organizations that
evaluate nonprofits according to their own standards, also have influence because of the
visibility their ratings command.
It is necessary to distinguish among program effectiveness, organizational effectiveness,
and organizational performance. Effectiveness relates to achieving the mission, but perfor-
mance is a broader concept that also includes financial results and other variables related to
the overall organization. In evaluating effectiveness and performance, some emphasize finan-
cial ratios, including the percentage of expenditures devoted to programs rather than overall
management and fundraising. But it is important to distinguish efficiency from effectiveness,
with the latter related to accomplishment of the mission rather than merely minimizing costs.
Some argue that an undue emphasis on efficiency could undermine effectiveness, by caus-
ing organizations not to invest in capacity, the subject of the next chapter.
Among other approaches to evaluating performance is benchmarking, which compares
organizations with others with similar characteristics, but this may be a technique better
suited to learning than to evaluation. An influential approach, advocated by the United Way,
uses outcome measures. It may be more appropriate to evaluating the effectiveness of indi-
vidual programs rather than organizations. This approach requires developing a logic
model that links inputs to activities, to outputs, and to outcomes, the latter representing
changes in the people who are served by the program. Outcomes may be measured imme-
diately following completion of the program, over an intermediate term, or over the long
term. Long-term measurement may be difficult and costly.
Other approaches to measuring performance, such as the balanced scorecard and the
dashboard, seek to integrate internal and external variables to provide a comprehensive pic-
ture. Some venture philanthropists and scholars have adopted the tools of cost-benefit
analysis and SROI to measure social impact. Others have developed concepts of value incor-
porating financial, social, and environmental impacts, which they would apply to both
nonprofit and for-profit entities.
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142 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
CASE 5.1
a number of issues, including TNC’s relationship with corporations, the consistency of some of its
entrepreneurial activities with its mission, and compensation and loans made to employees. The
Conservation Buyer’s Program received some of the strongest criticism.
The Post articles noted that conservation buyers had included individuals who were donors or
active volunteer leaders of the organization, who appeared to have had an inside track on purchas-
ing property. Property purchased by conservation buyers included beautiful wooded sites, on which
some buyers were able to build homes despite the environmental easements. The authors suggested
that while the transactions may have been legal, many of the owners gained valuable land for a dis-
counted price and a deductible gift without really having to alter their plans for the land. As the Post
authors describe one of the transactions
On New York’s Shelter Island, the Nature Conservancy three years ago bought an undeveloped,
10-acre tract overlooking its Mashomack Preserve, an oasis of hardwoods and tidal pools
located just a stone’s skip from the exclusive Hamptons. Cost to the charity: $2.1 million.
Seven weeks after, it resold the land, with some development restrictions to [a former
chair of the TNC regional chapter] and his wife. . . . Cost to the [buyers]: $500,000.
(Stephens & Ottaway, 2003c, p. A01)
Like other conservation buyers, the couple in this transaction then made a $1.6 million gift to TNC,
enabling it to recoup its cost of the land. The donors received a tax deduction for the gift. The Post
authors cite tax experts who disagree on whether such deductions were legal, with a key issue being
whether the donors had received a quid pro quo for the gift (Stephen & Ottaway, 2003c, p. A01).
TNC assured the Post authors that the gifts were not tied to the land transactions, but the authors
interviewed some donors who said they believed that they were.
TNC’s then president, Steve McCormick, issued a sharp response to the series of articles within a week
of their publication. He claimed that the articles had “painted a distorted picture” with its accusations
and, while defending the Conservation Buyer’s Program, announced that TNC would immediately sus-
pend all new conservation buyer transactions (McCormick, 2003; Stephens & Ottaway, 2003a).
Following a yearlong review of its policies and practices, including the assistance of an outside
panel, TNC announced in 2005 a wide range of changes, including restructuring of the TNC board,
adoption of a number of principles from Sarbanes-Oxley, a strengthened audit function, and new con-
flict-of-interest policies. With regard to the Conservation Buyer’s Program, the following new policies
were implemented among others (TNC, 2005b):
• Transactions will no longer be undertaken with related parties (generally board members or
employees), although such transactions are not prohibited by law.
• Transactions with major donors will be undertaken only following advance review against
TNC’s strengthened conflict-of-interest policies.
• The land will need to fall within a priority conservation site, established by scientists.
• The land will be offered for sale in a manner that provides an “open and equitable purchase
opportunity to all potentially interested parties.”
• TNC will obtain independent appraisals to ensure that it receives fair value for the land sold.
(Continued)
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144 M A N AG I N G T H E N O N P RO F I T O R GA N I Z AT I O N
(Continued)
• When a gift is solicited in connection with a land sale, TNC “must document that fact and
provide the buyer with a statement of the link between the gift and the sale.”
• TNC will obtain community input on future use of the land.
The Washington Post series focused attention not only on the Conservation Buyer’s Program but
also on a range of TNC policies and practices. During the following year, while TNC was developing
its own strengthened policies, the Finance Committee of the U.S. Senate conducted its own investi-
gation and released a report in 2005 critical of some of TNC’s practices, some of which already had
been addressed in TNC’s own reforms. The Senate Committee’s review of TNC coincided with its con-
sideration of broader legislation regulating the nonprofit sector and influenced its thinking about
wider reforms (TNC, 2005a).
By 2006, the TNC Web site featured the Better Business Bureau Wise Giving Alliance seal, certi-
fying its full compliance with the standards, and its positive ratings by Charity Navigator, the
American Institute of Philanthropy, and other watchdog organizations.
In an analysis of the Washington Post series on TNC, the scholars Max Stephenson Jr. and
Elisabeth Chaves (2006) state that the authors used a rhetorical style that “strongly directs the reader
toward specific conclusions through inference and implication” (p. 350). The authors conclude that
the series influenced the policies of the organization and the public policy debate on nonprofit
accountability. They also provide an interesting perspective on TNC’s response to the communica-
tion issues presented by the publication of the Post articles.
Sources: Ottaway and Stephens (2003); Stephens and Ottaway (2003a, 2003b, 2003c); McCormick (2003); TNC (2005b);
and Stephenson and Chaves (2006).
Web Sites
BBB Wise Giving Alliance, www.give.org; Maryland Association of Nonprofit Organizations,
www.marylandnonprofits.org
Charity Navigator, www.charitynavigator.org; Guidestar, www.guidestar.org
Blended Value, www.blendedvalue.org
United Way, www.unitedway.org/outcomes; The Balanced Scorecard Institute, www
.balancedscorecard.org