I wrote a post a while ago called Paul Brest Needs a Blog (Paul is the head of the Hewlett Foundation). I’ve been an advocate for more people in philanthropy to start blogging in general. In the above mentioned post I wrote:
So why should foundations blog? It seems to me that the imperative is not for them to embrace technology so much as it is for foundations to join and begin to drive the online philanthropy conversation. [But] it is the two-way flow of information that blogs encourage that is important, not blogs themselves.
Even so I’ve noted recently that some people feel that I’ve pushed blogging rather than information sharing. As the conversation we’re all having unfolds I think it is important to take a step back and make sure we haven’t missed the forest for the trees. I wish I had expressed my thoughts with more clarity.
When Phil Cubeta recently asked why nonprofits should blog, astute reader Michele Moon asked:
I’m not entirely sure why it’s blogging, in particular, that’s the focus of discussion, especially because it’s now considered a little bit old-hat, Web 1.5. What is it about the format that makes it so essential to transparency and its tyrant? Is it actually blogging you want to see – personal, real-time updates and editorials, followed (if you’re lucky) by people who read, comment, and sometimes stick around to converse?… Why should it be blogging that we aim to do, or is that shorthand for more complicated online interactivity?
I’m guilty of using “blogging” as short hand for information sharing. I’ll stop making that mistake.
When economists speak about efficient markets they are talking about a situation where money flows to the organizations that can put it to the best use. Widely available, robust information is a critical factor for a functioning efficient market. Recently, in a conversation with Phil Buchanan and other readers on this issue I wrote the following (you can find the full thread here. The Chronicle of Philanthropy recently highlighted the conversation):
In an efficient market, investing is a zero sum game. Maximum returns are generated globally so the only question is matching an investor’s risk/return preferences. In inefficient markets, higher returns accrue to more “effective/smarter” investors. In a public benefit market, since all returns accrue to everyone, investors should desire an efficient market within which they could align their social investments with their personal values/goals.
The philanthropic capital markets are highly inefficient. Far more inefficient than any for-profit marketplace.
Therefore, it seems to me that making the philanthropic capital markets more efficient should be the number one priority of large funders who desire to be effective…
I’m not arguing that the public will make better decisions than the “experts”. I’m saying that efficient markets will produce better outcomes than inefficient markets. In the for-profit world, inefficient markets are great for “expert” investors because they can exploit superior information to generate outperformance of investment returns. But these inefficient markets reduce the total returns in the market by preventing capital from flowing to the best performing investments.
What I’m saying is that unlike in the for-profit market, “expert” philanthropist enjoy no advantage from superior information. The returns they generate accrue to the public, and so no “outperformance” is possible. Instead, they should be interested in the total market functioning at a higher level, since that is the only way to increase the social return on investment that accrues to everyone.
This is the challenge we face as a field. How can we ensure that the $300 billion that is given to charity each year is flowing to the organizations that can put the money to its best use? The key will be our ability to supply market participants with widely available, robust information. Blogs are one tool in this work. There are many others.
18 Comments
This is a helpful clarification — blogging as shorthand for information sharing. Thanks.
The logic here can become relentless and destructive. What this tends towards a lists, like league tables in a sport, with the best at the top. It leads then to managing a nonprofit by the numbers, to get the rating, and it leads to shutting down those that don’t rank high. We then have the tryanny of the metrics, however much arbitrariness is built into them.
My wife teaches literature in TX. She is now under the TAKs system with tests and metrics for everything. Time was she taught literature 5 days a week. Now she teaches literature maybe 3 days a week, the rest is consumed in exercises around jacking up test results, outsmarting the tests, analyzing data, and other nonsense that is inevitable once a field allows itself to be ruled by metrics that abstract from excellence and turn all into a number on a scale. After they figure out the band teacher is not contributing to measurable results, out she goes. Pretty soon we are all living inside a factory 24/7.
“There is a moment in every day that Satan’s watch fiends cannot find.” Wm Blake. By Satan he meant Reason, tactics, plans, and sterility.
The nonprofit sector exists in part of foster citizenship, active citizenship, not just “results.” Amateurism, congeniality, gregariousness, volunteering and messing about in a good cause. You kill that with metrics and you have killed the heart and soul of our democracy and replaced it with Weber’s Iron Cages of bureaucracy, filled with “sensualists without heart” (consumers) and “specialists without spirit (MBAs and managers).
The world you want – are you sitting in corner office reading a spreadsheet?
Phil, I agree with your sentiment. and bad foundations don’t blow up, like a bad company does. the element of creative destruction is essential for growth and evolution. insulation, silos and ivory towers are real problems. transparency is one real way forward.
Spot on comment. Thanks for getting your Texas crank on here.
If the stock market has more data than God available with a mouse click so how come 3/4 of our smarty pants investment advisors can’t beat the indices?
You reminded me about the wonderful field of sabermetrics — the analysis of baseball through objective evidence, especially baseball statistics.
The steroidal sport of baseball is pumped up with more data and statistical measures than any other human enterprise.
Yet for all of its satisfying and sexy quantifiability those nerdy sabermetricians point out that many of the traditional measures we use are horse-hockey.
The brainiacs with the spreadsheet burns on their noses are also quick to point out how darn hard it is to predict and compare without having some other geek point out problems with their assumptions.
Any baseball freaks out there who can offer examples of what I am getting at?
Now, I love hard data as much as a steaming bowl of Texas chili, but like my chili I always take it with a grain of salt and a nice cold Bud.
Tidy Sum,
There is plenty of information to make it quite easy (mostly) to figure out which publicly traded company is producing the highest return on capital (not the best stock returns, but making the most profit). The stock market has an extra layer of complexity in that the price of shares adjusts to take into account effectiveness. That doesn’t happen in the nonprofit world. What could happen in the future is that effective orgs get so much money that it becomes a better “investment” for donors to give to less effective orgs because their money goes further than just sending more money to nonprofits
I would suggest that is happening right now at the elite universities where donors are questioning why they need any more money and wondering if gifts to other schools (that are objectively not as good schools) are a smarter use of their funds.
Sabermetrics: Moneyball was a GREAT book and interesting look at a real life attempt to use nothing but quant to run a baseball team (note that the sub-title was “the ART of winning…”. I think that sabermetrics teaches us that many of the assumptions we have are wrong when you look at the data. But that doesn’t mean data trumps everything else.
A good investor knows that you can create a list of 100 data points that show we are definitely in a recession or going into one as well as 100 data points showing that we’ll avoid one for sure.
Sean,
I’m puzzled by your comment that if effective organizations get so much money, donors will give to less effective organizations to make their money go “further.” Seems to me that giving to organizations already effective at their work is more likely to result in a positive return on investment. Giving to less effective organizations doesn’t seem like a wise alternative, unless donors are working with those organizations on a plan to improve their operations and better their outcomes. At the same time, it seems like organizations doing a good job shouldn’t be penalized for because they are succeeding at what they do.
Bruce, giving to less effective organizations seems like it’s way to reward failure, which is kind of consistent with the bassackwards way non profit funding sometimes runs…. or not.. im sure sean will explain what he means, but i’d thought i’d throw in a cheap shot in the interim, just for fun.
Sorry to not be more clear. I was responding to Tidy Sum’s comparison to stock market investing. In a world where effective organizations were fully funded (ie. they had all the money they needed for their highest return projects, and could only use more money to pursue projects with secondary priority), less effective organizations could become better relative funding opportunities if their best projects had higher return potential than the top nonprofits secondary projects.
Think about it this way: Imagine that X Charity is the most effective organization in the world. It would not be most efficient for every donated dollar in the world to be given to them. They simply would not be able to put all of that money to work. Markets generally do not create a winner take all scenario, usually (when they work well), they create an ecosystem of organizations that compete against each other.
ok. so it’s like portfolio theory; put the money where it makes the most sense. to the program that works.. that’s ok.. but it still makes it program, not capacity funding, which is a fundamental problem
I didn’t mean that. I generally advocate for nothing but unrestricted grants (although I admit there are times when restricted grants make sense). I meant that the more you give to a nonprofit the less social return on investment it can get on every incremental dollar. The nonprofit sector doesn’t face this very often. But my point what that if capital flowed freely to its highest use, that after awhile some effective nonprofits would begin to produce diminishing returns. It would be good if Harlem Children’s Zone (for instance) got $1 million or $5 million instead of $100,000. But they couldn’t use $1 billion dollar. So at some point, dollars should start going to lower impact nonprofits who can still get the full use out of new funds.
Sorry I haven’t explained this clearly.
Im not sure your base line assumptions are correct. what makes non profits or their impact inherently unscalable? the rule you are applying would not be applied, in fact would be avoided as an inherent inefficiency in business. you want businesses to scale, to be increasing returns businesses. why can’t you have (and i have not considered the question deeply and can feel phil cubeta breathing down my neck as i say this) an increasing returns social impact non profit?
Sean,
I have to agree with Kevin. Not so much that your assumptions are incorrect. There just isn’t enough evidence to prove your point. There hasn’t been enough unrestricted capital flow to see what a fully scaled organization can accomplish. Let’s get to that point and then revisit this debate.
The discussion of general vs. project support sounds depressingly like the unenlightening debate about “old” vs. “new” philanthropy. First, it sets up a false dichotomy, partly a result of imprecise definitions: a fair share of foundation project support is, in fact, general support. It may be called capacity-building (or better, improving operations), or the “project” may be all the agency does. Second, many foundations that have made general support the next new thing put huge demands, and sometimes, restrictions, on their grantees, e.g., hiring business consultants, putting corporate staff into the nonprofit. This may or may not be a good thing, but it’s hardly what most nonprofits think of as general support. Finally, if we’re only going to make grant to nonprofits that a foundaton believes can “handle” general support, what happens to small agencies in poor neighborhoods who may not be the most efficient at what they do–but are the only ones helping people in those communities.
Foundationwriter makes some valuable points. It should be less a question of “general” vs. “project,” but more about whether the grant will help help the organization fulfill its mission. In my fundraising efforts, I sometimes seek project support for work we initiate and that is more likely to get funded as such, rather than making a general request (which we also do a lot of). But in those cases, it’s money to keep us operating day-to-day.
Bruce & Kevin,
Sorry I’m having a hard time getting my point across. I doubt we disagree. My point is just that the law of diminishing returns exists for grants the same way it does for anything you put time/energy/money into.
Clearly, in an efficient market, there is not one organization that should get every dollar of total global donor resources. In an efficient market, capital would be allocated to many, many nonprofits, some of which would be less effective than others.
My point when I first mentioned the concept that once the market is more efficient, the question will be less about identifying the most efficient nonprofit, but the one that can do the most with more money.
foundationwriter,
For me I think of the debate as kind of a “letter of the law, spirit of the law issue”. I don’t think that restricting grants is terrible or general support perfect, but I believe in the spirit of the idea that nonprofits tend to know best how to allocate resources given to them and that funders should not (generally) seek to decide which line items to support.
I see robust nonprofit organizations as the goal, not simply great projects. Much the same way I see Apple as a great company, it is not the iPod as a separate project, it is the organization itself.
There are a ton of qualifications to this. I’m just talking about the spirit of the law.
Thanks for joining the discussion. I always like to see new people!
(Nothing in this post should be considered investment advice).
sean, in venture investing, people look for the occasional examples of the increasing returns business; the ones where the cost of getting bigger and having a bigger impact comes at increasingly reduced cost (think windows back when microsoft was a growth company, or google now) why is that not potentially the case with social benefit organizations? why is there not a hockey stick possibility? are you always playing in a game where you can’t dunk in this kind of court? there are power laws and there are bell curves; diminishing returns is a bell curve law. the bell curve is not the only that applies. the black swan also exists; the orthogonal case where outsize impact is enabled by pouring more resources into the silver bullet; im not sure what that case is, but i am not sure i like your implicit assumptions, sean.. i dont’ think we disagree, but i want to mix it up a bit further, if you’re game.. could there be a case where a power law applied in social benefit where piling on equals the google for good?
Kevin, this is fun and interesting conversation. I just want to be clear that my comments originated during my explanations of why stock picking is harder than picking good charities to fund. My point was that stock prices exist in a (relatively) efficient market where the market price adjusts so that more or less effective companies become equally attractive investment opportunities. The nonprofit sector has some very important differences, but I do believe that over time, as nonprofits become more fully funded, that a similar dynamic will enter the picture.
Now to your point above in comment #17. I agree with you completely. Of course there are many projects that have the power laws you describe. But I assume you don’t imagine that the entire sector would represent a hockey stick type growth pattern (except for short periods of time).
I would suggest that almost all nonprofits are operating under famine type conditions currently and that we will be shocked by the impact that the sector can have as we move to a market where funders chase good impact opportunities rather than having nonprofits chase funders.