Monday, March 18, 2013

Are Popular Charities More Efficient?

At this point, it seems widely accepted that the most well-loved charities charities are also often the best at accomplishing their mission.  Whether it is that effectiveness makes them popular or that popularity makes it much easier to focus resources on a mission is hard to say.  However, what few seem to admit is that the relationship between popularity and efficiency may actually be more complicated.  After all, popular charities perhaps may face less scrutiny since people find it hard to question these highly-regarded organizations.  Or, it could also be that attaining popularity requires an organization to take its focus off the mission, instead focusing on visibility.  If true, these considerations suggest that the connection between popularity and a strong focus on mission may be tenuous.

Consider the following mini-experiment to address this connection simply.  First, take the top 50 charities in the US according to Forbes, and rank them based on popularity (measured by number of Facebook 'likes') and also rank them based on mission-focus (measured by the percentage of expenditures devoted toward programs, available from Charity Navigator).  Due to missing data for some charities, the experiment covers 42 charities.  A plot of the connection between popularity ranking and mission-focus ranking reveals a surprising connection, as presented in the chart below which shows each data point as well as the best fit (regression) line...


A few details to note before considering the big picture:
  • Yes, the negative correlation reflected in the regression fit line is statistically significant.
  • The negative correlation in the chart persists if you examine raw numbers rather than ranks (though there are some notable outliers).
  • The usual caveat applies: correlation doesn't imply causation, i.e., being popular does not necessarily make you less mission-focused, and vice-versa.
  • Both the measure of popularity (Facebook 'likes') and the measure of mission-focus (program expense ratio) are imperfect, so these imperfections may be driving the negative connection.

With all that said, the chart is supportive of two big-picture themes.
  • Just because a charity is well-liked does not mean it should not face scrutiny for its financial choices.
  • When seeking a charity that spends a greater portion of funds on its mission, sometimes the road less traveled is the more effective one.

4 comments:

  1. Did you sort the data? Maybe by the sizes of the charity? The table above has too many "outliers". the regression line above also has great erorr rate. It looks like random distribution.
    Anyway, if it works. Sometimes, the wealth do not care where or how the charity used the donation. The article provide a theoretical basis for they behaviors, since nobody could tell which one is better.

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  2. Cong, good questions...

    As far as the effect of size, if you also include size ranks (based on Forbes' size ranking), the results are basically unchanged (i.e., the multiple regression has an insignificant coefficient on size but the coefficient on popularity remains negative and significant).

    As for how good the fit is, the regression has an r-squared of 16% (i.e., the two underlying variables here have a spearman correlation of -40%). This translates into a statistically significant relationship; however, I would not suggest this as a good prediction model by any means.

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  3. You're correlating increased admin and fundraising costs with decreased efficiency. I'd say that these organizations got as big as they are precisely because they spend so much money on infrastructure and reaching new donors. The Nature Conservancy, with it's 25% overhead, is arguably doing much more to help the environment than a small volunteer run nonprofit with zero overhead. However, there may also be smaller environmental nonprofits that are doing a better job of addressing certain issues than the nature conservancy.

    That said, I agree with your point that well-liked charities should not be exempt from financial scrutiny, and it shouldn't be assumed that just because and organization is large and popular that it is the best at its mission.

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  4. Good investigation. I'm sure, however, that all charities could do with improving their efficiency and to work more like businesses. Charities such as The Clare Foundation work just for that purpose - to provide charity services to other charities, to help them improve - whether that be advice or office space - they can provide it.

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