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Home / Economics  /
The Charity Contribution Crusade

There are an unlimited number of hands begging for your cash. Who are you going to give it to?

Donating to charity is a lot like exercising:  everyone says it's a good thing, though few people do it. 

All the major religions endorse charitable giving.  The Muslims practice zakat.  Jews have a concept called tzedakah.  The concept of tithing – giving away 10% of your wealth (however you define that) – comes from the Old Testament, but the New Testament, which Christians hold dear, has plenty to say about charity.  Jesus supposedly said, “Give to the one who asks you, and do not turn away from the one who wants to borrow from you.”  After the United States ended state support of churches in the early nineteenth century, passing the charitable plate around during Sunday worship became a morning ritual.  Hinduism features ten niyamas, practices that every Hindu should ideally follow.  The third is called dana or giving generously without thought of reward.  Buddhism encourages the giving of something without expecting anything in return

So the idea of donating to a charitable cause is ingrained into nearly all of us.  We're taught from a very early age that charity is good, almost an obligation. 

Charity looks a lot like the microbrewery market today.  Every week, it seems like there's a new beer brand to try and charity to donate to.   If you walked into a bar and saw thirty different beers on tap, how would you know which one to order?  And when it comes time to share your hard-earned dollars, how do you have any clue where to send them?

One obvious answer is to sample the beers and donate to the charities you've actually heard of.  Most of us practice this option by default.  What you know about all comes down to how well the choices have been marketed to you.  The beer manufacturer and the charity expend money and effort on campaigns to get the word out there and encourage you to spend. 

The recent ALS Ice Bucket Challenge is an example of a massively successful charitable campaign.  A person dunks ice cold water on his head, films it, nominates a few other people to do the same, and posts the videos online.  There are different versions of the challenge, but the gist of it is that you donate a smaller amount, say $10, to the ALS Association if you're willing to bathe yourself with arctic temperature waters and post online video evidence of having done so.  If you refuse the icy shower, you donate a higher amount like $100.  In practice, people both dunk themselves and donate the higher amounts.  Last year, without the ice bucket challenge, ALS raised $2.5m.  This year, by Labor Day, ALS had raised over $100m.

The ALS campaign was incredibly successful because it tapped into more than one social trend simultaneously.  Most of us love following what's currently fashionable.  Getting celebrities and business tycoons involved was a masterstroke.  The rich and famous, once nominated, had to participate, although I'm sure it didn't require too much arm twisting to get them to show in public how selfless and caring they are.  The high profile soakings encouraged a wave everyone else was more than happy to surf along with.  Then you have people in love with sharing videos, particularly when they're in them doing something 'beneficial.'  Bill Gates went so far as to hire a professional videographer and editor.   Everyone longs to feel part of a wider fraternity.  Icing yourself in under a minute gets you into the 'exclusive' club.  And the challenge merges perfectly with the new millennium philosophy of slacktivism, doing practically nothing but feeling like you're changing the world. 

You couldn't engineer a more perfect campaign.  The Ice Bucket Challenge made people feel good about themselves on multiple levels while costing ALS virtually nothing to implement.  It was like a viral video, except this time, there were multiple self-produced videos, and each video wrung out a lot more money per limited viewings than anything Google pays its top YouTube partners.  Without a doubt, the Ice Bucket Challenge will be a case study dissected in business school courses for decades to come. 

Amidst all this wet wonderfulness, one thing I'm sure most donors never bothered to ask is whether ALS is actually the most worthwhile charity they could be donating their money to.   

Because of all the publicity the ALS Association has gotten from the challenge, there were bound to be writers surfacing to disparage the association and its cause.  One broke down the ALS Association's expenses for fiscal year 2013 and slammed it because only 27% of the funds went towards research, almost $1m was spent on lobbying, and total labor costs totaled around $12.5m, about 50% of what ALS received that year.  High salaries were a major gripe.  The President/CEO was paid $339,475 and the Chief Financial Officer $201,260.   Another circulating article cited on Facebook showed how ALS as a disease isn't that significant.  In 2013, less than 7,000 people died from ALS in the United States and Canada.  Heart disease, by comparison, kills 100 times as many people but has just 2½ times the funding.  On those figures alone, ALS looks like a con. 

As you shall soon see, however, judging how meritorious a charity is for your cash isn't always so cut and dry.   Charity Navigator, itself a charity, has tried to establish a utilitarian way to grade charities.  Among the criteria they consider is the percentage of total functional expenses spent on the programs and services the charity exists to provide.  Any charity spending less than a third of its budget on program expenses is given a 0-star rating for financial health. 

Another measuring indicator is administrative expenses, the amount spent on management and general expenses.  The lower this figure, the better.  Then there's fundraising expenses and fundraising efficiency – how much does the charity spend on fundraising and how much does it cost to raise a dollar.  Last, there are factors like primary revenue growth, program expense growth, and working capital ratios. 

Combining the Charity Navigator measurements, the ALS Association scores an average of 90 out of 100, an excellent measurement by any standard. 

Which is it then?  Is ALS a con game overpaying its senior staff and its pundits in Washington or an exemplar of a charitable institution?

Theoretically, I suppose it would be nice if every dollar donated to a charity made the maximum impact.  If you're looking at health issues, heart disease and cancer are more of a threat than ALS since many more people are impacted.  Then again, the American Heart Association and the American Cancer Society, two of the more famous charities devoted to America's two biggest killers, score worse than ALS on most of the key metrics.  Only 59% of the American Cancer Society's budget goes towards program expenses. 

Impact can always be measured in more than one way.  Both the ALS Association and the American Heart Association spend about three quarters of their budget on relevant programs, considered a respectable amount.  The more worthwhile charity might be assessed by which disease impacts more of the population, as the complainant suggests, but also perhaps by how effective each charity is in reducing the numbers of people afflicted with or who succumb to that disease over time.   In the United States in 1990, 489,171 people died from coronary heart disease.  In 2013, that number rose to 596,577.  If you account for the rise in the U.S. population between those two years, the number of deaths from coronary heart disease dropped by about 3.4%.  The mortality rates for ALS, on the other hand, have hovered around 2 deaths per 100,000 people per year for over two decades.  By these measures, it looks like whatever funds were devoted towards heart disease made more of a dent than anything that went towards ALS.  But these figures, too, can be deceiving, because there are multiple heart disease charities besides the American Heart Association raising money for heart disease.  And just because normalized mortality rates dropped by 3.4% over a quarter century doesn't mean that the charitable funding from the heart organizations was responsible for it. 

Charities are businesses like any other.  And while they may be non-profit businesses, their objective is still to maximize profits (= donations minus expenses) which then get apportioned out for programs, lobbying, marketing, and so on.  These charities compete in the same arena for labor as for-profit businesses, so they have to offer commensurate salaries, benefits, and pensions.  We think of charities as tiny penurious offices with employees working for free or for next to nothing, a stupid notion given the climate they're forced to compete in.

And yes, they do compete, just like any other private sector business.  It's easy to note Apple, Samsung, and Nokia duking it out in the smart phone markets.  Or Hertz, Avis, and Enterprise in the rental car markets.  But we don't think of charities as competitive entities, do we?  All of us have a finite number of dollars we earmark for charitable causes, and these charitable organizations must compete for our attention long enough to convince us that what they're selling (a cure for X, new schools for the homeless children of Y, suitable drinking water for the poor population in Z) is worth our investment. And they also have to compete to get legislators and Washington budget bureaucrats to dish out limited piles of research funding. That's where overpaid lobbyists come in.

In the real world, the highest quality product or service doesn't always win.  The best marketed one which appeals to consumer tastes does.  Back in the 1980's, JVC's VHS trounced Sony's Betamax on the war over videotape standards.  Sony's Betamax was the superior technology, but JVC's VHS could tape for longer periods of time.  PC's ko'd Macs in the 1990's, despite the PC's inferior operating system, because PC's incorporated processors and operating systems which were affordable to more consumers. 

So even if ALS is an 'inferior' cause next to cancer, heart disease, or diabetes on an objective basis, that is as irrelevant as one book being much better written than another but the more poorly crafted book being the far better seller.  ALS had the superior marketing campaign and was able to appeal to consumers to buy into them over their competitors. Perhaps the ALS Association in 2014 is overfunded considering the limited scope of the disease, but that's like saying Google, Toyota, and Disney made too much money last year because people chose to spend money on their products and services.  

As if this needs to be stated, purchasing decisions aren't always logical.  Harvard University is, objectively, a better school in terms of prestige, reputation, history, and noted alumni than Rice University, but a student may still opt to attend Rice if he prefers the Texas climate to Massachusetts' or if his father, his grandfather, and his great grandfather all attended Rice.  Some charities just resonate closer to home.  If your father died from ALS or you're the great grandson of Lou Gehrig, you'll be donating to the ALS Association over any other charity even if only fifty people per year were dying from it.  Emotion, not logic, dictates your decisions.

The Kids Wish Network is considered the worst charity in the United States since less than 3 cents of every dollar donated actually goes to help the kids whose wishes the charity is supposed to grant.  You'd always be smart to do some due diligence before devoting money to any charity.  Any cause, however small, can be a good cause if you believe in it.  At the end of the day, it's up to you, voting with your own money, to decide if the charity of your choice can change the world.   

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