The capital market for financing charitable work is far from efficient, and could be improved dramatically. Donors and the nonprofit agencies they fund do not share a standard set of measures and procedures to evaluate performance. Lacking measures of impact, donors—a group that includes government agencies, foundations, corporate CSR programs, and individuals—and charity “watchdogs” often focus on available information that typically has one main focus: the overhead expenses reported by nonprofits in public disclosures.
The problem, however, is that the use of overhead expense as a proxy for operational efficiency and effectiveness has many shortcomings. There is no shared understanding of what expenses constitute overhead; overhead spending says nothing about the quality of a nonprofit's programs; and an excessive focus on this single dimension can cause management to underinvest in infrastructure.
Management of nonprofits should be encouraged to communicate the results of their key programs—in particular, their impact on the communities they serve. For example, for at least their largest programs, nonprofits could describe the key performance indicators established at outset of their programs, and how they are currently performing against these benchmarks. A substantive management discussion that includes an explanation for any underperformance, and the corrective actions being taken, would help other agencies avoid similar pitfalls while providing potential donors with valuable information that improves not only their decision-making, but the “efficiency” of the entire market for charitable giving.