Do Donors Know Better than Nonprofits?

My friend Bruce Trachtenberg responds to my post about alumni giving trends:

Reminds me of a story I had commissioned when I was at in early 2000. Called "Melodious Intent," it told about how a regular (and major) giver to Yale decided one year NOT to give to the school’s capital campaign. Instead, he found out that despite Yale’s riches, the music school was starving for funds and couldn’t afford to replace its leased Yamaha pianos. So this person made a gift that was earmarked just so the school could lease new pianos. That triggered someone else to give for the same purpose too. Sweet music to the school’s ears.

There’s an interesting disconnect between how investors invest and donors donate. In the investing world, investors spend a tremendous amount of time examining which companies to invest in. But once they invest, they give the money as an “unrestricted” investment. They don’t tell the for-profit, “you can only use this money to build your new office building,” or “you can only use this money in your cell phone division, not your landline division.” In philanthropy, most donors spend very little time comparing the various options for donations, but they often restrict the gifts they do give to certain specific uses. Why is this?

Bruce’s story above could be read as the story of a tactical philanthropist who directed his money to the area where it could have the most impact. I don’t read it that way. To me this is the story of a donor who effectively said, “You dummies at Yale don’t know the best way to run your organization. I know better than you that the music department needs funds more than you need to build a new building.”

Why don’t donors trust nonprofits to know the best way to allocate their capital? If they don’t trust them to make capital allocation decisions, why are they giving to these nonprofits at all?

In a world where nonprofit research was widely available, would donors cease making restricted grants? If so, does it then follow that nonprofits should be encouraging the creation of nonprofit research platforms so that they can begin to attract more unrestricted grants? And if donors are so untrusting of nonprofits that they choose to restrict grants, then might this distrust also be limiting the amount they give?


  1. Eugene Chan says:


    Thanks for, as usual, a thoughtful post.

    I’m not sure I agree that it is about trust, per se. I believe it is about mission and program fit instead.

    I wrote more about my views here.

  2. Eugene raises an important point. Also, I don’t think restricted grants are all that bad if they support an organization’s mission. For instance, for the nonprofit I oversee, I frequently raise both restricted and unrestricted dollars. The restricted money is project–and often projects I initiate and then seek funders to underwrite. At the end of the day, all we are doing in such cases is entering into a contractual relationship. I ask for and receive support and in return promise to deliver something for it. Clearly, I’m only going to agree to do things that advance my organization’s work. And thankfully there are times when that fits nicely with a funder’s goals.

  3. Holden says:

    Sean, I’ve struggled with this issue a lot. As you know, a few months ago I was totally with you: I didn’t see why you would tell a good nonprofit how to do its job, or donate to a bad one. Here are a couple reasons, though:

    1. Philosophical values. I think this is what the two comments above mine are referring to. For example, preferring to save a life vs. correct a fistula vs. provide an education doesn’t have anything to do with thinking a charity is good or bad at its job; it just means my mission is a subset of its mission. With investing, everyone is aiming for the same thing – dollars – but with charity there are a lot of overlapping but different “end goals.”

    2. Then there’s just the way many charities seem to be set up. As I’ve written on our blog, a lot of the larger charities don’t seem to even *have* priorities, a bird’s-eye view, etc. They work on different projects, some driven by funders and some by in-the-moment decisions, without having an overarching vision/plan – indeed, without even having anything handy that gives an overview of what they do and whether it works. So they really do work like contractors (executing the funder’s wishes), rather than how I’d like them to work: having a complete view of the best way to help people, and inviting donors to fund them or go elsewhere.

    #1 is a legitimate reason to restrict funds. #2 is something I see as a problem with the sector, but others would disagree.

    Personally, I’d like to see charities slim down and become more philosophically and organizationally cohesive, to the point where it really did make sense to donate unrestricted. This would be especially useful for individual donors; how do I know which pool of randomly chosen projects to throw $1000 into?

    One more note to those who donate restricted. A charity generally has a pool of unrestricted funds. If you donate restricted, they’ll shuffle their unrestricted funds out of the thing you funded and put them somewhere else. So you need a LOT of restricted money before you’re really influencing their activities, and the extent to which your dollars are funding “only your project” is probably less than you think.

  4. “Why don’t donors trust nonprofits to know the best way to allocate their capital? If they don’t trust them to make capital allocation decisions, why are they giving to these nonprofits at all?”

    In a perfect world, nonprofits would be governed and managed by wise and experienced individuals. In the real world, they are not. That is one important reason why donors and grantors of significant means SHOULD be cautious in considering unrestricted gifts. Further, the argument that “nonprofits” or even “the sector and its leaders” know best suggests that donors do not have their own personal passions or missions – often rooted in intelligent observation – that they will (and have a right to) support.

    I applaud the donor who made the gift earmarked for leasing new pianos. It is quite possible that this person believes that music is a language that can transcend barriers of time and culture and that there must be interpreters of that medium who have the skills and tools to bring that language to the world. And if it so happens that this donor believes that Yale’s Music School is preparing among the finest of interpreters, it would make perfect sense to the donor to fund better tools.

    On the other hand, the donor might simply have a personal issue with the campaign chair and rather than give to the campaign, deliberately snubbed the chair by directing his funds to the music department.

    Ultimately, does it matter why the donor gave as he did? As long as nonprofits (I so prefer Claire’s term) are led by volunteers with varying motives and skill levels, with little oversight or accountability, as long as there are no consequences for their poor or uninformed decisions, as long as watchdogs continue to trumpet context-less (and manipulated) ratios as a valid basis for grant or donation decisions, and as long as its their own money that they are choosing to invest in charity, donors should be very wary about simply handing over a check for the organization to do with as it pleases or sees fit.

    Frankly, it makes me shiver to think that we would suggest to donors that Big Brother Board knows best, and they should trust that their contributions will be exercised with more wisdom (or a “bigger picture”) than that of the donors themselves. I think we already have a mechanism for that … it’s called “taxes.”

    I applaud donors who give with specific intent. They are so few in number compared to the ones who “trust” that charities (and we, as the sector’s leaders) know best.

  5. Phil Deely says:

    The issue of restricted giving vs. general operating support is a very lively topic among individual donors in small independent schools. For many ‘rookie’ donors the school’s annual fund raising campaign represents their first, non-church appeal for general operating support. In a school setting, parents of enrolled students generally want to give to specific, tangible projects which will benefit their child. Sometimes groups of parents get together and spontaneously decide to purchase some piece of equipment for the classroom. This often results in ‘friendly fire’ which undercuts the school’s official annual fund campaign.
    Schools and other small, unsophisticated non-profits are well-advised to take their lead from public broadcasting and routinely publicize the fact that on-campus improvements of all kinds are “Made possible in part by your generous support of the Annual Fund.” Some schools have identified the ‘secret scholarship’ given to all students which is, in fact, the per student contribution made by the annual fund to general operations. When parents get this message, and can see a newly painted classroom or upgraded computer system, they begin to understand that the Annual Fund is not simply ‘the black hole of operations!’
    Many board members of small schools are unaware of the FASB distinction between restricted endowment and ‘board restricted’ funds functioning as endowment. Clarifying both the legal requirements and adhering to donor intent are important if these boards and their schools are going to develop credibility with their donors.

  6. Bruce Bailey says:

    In your response to Eugene let me say that restricted gifts can sometimes become a burden to a nonprofit over time if the original need has been met and the agency is now restricted with a large gift principle that can’t be used. yes, the interest can probably be used elsewhere, but what great seed money the principle might be for another project.

  7. Bruce Bailey says:


    thanks for your response to Sean at Tactical Philanthropy. I enjoyed reading your comments particularly about respecting the donor’s ability to think through where s/he wants the gift to be used. There needs to be more attention given to donor insight and desire.


  8. Thanks for your comments Bruce. I think that at the end of the day, various types of grants are effective at reaching different goals. I think that the donor’s intent and desire is the overriding issue, because it is their money to give away. But I also think that donors should put more work into finding the right nonprofit and less time restricting the grant.