Saturday, December 29, 2012

Improving Measures of Efficiency

For some time now, the primary measure of charitable efficiency has been the accounting-based program expense ratio, which measures the percentage of expenses that are classified as program related (as opposed to those related to administration or fundraising).  The heavy reliance on program expense ratios by watchdogs, donors, and the organizations themselves, often to the point of ignoring the remainder of an organization’s financial statements, cannot be denied.

That said, recent years have seen a backlash against the prevalence of these accounting-based measures.

Thursday, December 27, 2012

The Accountability Gap - An Update

As discussed previously in this blog, a primary means of ensuring that charities are using donated funds to benefit the public good is the IRS requirement that they complete annual financial reports (Form 990 or a variant) to maintain their nonprofit status.  The notable exception to this is that churches and certain religious groups are exempt from annual filing requirements.  Though many church groups have been pushing for like-minded religious organizations to voluntarily provide this information to the public in order to promote accountability, compliance is the exception, not the rule.  A recent development may close this accountability gap, however.  A lawsuit has been filed by the American Atheists to eliminate what they view as discrimination against secular charities that takes the form of requiring an annual Form 990 of secular but not religious charities.  In my view, this is one to keep an eye on -- whatever your religious beliefs, it is hard to argue with the lawsuit's premise.  And, the outcome of the lawsuit has the potential to drastically change financial reporting for charities, especially religious ones.

Sunday, December 23, 2012

The Real Significance of Zuckerberg's $500 Million Donation

By now, it has been widely reported that Facebook founder and CEO Mark Zuckerberg has donated approx. $500 million of Facebook stock to charity.  In particular, his donation was made to the Silicon Valley Community Foundation to aid education and health efforts, and represents the first of several such gifts to come.  While the gift is substantial and noteworthy in itself, it also represents something more significant.  In the not too distant past, the ultra-wealthy conducted philanthropy in a different and very predictable way: late in life, they would start a private foundation in their own name and bequeath funds to that private foundation, the investment returns from which would later be used to fund charitable activities.  Zuckerberg's gift represents two key shifts from this formula: (i) the gift was made early in life; and (ii) the gift was not given to his own private foundation but instead a community foundation.  Both portend philanthropic efforts with more immediate impact.  The trend in (i) follows the lead of Bill Gates, while (ii) follows Warren Buffett's lead.  Though the donations to the Silicon Valley Community Foundation likely come with substantial restrictions (those details have not been released), they are still much more likely to be put in use quickly than funds placed in a private foundation.  It looks like Gates, Buffett, and now Zuckerberg have started a new wave of wealthy philanthropists with hopes of making notable impact during their lives.  Winkelvoss twins, your move...

Monday, December 17, 2012

The Rapidly Blurring Boundaries Between Investments and Missions

Many charities, notably private foundations and educational institutions, rely on substantial endowments to help fund their missions.  These endowment funds are typically placed in a range of investments, the returns of which are used to support the organizations’ day-to-day operations. These formerly clear boundaries between investment activities and their subsequent funding of mission-based operations have been rapidly disappearing in recent years.