Trust in Philanthropy

My colleague Bill Somerville talks a lot about trust in philanthropy. Bill feels that funders do not trust grantees enough and that the reams of paperwork required by funders is simply a mark of their lack of trust.

To the cynical person, trusting someone is equivalent to being naive. Trusting someone can be criticized as demonstrating a lack of rigor. But it turns out that trust is at the core of what makes systems function.

From a recent Forbes article titled The Economics of Trust:

Imagine going to the corner store to buy a carton of milk, only to find that the refrigerator is locked. When you’ve persuaded the shopkeeper to retrieve the milk, you then end up arguing over whether you’re going to hand the money over first, or whether he is going to hand over the milk. Finally you manage to arrange an elaborate simultaneous exchange. A little taste of life in a world without trust–now imagine trying to arrange a mortgage.

Being able to trust people might seem like a pleasant luxury, but economists are starting to believe that it’s rather more important than that. Trust is about more than whether you can leave your house unlocked; it is responsible for the difference between the richest countries and the poorest.

"If you take a broad enough definition of trust, then it would explain basically all the difference between the per capita income of the United States and Somalia," ventures Steve Knack, a senior economist at the World Bank who has been studying the economics of trust for over a decade…

How could that be? Trust operates in all sorts of ways, from saving money that would have to be spent on security to improving the functioning of the political system. But above all, trust enables people to do business with each other. Doing business is what creates wealth.

One thing we know is that philanthropy is a dysfunctional system. Resources do not flow to those who can best utilize them. While I’m all for the efforts to quantify the effectiveness with which various organizations deploy resources so that we might better direct our giving, it is just as important that we inject more humanness into the workings of our field.

Trust isn’t a human weakness that analytical donors must overcome, it is a fundamental attribute of functioning systems. According to Forbes, the financial system would collapse without trust. Maybe more trust is just what we need to build a functioning social capital market.


  1. Paul Botts says:

    The conventional wisdom that philanthropic “resources do not flow to those who can best utilize them” remains, so far as I can see, unsupported by any meaningful evidence. Since the civic sector does not in any serious way measure its own effectiveness — mission results achieved per amount of resources spent — how can we know whether resources are or are not flowing to those who best utilize them? We can presume it from our own experiences (in my case 15 years as a grantseeker and 4 as a grantmaker); we can form such a conclusion from others’ anecdotes; we can base it on the wishes of those working in the field…all of those types of information are relevant in various ways but none of them actually support or debunk such a broad claim. More systematically we can actually now know whether resources are flowing to those who are most “efficient” in various ways (e.g. the Charity Navigator ratings), but of course that’s not at all the same thing as actual effectiveness. As “best utilize them.”

    None of which represents an argument that philanthropy is provably not dysfunctional in this way; we simply do not in a truly meaningful sense know one way or the other. Call that reality ridiculous, disappointing or shocking and you’ll get no argument from this not-for-profit lifer; but it is the reality of our sector.

  2. That’s a good point Paul. We can’t prove that resources are not flowing to those who can best utilize them since we have so little ability to measure who can best utilize resources (ie. who the most effective nonprofits are).

    While I can’t prove my statement, I do believe it is true. I see little evidence donors take effectiveness into account or that nonprofits use the fact they are effective in order to raise funds.