The recently launched Markets for Good initiative, promoted by the Bill & Melinda Gates and William & Flora Hewlett Foundations and Liquidnet seeks to dramatically improve the information infrastructure for the ‘social sector’ to a point ‘where capital flows efficiently to the organizations that are having the greatest impact, programs and interventions are more effective and responsive, beneficiaries have a voice
and there is a dynamic culture of continuous learning, development, and innovation.’

Buzz Schmidt’s paper Promoting passion, purpose and progress online, originally written for a symposium on online philanthropy and non-profit information services held at the Stanford’s Centre for Philanthropy and Civil Society in April 2011, looks at the utility of non-profit sector information over time and the potential to establish integrated information, objective setting, performance monitoring and feedback systems throughout – from communities to donors to agents to beneficiaries and back. In so doing, it advances a credible vision for the infrastructure contemplated by Markets for Good.

Towards a successful internet-enabled philanthropy ecosystem

Introduction

Over the past 15 years, scores of American social entrepreneurs have tried but been largely frustrated in their efforts to promote more intelligent, proactive and generous philanthropy via the internet. For the most part, they have been unable to bring their databases, site traffic and transaction activities to scale. The early internet experience has been equally frustrating for managers of non-profits. They are buffeted by numerous, increasingly intense and generally conflicting demands for information. They receive inconsistent market signals from donors, both individuals and institutions, and watch the great bulk of online giving flow to causes that are hot, visual and immediate instead of to those that are thoughtful, well-managed and persistent. Like the online philanthropy entrepreneurs, non-profit leaders are frustrated by their own failure to exploit the transformative promise of the internet.

While frustrating, this result was predictable. Our efforts to promote online philanthropy are stuck in a tangled web of ineffective and inconsistent practice that extends throughout the universe of philanthropy. We have sought, though our sophisticated tools and exhaustive data, to untangle a part of that web. Certainly there have been bright spots. Modest untangling and change has occurred here and there. But the pace of that change has been painfully slow. This paper argues that change will continue to be hampered unless we invoke strategies to untangle the entire web, that is, remove impediments that inhibit progress throughout the entire philanthropy ecosystem. This is the aspirational name I use in this paper to describe the interconnected, information-driven, innovation-embracing philanthropic universe we must resolve to build together.

This paper revisits early initiatives to facilitate more generous and intelligent philanthropy and flags the causes of entrepreneurial frustration. It then discusses, in turn, the pertinent attributes and challenges facing each of four component systems of an inclusive philanthropy ecosystem:

1. The philanthropy knowledge system
2. The giving system
3. The non-profit management and reporting system
4. The non-profit evaluation system

It concludes the discussion of each component system by identifying opportunities for social entrepreneurs to intervene productively. Perhaps most importantly, it highlights the systemic potentials of the philanthropic universe, and the necessity for social entrepreneurs to pursue opportunities for coordinated or collective action across the ecosystem. Indeed, without a commitment to build this ecosystem together, the entrepreneurs and others who build and lead non-profit organizations will continue to operate within a confusing and ineffective resource marketplace. And, most importantly, the people and planet served by these actors will be denied the benefits of a well-functioning philanthropy ecosystem.

The drive to make giving better – early initiatives revisited

We haven’t always sought to turn donors on to the rewards of smart, proactive philanthropy. We haven’t always believed that we could elevate them to greater heights of discerning generosity by offering them immediate access to evaluative, fiscal and programmatic information about non-profits. Indeed, throughout its long history, American philanthropy has been very slow to move from its longstanding association with alma maters, churches, hospitals, and other local institutions – an association fortified by friends, family, pride and proximity – to embrace the hundreds of thousands of distant, more cause-focused non-profits that proliferate around the planet.

Community Chests and United Ways
Attracting the attention and allegiance of new donors has always been a difficult and expensive proposition for non-profits that lack human ties to their targets. The most successful have deployed sophisticated marketing methods of messaging, direct mail and friends of friends networking. Throughout the 20th century local Community Chests and their United Way offspring popped up to capture and rationalize donor interest in local social agencies. While relying still on tried and true direct mail and a network of workplace ‘arm-twisting’, United Ways have long researched local community need and purported to fund the most effective charitable responses. In this way they conduct, albeit not always cost-effectively, the evaluation and funds-sourcing functions for local charities that online intermediaries, as we will see, seek to do for non-profits and causes throughout the world. But note that, despite their ubiquity and longevity, United Ways still process less than 2 per cent of total giving.

National Charities Information Bureau, Better Business Bureau and American Institute of Philanthropy
Direct mail campaigns by national non-profits seeking donations from throughout the country grew in prominence in the 1960s and 1970s. In response, state charity offices and national watchdog groups, principally the National Charities Information Bureau, Better Business Bureau and American Institute of Philanthropy, emerged to ‘protect’ the public from ‘fraudulent’ solicitors and ‘inefficient’ charities. NCIB and BBB, each working with populations of roughly 350 non-profits, identified those organizations that exceeded their standards and those that fell short. AIP offered letter grades for selected standards for the 600 non-profits it rated. The expressed purpose of these efforts was consumer protection, and the primary focus of analytical attention was non-profit fundraising practice. The perverse upshot of the whole exercise has been a widely accepted, two generations-long tradition of non-profit evaluation based largely upon the magnitude of fundraising and administration ratios.

The NCIB and BBB combined operations in 2003, revisited respective evaluative standards and now offer a more holistic view of general fiduciary, as well as fundraising, practice in their reviews of 600 non-profits.

GuideStar and Charity Navigator
GuideStar launched its comprehensive website in 1998, offering extensive financial and limited descriptive information, all self-reported and non-evaluative, on the hundreds of thousands of non-profits that complete the Form 990. GuideStar assembles vast amounts of data from all American non-profits, which helps donors and others to identify, compare, track and connect with groups performing work that resonates with their own interests and values.

Charity Navigator, also seeking to take advantage of the data management and broad distributional functionality of the web, was founded in 2001 and has become the most highly trafficked website of the evaluative services. Using a relatively few financial data fields from the Forms 990 of 5,500 organizations, it applies star ratings for each of four indicators of organization financial ‘efficiency’ and three indicators of the financial capacity of organizations. Charity Navigator has sought lately to reorient its evaluative model to focus increasingly on organization accountability and ‘results’ thereby diminishing its single-minded focus on simple financial calculations, now largely in disrepute.

The formation of Network for Good, originally a partnership of AOL, Yahoo, Cisco, GuideStar and VolunteerMatch in 2000, provided a pivotal and instructive moment in this concentrated historical development. The question arose whether GuideStar should use its mountains of data to construct and display an evaluative framework, like the one eventually launched by Charity Navigator, but on a much larger scale. The principals at the time determined that GuideStar must remain a neutral aggregator of this largely self-reported information by charities. Beyond continuing to digitize the voluminous financial data resident in the Forms 990, they determined that GuideStar should strive to capture additional narrative information about the intentions, programme activities, objectives and accomplishments of all charities.

GuideStar’s principals subscribed to the theory that a non-profit’s ‘worthiness’ was largely a function of the values of the evaluator or other observer. Further, if it could assemble all the pertinent information about each organization and provide the robust ‘mining’ and ‘analytical’ tools, donors could theoretically do their own ranking and rating. GuideStar had confidence in the integrity of the do-it-yourself theory but acknowledged that a donor public would likely seek the help of ‘expert’ evaluators to help them identify the right organizations. It envisioned the ultimate emergence of a substantial network of evaluators, each bringing differing institutional perspectives, fundamental values, and subject and geographic expertise to proprietary evaluative models. It used the ‘movie critic’ metaphor to explain its vision that one day millions of disparate donors would come to trust the judgement of one or more of scores of evaluators to identify worthy non-profits. In this conception, GuideStar would play a valuable role in supporting the emergence of this network of evaluators with data and internet visibility.

Happily new evaluation schemes seem to emerge regularly. And other new efforts that identify ‘excellent’ giving opportunities, eg GlobalGiving, evaluate implicitly through their choices of programmes to display, though they do not rank or rate non-profits. Just as we have seen in every other walk of life, philanthropy has seen an explosion in information sites, Web-2 interaction sites, and now directly focused social network initiatives, eg scores of apps and thousands of custom pages grafting philanthropic services and non-profit causes onto the Facebook platform. With these developments, perhaps we will go full circle, once more depending upon friends and virtual neighbours for the connections to social expression through philanthropy.

Progress to date
So far, despite the churn, time has told a disappointing story. The amount and quality of philanthropic activity springing or gaining confidence from serious evaluative activity, at least that which can be adduced from web activity, is hardly in line with the expectations of the early internet social entrepreneurs. In 1999, Pete Montanos promised that Charitableway would become the ‘Amazon of philanthropy’. It was a little scary, but we believed him. While the hubris of subsequent initiatives has not matched that of this pioneer, our own founding expectations have rarely been fulfilled. Certainly the full value of online information services in supporting offline donations has not been studied adequately, but the contention that the web has revolutionized donor behaviour, as it has virtually every other human transaction, is not remotely supported by the data.

The early frustrations have not inhibited efforts to use electronic technology and the web to rationalize and facilitate giving. But like the wild philanthropic marketplace they seek to tame, these efforts are ‘all over the map’ with respect to motive, method and message. This uncoordinated entrepreneurial quality is at once the strength and continuing weakness of this movement. Operating independently, without a holistic view of the ecosystem they hope to improve, online initiatives today constitute little heard noise in a vast forest of non-profits.

By no means does our sketchy early experience demand we cease these efforts, but this will remain a tough road. In the larger economy, internet information and transactional services succeed when they offer ‘consumers’ a value proposition that builds upon current, self-interested decision processes. Like Amazon or E-Trade, our online philanthropy solutions also ask users to change to electronic transaction processes. But the success of these ventures also requires our users to switch from an affiliative, borderline self-interested, decision process to one that is more discerning, other-centred and cause-related.

The institutional barriers to the success of online ventures do not end there. Lest we forget, another major operating challenge these initiatives face is the need to capture information about large numbers of non-profits to feed proprietary databases. This requirement compels each service to ask non-profit organizations to report differently and, at times, behave perversely, in reaction to our requests for information that are varied, conflicting and often internally irrelevant.

The online philanthropy entrepreneurs could take comfort in the knowledge that they are not alone. Numerous systemic barriers to ‘rational’ behaviour limit the progress of innovative initiatives in other areas of the philanthropy ecosystem, such as the promotion of ‘impact reporting’ and the sharing of grantee due diligence data and the encouragement of best-grantmaking practice by foundations. However, the continued failures of these initiatives bode poorly for our own. In practice, we need these types of initiatives to succeed, which will help lift the entire ecosystem, if we are to succeed.

An alternative vision for the philanthropy ecosystem

We have not succeeded to date because we have not accounted for the complexities and contrary economies of philanthropy, as it exists today. We are attempting to interject creative online methods into a philanthropy ecosystem that does not yet value, promote and reinforce the importance of information, consistency or effectiveness. If we continue to innovate without a sense of the whole and assiduous attention to the major driving conditions, we will continue to spin our wheels.

But if we can step back, and examine the methods, signals and accountability of the entire philanthropy ecosystem, we will not only improve the prospects for the existing online intermediaries, we will identify multiple additional opportunities for fruitful intervention. We will recognize that far from a zero-sum shoot out among the current group of online entrepreneurs, if we are to elevate philanthropy and non-profit practice appreciably, many more savvy intermediary actors will likely be needed to innovate in what may yet become a vibrant, continuously improving philanthropy ecosystem. But first, we should attempt to reach agreement on a vision for an ecosystem that we intend to help build together. Here is my candidate for that vision:

The non-profit sector will play an increasingly and recognizably effective role in our social economy and civil society. Its initiatives will continue to capture and offer institutional expression to the hopes, ideas and energies of private citizens. But in the near future, supported by strategically coordinated information and transactional (mostly online) services, it will do so in ways that are at once more purposeful, coordinated and accountable. Individual donors will seek out and support organizations that are doing work that they value. Institutional donors will be accountable, consistent, transparent, intentional and demanding in their philanthropy. Communities will articulate common objectives and track collective progress. Non-profits will report consistently about their own objectives and institutional progress. Resources will be directed to organizations that best meet society’s evolving needs. Superior social and environmental progress will result and our liberal democracy be strengthened.

Properly construed, these activities operate with a set of semi-discrete component systems that in turn are nested within an encompassing philanthropy ecosystem. Innovative but mutually reinforcing work by numerous intermediaries, existing and prospective, within and across the systems, will be needed if we expect to strengthen the entire ecosystem and advance social and environmental progress as a result.

To explain the workings, impediments and opportunities of the philanthropy ecosystem more fully, I have divided its principal activities into the following four, ostensibly discrete but ultimately interconnected, component systems:

1. The philanthropy knowledge system  The theoretical repository of pertinent social and environment indicator data, government and corporate activities and policies, community objectives and expert opinion about effective intervention methodologies that informs, constrains and motivates non-profits, donors and intermediaries in the philanthropy ecosystem.
2. The giving system  The complex network of donors, trustees, institutional advisers, online transaction services and formal philanthropic institutions that originate and/or manage over $300 billion in annual charitable gifts and grants.
3. The non-profit management and results reporting system  The process of objective setting, planning, performance tracking and reporting that resides at the heart of every excellent non-profit organization’s management system.
4. The non-profit evaluation system  The network of auditors, evaluators, accreditors, regulators, experts, information websites, journalists, friends and others who seek to inform, influence, validate and/or protect donors and their decisions.

In the sections that follow, I have attempted to depict each system’s salient attributes, its interconnectedness with other systems, the bottlenecks and inefficiencies that impede its success and the opportunities for tech-savvy social entrepreneurs to intervene and innovate.

The philanthropy knowledge system

Donors, non-profits and intermediaries respond to what they hear and learn from the news, public opinion, policies of governments and corporations, studies of successful interventions, and explicit community objectives. The torrent of information that drives disparate behaviours of the actors in the philanthropy ecosystem is chaotic, and the signals these actors send and receive are inconsistent. If we expect to achieve our vision for a more intentional and connected philanthropy ecosystem, we must find better ways to access and assess this information and convert it into actionable knowledge. The following categories of information are particularly important and promising and will comprise a robust philanthropy knowledge system (knowledge system) to support the philanthropy ecosystem.

As we convert chaotic information into useful knowledge, it is critical to establish a common language and frame of reference. Today, we can access compelling data indicating the status of virtually every issue, which can support interventions at every level. State of the USA, which seeks to provide exhaustive indicator data with a toolbox of visualization tools, is one of dozens of compelling new services.

With excellent indicator data readily available, we should expect political leaders, communities and private citizens to identify priority indicators to establish and track consistent objectives for progress for each priority indicator. If donors and non-profits synchronize their objectives with those of their communities, we can expect information chaos to dissipate and collective action to emerge.

The marketplace of expert opinion is vast and uncoordinated. Foundations commission and fail to share proprietary studies about needs, data and effective interventions. Non-profits are asked sporadically to assess the impact of their own programmes. Little is done with this information. There is a great need for a public repository of expert opinion about effective solutions and useful interventions.

Very often we think of the non-profit sector as a closed system in which much of society’s good work is performed. We acknowledge that government also performs much good work, though that assessment is continuously challenged. We seldom think about the role of business, beyond corporate social responsibility, with respect to its positive impact upon social or environmental objectives.

We have an excess of information swimming around, more likely lying dormant, in the filing cabinets of foundations, government entities, non-profits and academics. Making the best of this information accessible and useful, turning it into knowledge that can power collective action and consistent provision of resources to effective non-profit programmes, is both a critical need and a tremendous opportunity for the internet entrepreneur who wants to change the rules of the game. Without this common and virtual repository of knowledge, we cannot materially improve the effectiveness of the non-profit sector.

What is the importance of the knowledge system within the philanthropy ecosystem?
The knowledge system provides the context for the strategies and actions of each of the ecosystem’s participants and predicates defensible ‘theories of change’. A properly functioning knowledge system will offer greater clarity about the absolute and relative standing of each community’s progress with respect to a broad range of social indicators (the metaphorical needles and dials); a formal statement of the priorities of each community (geographic or subject area) and objectives for these priories; an inventory of successful intervention methods and accompanying expert commentary to support effective programme selection by non-profits and funders alike; and a full record of government programmes and business activities germane to each programmatic area.

What are the bottlenecks or impediments to making this system function optimally?
The vastness of a well-functioning knowledge system is clearly daunting. Agreement over what is important or which language to use is elusive. The inclinations of both non-profit managers and private foundations to ‘do their own thing’, commission their own duplicative research, operate within narrow communities of practice, fail to share knowledge, and ignore the innovations of others are major barriers. Low data literacy in some quarters and the fast-rising belief that no one will agree on anything, worsened by our inane red/blue political ‘discourse’, are certainly barriers to consensus. Innovations in the giving and non-profit management and reporting systems will be needed to compel the actors to build, respect and make the most of the knowledge system.

What are the principal opportunities for the innovative social entrepreneur?
Many, if not all, of the critical components of the knowledge system are already resident in specific online initiatives as well as in the nooks and crannies of the web. The opportunities facing the social entrepreneur are information design and online data aggregation. There are many public and private online sources of useful indicator data. State of the USA, a non-profit based in Washington, already endeavours to assemble and display data in one easily accessible place, together with tools to help understand and visualize the data. The Results-Based Accountability program has developed tools to help communities (geographic and subject subsector) select priorities, establish objectives and track progress using these types of indicator data. There are doubtless many other pertinent initiatives. From where I sit, the four opportunities listed below could compel policymakers and enable their communities, donors, non-profits and other agents of progress to access common information, set common objectives, and employ the most effective strategies.

• The expert source  A well-indexed, online catalogue (or set of subject-defined, subsector catalogues) that would aggregate studies of conditions surrounding and causes for each indicator; evaluations of relevant current and past interventions and programmes; and studies about untried prospective solutions.
• The catalogue of social intervention  Designed to complement the expert source, this online resource would catalogue the public, business and non-profit initiatives that have implications for each indicator and serve as a primary source of data for strategy development and partner selection.
• Mash-up of State of the USA and Results-Based Accountability services (or some similar combination). This is an opportunity to give geographic and subject subsector communities a robust and convenient way to determine priorities, establish objectives for improvement, track progress and publish all of the above (perhaps to the community objectives catalogue that follows.)
• The community objectives catalogue  This online resource would combine and catalogue pertinent social progress indicators with objectives that had been established for every bona fide geographic and/or subject subsector community. They may conflict. Cohesion is a goal not a prerequisite. The market of resource providers and practitioners ultimately decides. The catalogue enables that ‘transaction’. In addition to objectives, the catalogue would display the current (and past) value for each indicator. Its purposes would be to focus donor and non-profit attention on established objectives; encourage collective action; generate new programmatic initiatives that address the documented ‘sense of community intent’; compel communities to focus on collective objective setting; and encourage greater public data literacy and adoption of a common language for social progress.

The giving system

The giving system, as described here, consists of (1) principals – those individuals and trustees who have legal ‘ownership’ of philanthropic assets and (2) intermediary transaction services offering decision, distribution and accounting services and handling approximately 20 per cent of $300 billion in annual giving.

Principals 
These individuals have the ability, power and ultimate responsibility to direct charitable resources effectively. They control donation decisions, by giving directly, working through transaction services or delegating their donation decisions and transactions to expert intermediaries.

Charitable gifts come from over 65 per cent of American households. Their gifts totalled $251 billion in 2009 of which only 44 per cent went to destinations other than local churches, private foundations and alma maters – less that $78 billion was directed to disadvantaged people.[1] Individual donors seldom seek corroboration of the effectiveness of their contributions, their job being done when they give and claim a tax deduction. In a thriving philanthropy ecosystem, donors will take responsibility for their charitable gifts and demand performance from both non-profits and intermediaries.

Advisers, typically the original donor to donor advised funds,[2] comprise an increasingly powerful segment of the donor population. Technically, advisers ‘recommend’ to the boards of the host institutions that they make gifts from each relevant fund. Practically, they call the shots on grants from over $27 billion currently sitting in such funds.[3] With few exceptions, original donors and their heirs can determine the disposition of charitable gifts from their ‘accounts’ indefinitely.

The founding donor to charitable trusts and private foundations can choose to retain control (for him or herself and his or her heirs) over charitable distributions. Practically, over time, family gives way to independent trustees and institutional fiduciaries. These trustees become legal owners, controlling vast sums in dedicated, generally long-term, charitable vehicles. Like individuals, they have the authority to direct charitable distributions; with respect to the largest funds, they effectively cede that power to ‘professional’ grantmaking staff, an intermediary role in this construction.

Giving Transaction Intermediaries
Much of the country’s giving is conducted through intermediaries that either execute a donor-directed or donor-advised gift or actually determine and execute gifts on behalf of donors. Six models of intermediary activity are explained below.

• The neutral model  This first, ‘neutral’, model, used by JustGive and NetworkforGood, is the purest use of the web to facilitate proactive giving by donors. The more knowledgeable, sophisticated and intentional donors become, the more these services can be integrated with personal accounting and planning services. The higher the quality of non-profit reporting into such services, the greater the role and value of this model.
• The expert model  The second model where a donor gives through an intermediary, guided by experts, to non-profits of the expert’s selection is a century old. United Ways have long selected portfolios of ‘winner’ local social agencies and distributed donor gifts accordingly. Services that aggregate interesting projects or worthy organizations (eg GlobalGiving and Give Well), or use experts to rate organizations (eg Philanthropedia) allow donor choice but only to a small number of preselected opportunities.
• Advisory services An industry of formal donor advisory services, a third model, has emerged among private banks, family offices, accounting and law firms, and dedicated donor advisers, each of which seeks to differentiate its services to wealthy clients. The quality of such services varies broadly, but as other institutions enter the field and the industry matures, the potential for greater accountability and competence increases.
• Community foundations have tremendous potential to compel ‘advisers’ to the accounts that comprise the bulk of community foundation assets to be more strategic and intentional. They have long wrestled with simultaneously serving donor and their own community objectives. The best look for ways to entice ‘donor advisers’ to be partners in specific community initiatives. The huge charitable gift funds, established by mutual fund companies, make few attempts to promote pro-activity by ‘advisers’.
• Trust departments, independent trust companies Hundreds of thousands of trusts, supporting organizations and private foundations are effectively controlled by bank trust departments, independent trust companies, and law and accounting firms. In some examples of this fifth model, these institutions serve as trustee and staff. This expansive population of philanthropic institutions is hardly transparent and generally ignored in analysis of the non-profit sector.
• Professional foundation programme staff  Calling professional foundation programme staff an ‘intermediary’ in this construction is novel. This characterization, the sixth model, reflects the fact that private foundations, with their captive endowments and no need to report to external stakeholders, are largely immune to influence and oblivious to external, or even internal, accountability for the quality of their grantmaking and investment decisions. Professional grantmaking staff often call the shots for the putative owners – the trustees.

The graphic below depicts the current movement of gifts and grants (green arrows) from donor principals (blue shades) directly to non-profits at the bottom, as well as through relevant intermediaries (grey shades).

What is the importance of this system within the philanthropy ecosystem?
Non-profit organizations often have opportunities to earn revenue through commercial or service activities and may be eligible for government payments for specific services. Nonetheless, philanthropic gifts and grants comprise the stock of capital non-profits use to support strategic evolution, new initiatives and capacity development. The giving system comprises the philanthropy ecosystem’s life blood of intentionality, innovation and responsive capacity. The participants in this system, principals and transaction intermediaries, must take their role very seriously and send informed, faithful and consistent signals and resources to non-profit organizations.

What are the bottlenecks or impediments to making this system function optimally?
Donor principals of all kinds are fundamentally unaccountable, which in turn compromises the accountability of the process of allocating philanthropic resources. In general, fulfilment of IRS requirements to realize a tax deduction by an individual or institution or satisfaction of the statutory payout requirement by a private foundation are the only auditable ‘bottom-line’ reporting requirements that donor principals have to any external audience. One might expect compensating internal accountability within institutional philanthropies like foundations. However, programme staffs that effectively make most recommendations for foundation grant distributions recognize that their poor decisions will not impact the foundation fiscally. The same 5 per cent of the endowment will be available to them to distribute the following year. As a consequence, foundations themselves have few if any effective mechanisms for either external or internal accountability. A philanthropy ecosystem that lacks an accountable resource allocation process is by definition sub-optimal. We cannot expect non-profit organizations to function effectively if donor principals, particularly institutional donors who are looked to as powerful ‘experts’, are fundamentally unaccountable.

What are the principal opportunities for the innovative social entrepreneur?
There is no shortage of innovative giving transaction strategies promoted by social entrepreneurs on the internet, but these efforts will not be valued until donors recognize that they truly have ‘skin in the game’ and that, as the allocators of financial resources to non-profits, they must be accountable for their decisions. It is critical therefore for social entrepreneurs to focus on activities that promote accountability by donors, especially foundation trustees, and transactional institutions. Here are some opportunities.

• Foundation practice watch  Evaluate the grantmaking processes of foundations on public websites. The Center for Effective Philanthropy (CEP) has developed methodologies intended to help foundations understand and track grantee satisfaction with their own grantmaking. This is a good start and likely CEP staff has many thoughts about how to make the foundation sector more effective and accountable through evaluation. However, CEP operates within the intellectual sphere and under the financial boot of the institutions it could evaluate. CEP and existing or new groups like it such as the National Center for Responsive Philanthropy must be encouraged and independently funded to take on a more incisive role in foundation practice evaluation. Additionally, existing or new entrepreneurial agencies should pursue the following additional initiatives.
• Centre for grantmaking impact  This initiative would evaluate foundation programmes on their effectiveness, the quality of their reporting, and the congruence of their grantmaking strategies with community needs and goals, and report such findings on a public website. In a bid to encourage internal and external accountability in private foundations, the centre would view trustees as a principal audience for this work product, encouraging them to demand more from programme staff.
• New intermediary grantmakers  If trustees of foundations remain dissatisfied by the conduct of their resident programme staffs, they should utilize the services of other grantmaking institutions to manage all or a portion of their annual grantmaking budgets. Social entrepreneurs could remake the grantmaking model to be more efficient, effective and accountable and sell that service to endowments and wealthy people. Such services would enable the necessary separation between endowments and grantmaking and establish a degree of accountability unattainable in our dominant private foundation model.
• Foundation worthiness calculator  The strategies above would improve the internal accountability of foundations, but until foundation trustees become accountable externally for the activities and decisions of their institutions, we cannot expect the giving system to perform optimally. Today, accountability for trustees begins and ends with proper fiduciary conduct. A service that would not only reveal the effectiveness of the grantmaking programme of a foundation but also report on each foundation’s institutional strategy to maximize the value of its capital (eg more rapid payout, mission investment of endowment, collaborative grantmaking with other foundations, use of multiple grantmaking intermediaries, etc) would have considerable, highly leverageable value for the entire philanthropy ecosystem.
• Catalogue and evaluations of the donor advised fund programmes of community foundations and major charitable gift funds  This entire field would benefit if a new service was formed to review the value propositions offered by each of these transaction intermediaries. These intermediaries have the potential to become highly productive forces in the education of donors and the accountability of the giving system, but no external party is watching, evaluating or reporting. A new evaluative service could assess the degree to which each intermediary provides its donor advisers consistent reporting by non-profits, non-profit performance tracking information, pertinent knowledge from the environmental knowledge system, and other support to become more intentional and discerning donors.

Nonprofit management and reporting system

The non-profit organization is the ultimate object of the attention of each system within the philanthropy ecosystem. A reporting process that provides pertinent performance information to external stakeholders as well as to internal staff resides at the heart of each effective organization’s management process. In an ideal world, external audiences and internal organization actors would focus upon precisely the same information; the same objectives for output and outcomes, capacity development and fiscal health and proper fiduciary conduct; and the same periodic reports that explain progress towards meeting those objectives. It is incumbent upon the trustees and senior management of non-profit organizations as well as donors, transaction intermediaries and evaluators to reinforce consistent reporting practices. If we are serious about realizing effective management practices at non-profit organizations and working through them to achieve excellent results, we must all seek, review and make decisions using the same managerial reports for past periods and plans for future periods.

To achieve that end, a common reporting core, such as that promoted by the Charting Impact initiative of Independent Sector, the Better Business Bureau, GuideStar USA and the Hewlett Foundation, must rest at the heart of all non-profit reports. These critical questions, or a very similar set of reporting elements, are at the heart of any useful planning, managing and reporting system. In the spirit of common objective setting, rather than follow my own entrepreneurial inclinations to advance a new, proprietary set of questions, I will use Charting Impact’s model and five questions to make this point.

‘What is your organization aiming to accomplish?’ Charting Impact’s first question in essence asks the organization to state a vision for a distinct future (within a distinct time frame) that will result from successful completion of its work. This is the organization’s ‘intended impact’. It is also a question that must be revisited for relevance every reporting period because it forms the essential rationale for the non-profit and the cornerstone for its strategic plan. I would argue that the vision the organization offers should have external as well as internal characteristics – external with respect to what the organization’s good work will mean for society; internal with respect to what the organization will look like at that future ‘vision’ date.

‘What are your strategies for making this happen?’ Or ‘what programmes will you pursue to achieve this larger vision?’ or maybe ‘what is the organization’s theory about how it will achieve change (the intended impact)?’  [4]

‘What are your organization’s capabilities for doing this?’ This is the reality question, anathema to many a social entrepreneur. But an answer is essential for every serious effort even if the answer indicates capabilities short of what’s required at the moment. A more useful construction might be ‘what are your organization’s current resources and its plan to secure any additional resources and competencies required to achieve your objectives?’ Ultimately the resources and objectives must be reconciled or, if not, objectives restated. This is an excellent exercise that must be conducted in one form or another each reporting period.

‘How will you know if your organization is making progress?’ Though an important question, this requires some art to develop. It’s an unusual organization for which the actual ‘output’ of their programme activity will equal demonstrative progress towards the longer-term vision. With respect to tracking the organization’s progress against strategic objectives and towards achieving its vision, it is important to chose metrics that can be discerned easily and measured accurately; understood by staff and utilized in their own periodic internal reporting; and for which a reasonable case (theory of change) can be advanced for its correlation with the impact the organization intends to have.

‘What have and haven’t you accomplished so far?’ The fifth and final question is the regular performance report. It must be emphasized that answers to at least one, probably more than one, of the first four questions will change each reporting period. The answer to question 5 will always change. This should be expected. When it happens, the reasons for the change should be flagged and incorporated along with the progress statement in any reporting. Appreciation for these changes, regular restatement of answers to these questions, and faithful reporting of the results of the process are the hallmarks of a learning organization. Every participant in the philanthropy ecosystem must respect the central importance of this process.

Likewise, it is not enough for GuideStar USA, the Better Business Bureau (BBB), Independent Sector and the Hewlett Foundation to commend the five questions to non-profits as best practice. Non-profit organization’s answers to these questions must be thrust front and centre in the information systems developed and displayed by each of these actors, by all other evaluators, and in the grant application and reporting forms required by all foundations, donor intermediaries and other institutional philanthropists. Only then can we expect that the substance of the questions will be taken seriously and internalized in the sequential planning/reporting/planning/reporting processes of each non-profit.

In other words, the ‘audience’ for the Charting Impact initiative must all be serious participants in the philanthropy ecosystem, and foremost among these are the non-profit organizations themselves. Although the level of sophistication and quality that non-profits bring to their reporting will vary considerably, every organization has ample opportunities to interject consistent responses to the five questions in every reporting venue.

What is the importance of this system within the philanthropy ecosystem?
To achieve its potential, the philanthropy ecosystem requires that non-profit organizations operate and, just as importantly, report as effectively and consistently as possible. Without an expectation and fact of dependable reporting by non-profits, the ecosystem will not move beyond its current dysfunction.

What are the bottlenecks or impediments to making this system function optimally?
The failure of the donors and intermediaries that comprise the giving system to take non-profit reporting seriously, agree on a common application for grants, and demand a common annual report that derives from the non-profit’s internal planning/management/reporting process is the principal impediment to optimal functioning of the nonprofit management and reporting system. Unless non-profits can count on donors to coordinate to reinforce the value of excellent and singular reporting, they cannot expect to benefit externally from consistent donor signals or internally from more effective management processes. Instead, they are more likely to spend scarce managerial time responding to multiple and disparate requests for information that may be impossible to internalize in any cohesive reporting system.

What are the principal opportunities for the innovative social entrepreneur?
We must do everything possible to focus the attention of donors and their intermediaries on the necessity for cohesion in the funding application and regular non-profit reporting processes.

• Charting Impact programme revisited  Redirect the promotion of the Charting Impact programme from non-profit organizations to donors and donor intermediaries. If every donor and intermediary demanded an annual report that featured the ‘five questions’, the quality of non-profit reporting, and as a consequence philanthropy and non-profit management, would improve immediately. Short of that, attempts to influence non-profit reporting behaviour will fail.
• Synchronize all standard non-profit reporting systems  This opportunity will require social entrepreneurs to engage in a programme of education and advocacy with established ecosystem reporting systems to reinforce the ethos of the Charting Impact programme. For 12 years, GuideStar USA, the most ubiquitous and neutral reporting venue, has asked that non-profits voluntarily enter answers to survey questions that are quite similar to Charting Impact’s. If GuideStar USA ensured that its own reporting form was precisely consistent with the five questions, and honoured or featured the most faithful, multi-year non-profit reporters, it would be an immediate boon to this movement. Additionally, even though the IRS recently revised its Form 990, it might be willing to include these questions in the next iteration if the principal ecosystem actors could converge around the five questions. The inclusion of these questions on the universal reporting form for all tax-exempt organizations would be a boon to the effort to create a common reporting formula benefiting non-profits and the public in general. Further, associations of non-profits could include the five questions in the ‘best practices’ they promote to their members. Groups that honour the best annual reports could require that proper attention to the five questions become a central criterion for consideration. Finally, the principal non-profit sector media could be trained to look for answers to the five questions in their reporting on individual non-profits instead of focusing on financial ratios, as they do today.
• Common foundation grant applications and annual reports  Any effort to cajole, coerce or otherwise convince foundations to adopt common policies with respect to grant applications and subsequent evaluation of the performance of organizations would be well worth undertaking. To be meaningful, this would require that foundations first focus intently on the non-profit organization as an entity rather than upon its individual programmes. Further, foundations should use the formal, annually revised business plan and annual report of each organization, both of which would emphasize the organization’s response to the five questions as its primary source of information about an organization. In this way, foundations would reinforce more effective internal management systems and strategic planning as well as pertinent reporting. They would also benefit from the receipt of better information and presumably more effective non-profit interventions.
• Establish a service to audit non-profit output/outcome reporting  The planning/management/reporting information environment envisioned here asks non-profit organizations to self-report their accomplishments versus their objectives. Presumably donors will identify organizations with work that coincides with their own purposes and values. In a well-functioning philanthropic ecosystem, both donors and non-profits would have access to a robust philanthropy knowledge system, and donors would have the ability to reward organizations that pursue objectives that are most consistent with community goals and expert opinion about effective solutions. One concern would be how to determine whether the organization’s reported accomplishments are accurate. We rely now on accounting firms to audit the veracity of a non-profit’s self-reported financial statements, and we can expect the development of firms that audit and validate reported organization accomplishments. Such developments would add appreciably to the integrity of the ecosystem.

Nonprofit evaluation system

The graphic below depicts the entire flow of information about non-profit organizations reported directly and indirectly through intermediaries from non-profits themselves as well as content-contributing intermediaries to donors and donor transaction intermediaries. Most non-profit self-reporting is made through standard reporting channels.

Some non-profit reporting, mostly promotional, finds its way directly to individual donors. Some of it, grant applications and performance reports, flows directly to foundation programme staff. The financial statements of substantial organizations are audited by public accountants. Data flows directly to regulators (including the Form 990 to the IRS and state charity officials) and finds itself posted at neutral online data services, notably GuideStar. From these channels, data flows to third party evaluators and then, along with what is still a limited quantity of evaluative content, to donor transactional intermediaries and donors. The system comprises the evaluation methods and strategies shown in the middle of the graphic.

Evaluation methods
Online initiatives promoting more generous or intelligent philanthropy seek to evaluate non-profit organization worthiness from distinctive points of view. It could well be argued that evaluation is as much a function of the evaluator’s values as it is of the substance of the organization’s work. Theoretically, there are as many ways to assess the worthiness of a non-profit as there are evaluators or even donors. Seven evaluative methods, existing and theoretical, are covered below.

Intelligent systems recognize the pivotal importance of values and would enable individual donors to employ their own, using customizable evaluation algorithms and exhaustive data about the full population of non-profits. There are no truly intelligent systems today, but with better data (maybe GuideStar X 2) we could implement this intellectually attractive methodology.

Asssessing fiduciary and fiscal integrity  The BBB’s Wise Giving Alliance is an example of the second evaluative method, one largely concerned with fiduciary and fiscal integrity. It derives from the perceived need to protect the donor-consumer from fraudulent fundraising. This method does not address non-profit operations and effectiveness.

Assessing organizational capacity/efficiency  Charity Navigator and periodic ‘best charities’ lists focus upon the financial ratios of organizations as
indicative of their efficiency, health and capacity. While popular, this
third approach lacks analytical integrity. Charity Navigator also evaluates
organizations for accountability and transparency, and has recently
announced analysis that will better reveal the impact made by organizations.
The jury is out on this.

Asking experts  Asking ‘expert’ practitioners, academics and funders to review the bona fides and work of organizations has significant inherent appeal. Philanthropedia seeks to assemble a body of informed opinion to help donors identify the most ‘effective’ non-profit organizations

Asking other stakeholders  Beyond seeking the point of view of external ‘experts’ about the worthiness of an organization, is it not equally valid to seek and display input of other stakeholders of an organization – staff, beneficiaries, donors, etc? Keystone Accountability has pressed this fifth methodology to donors and evaluators. Great Nonprofits seeks to capture broad stakeholder sentiment about non-profits

Journalists have long been the principal public evaluators of non-profits. Their evaluative ‘method’ focuses typically on organization attributes the journalist deems ‘newsworthy’. We would be wise to remember the power of journalists and seek to advance their knowledge and sophistication accordingly.

Friends have always been the most important implicit ‘evaluators’ of non-profits. Traditional philanthropy counts on the human tendency to share interests and preferences. Social network philanthropy initiatives are betting that reliance on friends will become ubiquitous in Facebook. Hopefully, they will bring objective system knowledge as well to this crowded venue.

What is the importance of this system within the philanthropy ecosystem?
Theoretically, using intelligent systems, donors will one day manipulate data and generate their own custom ‘evaluations’ of non-profits. Even if this expectation is realized, we will doubtless witness increasing demand for third party evaluations of non-profit organizations. If these evaluators can reinforce proper and consistent non-profit reporting (eg the five questions), are transparent in revealing their own values, and contribute insight as well as utilizing a cohesive philanthropy knowledge system, they will be an important and progressive component of the ecosystem. In fact we need many more evaluators bringing many more perspectives and transparent values to this work. If evaluators encourage perverse economic behaviours by organizations (via overemphasis on financial ratios for instance), erode the sophistication of donors by dwelling on irrelevant measures of worthiness, or let their perceived need for scale erode the quality of their work product, however, they will be detrimental to the ecosystem.

What are the bottlenecks or impediments to making this system function optimally?
Perhaps the principal impediment to making this system function optimally is the failure of its practitioners to understand the practices, deficiencies, opportunities and interconnectedness of the components and systems within the philanthropy ecosystem. Internet entrepreneurs are driven by a perceived need to achieve scale. When an internet entrepreneur thinks about evaluating non-profits, the first question faced is how can I ‘evaluate’ large numbers of organizations so that I have sufficient scale to get noticed and influence behaviour. The inevitable result is the selection of highly ‘leverageable’ methodologies, eg simple financial ratios, networked friends’ endorsements, Zagat-inspired stakeholder opinion, and wiki-like networks of experts, each purporting to be the most useful means to assess non-profit worthiness. Underscoring and encouraging this phenomenon, though, is the absence of more pertinent and readily available information about non-profits and the environment in which they function, such as those envisioned within the philanthropy ecosystem.

Another barrier is the absence among evaluation practitioners of a clear understanding that this is not an ordinary sector to remediate like banking, book selling, music or rummage sales. There is no first mover advantage. This is no zero-sum game. There is nothing to lose and everything to gain through close collaboration among evaluators, helping new ones get started (especially ones with different methodologies), contributing to a common knowledge base and reinforcing excellent non-profit reporting practice.

A final barrier is reputational. It is easy for non-profits and serious donors to discount the current work product of evaluators, particularly the online variety. The misconceived shortcuts taken by a few can hinder progress for everyone in this space.

What are the principal opportunities for innovative social entrepreneurs?

• The evaluator network  Serious evaluators should form an association to ensure high analytical standards (and encourage reinforcement of the five questions); identify opportunities in the evaluation space; attract others to the field; classify the association members by expertise (for those who specialize in non-profit subsectors) and type of evaluation; and promote their work product though a common web interface. GuideStar USA could provide the most logical venue and organizing device for this service. It already has a head start though its relations with several online evaluators, although its recent merger with two evaluation agencies may comprise either its neutrality or the appearance of its neutrality in this regard.
• New knowledge/reporting-based evaluation algorithms  This approach would reconcile information from the philanthropy knowledge system and non-profit management/reporting systems. From the knowledge system it would capture information about the most effective intervention strategies and community objectives. From consistent non-profit reports (featuring answers to the five questions) and audited financial and output/outcome reports, it would capture information about the capacity and success organizations have in achieving their stated objectives. The resulting evaluative report would use the combined information to assess the extent to which an organization (1) established interventions and objectives based upon well-supported assumptions about the correlation of its expected operating outputs and community-valued outcomes and (2) performed the stipulated interventions and achieved the stated outcomes.
• Establish a service to audit non-profit output/outcome reporting This opportunity was presented in conjunction with the non-profit reporting/management system above. Its inclusion here in the third party evaluation section underscores the overlapping quality of these systems. But repetition is warranted in this case. The same energy that is now expended by an ‘evaluator’ could very productively be devoted to verifying the programmatic representations of non-profits. It would provide the philanthropy ecosystem with information of greater integrity and reinforce conducive and consistent non-profit reporting methods (the five questions again).

The philanthropy ecosystem

With vibrant subsystems each functioning well within the overarching ecosystem, we cannot help but enjoy more satisfying philanthropy, greater innovation and better societal outcomes. In this high-functioning philanthropy ecosystem, we will:

• work from a common knowledge base;
• seek consensus around community objectives and collective action;
• require consistent reporting by non-profits that is at once internally valuable for the organization and publicly transparent;
• direct resources to organizations that do well the work society values;
• demand accountability not only of foundations, trusts and intermediaries but also of ourselves, the vast population of individual donors that account for the vast majority of charitable giving.

As we build this ecosystem, we will introduce dependable market signals, establish consistent expectations and instil dynamics that not only ensure mutually reinforcing progress but demand and reward far greater innovation, online and otherwise, than we have witnessed to date. [5]

Conclusion

The positive implications of a high-functioning philanthropy ecosystem are substantial. The success of the whole, as well as the success of each of the parts, requires successful innovation throughout. While expansive, the scenario developed here is hardly revolutionary.[6] Rather, each component system described in this paper should be immediately recognizable. All of the ecosystem’s existing institutions will continue to play major roles. No legal or regulatory changes are proposed. Innovation and change will be evident at the edges, in the connective tissue linking people, institutions and subsystems, in greater accountability and a stronger ethos of common objective setting and collective action.

The frustrations encountered by today’s online social entrepreneurs will continue so long as we fail to recognize the systemic nature of the philanthropy universe and the need to embrace innovation throughout. We cannot blame non-profits for being unaccountable if donors are inconsistent and unaccountable themselves. We cannot expect great results if the major players will not coalesce around common objectives and collective action. We cannot expect innovative efforts by individuals to promote excellent philanthropy online to succeed if the rest of the philanthropy ecosystem is not functioning sensibly.

Finally, as we take on this surfeit of entrepreneurial challenges, we must remember why we are doing it. We do it to secure better outcomes for the causes we care about. We do it to build a stronger civil society and more competent and resilient non-profit organizations. We do it to make safe the proposition that private initiative for the public good remains an essential facet of our democratic society. Narrow and siloed thinking as well as protection of turf, methods, brands and the like have no place here. Instead, we must recognize this universe for what it is, embrace a common vision for a high-functioning philanthropy ecosystem, and set out together to build and link the components of that ecosystem. Only then will our frustrations dissipate and our ambitions ignite.

Buzz Schmidt is a visiting scholar at the Tuck School of Business, Dartmouth College. He is the founder of GuideStar and GuideStar International, the chair of the FB Heron Foundation and Nonprofit Quarterly, and a member of the boards of TechSoup Global and the Institute for Philanthropy.

David Bonbright has written an interesting article in response to this, titled Why Markets for Good may go wrong.

[1] The Centre on Philanthropy at Indiana University, GivingUSA 2010 Executive Summary, pp 6-9.
[2] Donor advised funds are hosted and are technically owned by community foundations and charitable gift funds.
[3] http://www.nptrust.org/philanthropy/philanthropy_stats.asp., Ben Gose, ‘Charities Can Expect More Money to Flow from Donor-Advised Funds’, Chronicle of Philanthropy, 11 July 2010.
[4] Bridgespan may be the principal proponent of planning/reporting language that places ‘intended impact’ and ‘theory of change’ at the heart of a good organization’s strategic plan.
[5] Today, it makes good sense to focus our attention upon developing the philanthropy ecosystem as described herein. Nonetheless, it will soon be necessary to incorporate two other emerging systems into any future analysis. The online social entrepreneurs will make sure that this happens. One, the social network system is shaping behaviour in myriad ways. At a minimum, the Facebook and Twitter duopoly has become an essential venue for non-profit organizations and a source of ‘friend-based evaluation’. The jury is out concerning the degree to which the ad hoc actions and associations of online social networks will supplant many activities and associations traditionally conducted and enabled by non-profit organizations.
Likewise, a second emerging system, the social enterprise system, is capturing significant mindshare from a broad swath of society. Among its captives are many already committed professionally to the philanthropic ecosystem. What are the limits of this system? Can it realistically challenge the provenance of non-profit organizations in our conception of a social action marketplace and in the hearts of donors? How can we most productively think about these developments?
Also for simplicity, I have avoided consideration of the extensive system of volunteer activity. Suffice it to say that implications of improvements of the philanthropy ecosystem that improve the participation, sophistication and satisfaction of individual donors should hold true for volunteers as well.
[6] A revolutionary solution might scrap the private foundation model for one less inherently autonomous and disconnected. It might scrap tax-deductibility of organizations that operate in areas of dubious social benefit or simply don’t need the money. It might require accelerated payouts to defray the social cost incurred when foundations warehouse capital perpetually.