Donors who restrict their gifts to avoid funding “bricks & mortar” or “overhead’ may unintentionally hinder a charity’s mission. Insights from investing in for-profit companies can help inform a more effective approach to philanthropy.
By Peter Fardy
Most people involved in philanthropy have, at some point, heard a donor declare they do not want their gifts used for “bricks & mortar,” “overhead,” or some other aspect of a charity’s operations. These self-imposed restrictions are often deeply rooted and may stem from reasons such as:
- The donor had an earlier experience that left them feeling their gift had not made the impact they hoped for.
- They may prefer that their gift be deployed at the “front line,” where they believe it will have a greater impact on the people the charity serves.
- They may think the charitable organization already has ample resources in the areas they refuse to fund (e.g., “they already have enough space” or “they seem to have a lot of admin staff”).
- They may believe that those who lead charities lack the business mindset required to make tough decisions about managing the organization, allocating resources efficiently, or effectively prioritizing expenditures.
These are legitimate concerns, but rather than coming up with a set of restrictions based on them to be applied to all gifts, donors are better served by considering the specific circumstances charities are facing at that moment and what will make the greatest difference in their ability to effectively pursue their mission. This requires a little more scrutiny or due diligence, but no more than what the same donor may apply to investments they have made in for-profit enterprises, especially if a significant amount of money is involved.
The needs of nonprofits change over time
Consider the example of a small hospice. To deliver on its mission — to provide a peaceful, comfortable, and dignified end-of-life experience to clients and their families — the hospice requires professional healthcare providers, dedicated support staff, spiritual advisors, a corps of volunteers, and a suitable place for patients and their families to access and benefit from what they have to offer. As the number of elderly and terminally ill community members grows, so does the need for places like this.
Like any organization, its needs have evolved over time. At some point, the hospice may have found that more support staff were needed so that frontline care providers could spend less time on administrative matters and more time at the bedside. At another time, as interest and demand for their services grew, it may have become clear that an expanded, purpose-built facility would allow them to do much more of this good work.
What was most important in each of these cases was the mission (the “why”), which rarely, if ever, changes, while the resources needed to help the organization best fulfill its mission (the “what”) usually change over time.
Starting with the why
Astute donors start with the “why” — the charity’s mission — before considering the “what” — how best to support it. To assess what the priorities truly are at a given time, they engage in conversations with leadership to gain valuable insight that allows them to make an informed decision. While others may balk at the idea of their gift being used for support staff (overhead) or a facility (bricks and mortar), astute donors are open to considering the possibility that these needs are the right priorities. They are also prepared to defer decisions about allocating resources to the professionals who run the organization.
For any organization (charitable or for-profit) to be successful, it needs to find an effective way to balance the allocation of resources across all the functional areas that are required to deliver service. All these functions are important, but over- or under-investment in any of them can negatively impact the quality of service and the ability of the organization to achieve its mission. In the case of the hospice, donors who respond to a request for help may be unduly impeding the charity’s ability to be most effective by prescribing how their gift is to be used. Considering infrastructure and overhead to be generally less necessary ignores the fact that they are a necessary part of the mix in any organization.
A parallel with financial investing
A useful way to think about this is to draw a parallel between the decision to make a financial investment in a company and the decision to make a philanthropic investment in a charitable organization. For our purposes, a financial investment is one made primarily to generate a financial return for the investor, while a philanthropic investment is made to help create a positive impact on a community or address a societal issue — without any financial return to the donor (though I would argue that there is personal fulfillment returned to the donor).
Whether a person is investing in a business for financial return or in a charity for impact, they want the same thing in both cases: for the organization to be successful.
Let’s use the example of an early-stage company that has developed proprietary technology allowing it to produce ultra-thin, highly flexible solar panels. Although there are many potential applications for the product, one of the most compelling is the idea that sheets of this film could be applied to the roofs of electric vehicles to allow their batteries to be recharged while being driven. Not only could that be of great value to EV owners, but it would help reduce non-renewable energy consumption and decrease the carbon footprint. As successful field trials continue and manufacturing processes improve, the company is seeking further investment to fuel its growth — and a plan to achieve it.
To be successful, this company needs engineers, salespeople, operational managers, labs, testing facilities, office space, a travel budget, computing equipment, and a long list of other requirements. When people think of a company like this, they are likely not picturing the people behind the scenes or the roof over their heads, but they probably would not argue about their necessity.
Likewise, it is unlikely that a financial investor would stipulate that they do not want their funding used for some specific aspect of the company’s plan. It would be unusual for them to say something like, “Don’t spend my money on office space, warehouses, labs, or overhead.” That’s because, in conducting even basic due diligence, an investor is looking at the overall business plan for signs that give them confidence in the organization’s ability to succeed. If the plan looks solid and the company has what it needs to be successful, the investor is likely to commit. They usually believe that the company’s leadership is in a better position to decide how resources should be allocated. If not, they should not invest.
Evaluating an investment opportunity usually involves some form of due diligence to assess the strength of the business and its likelihood of success. Among the key questions an investor might ask are:
- Credible Plan: How solid is the plan to achieve the targeted outcomes? Does it instill confidence? What concerns does it raise?
- Capability: Does the company have the right expertise and infrastructure to succeed?
- Key Dependencies and Risks: What does success depend on? What are the risks and how well is the company prepared to deal with them?
- Critical Personnel: Is the CEO/President the right person to lead this organization? Do they have a strong leadership team? Who are the critical employees? What would happen if any of them left the company?
- Use of Funds: What do they need the new funding for? Are these the right priorities at this point in the company’s development?
Only when the investor is reasonably satisfied with the answers to these questions (and likely many more) will they consider investing. They hold the leadership of the company accountable for implementing the plan and achieving success.
Back to philanthropic investments
It is not unheard of for someone who follows a disciplined process when making financial investments to apply restrictions to their philanthropic gifts. Why the different approach?
Both donors and the charitable organizations they choose to support will benefit from a similar form of due diligence before gift commitments are made. Variations on the same questions would be applied — simply substitute the word “charity” for “company” in the list provided.
Once reasonably satisfied that the charity has the right plan, people, expertise, capacity, and resources to succeed, a donor will be better served by entrusting decisions about resource allocation to the organization’s leadership. Just as with a financial investor, the philanthropic investor should expect that the plan presented to them will be implemented and that progress toward achieving the targeted outcomes will be reported.
This simplified philanthropic decision tree looks something like this:
This approach does not guarantee success in philanthropic impact any more than it does in financial investing, but it can improve the likelihood of success. By starting with mission, looking at how the charity plans to pursue it, then deciding whether you have confidence in the organization’s ability to deliver, you can make a well-informed decision about giving, while avoiding the temptation to becoming overly prescriptive about how your gift is to be used.
Peter Fardy is Principal, Northport Philanthropic Advisory Services.
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