February 2, 2023
Why The Nonprofit Sector Is Broken— And How To Start Fixing It
The evolution of philanthropy over time has changed the landscape of nonprofit organizations’ work, but the structures within which our organizations must still operate often stifle innovation and our ability to scale. Connectivity, data, travel and new technologies are no longer barriers; they are tools readily available to us. But our impact isn’t reflective of this new environment.
Here’s what’s happening.
The metrics for success don’t always capture effectiveness.
Some organizations exist to give bikes to kids and distribute nonperishables to the local homeless population. But many are tackling issues that are mammoth. For example, my organization, Well Aware, is working to change the trajectory of entire regions in developing countries through long-term clean water access. To do this with integrity and fulfill our promises to our communities and donors, our teams must include scientists, subject matter experts in international development, proficient relationship builders, governmental connectors and people who have fluency in cultural nuances, project management prowess and socio-political savvy. And, that’s just on the programmatic side; there’s another team required to raise the funding and run operational governance.
Nonprofits are required to spend dollars very specifically, often precluding innovation and efficient pivots. We are also rated by charity databases on the percentage of our donations that go to projects, but with no definition of what a “project” is and with no standardized or provable measure of impact.
For example, nonprofit A could have three people on staff and spend everything else on projects. Its project spending is 90%, but only about half of its programs last. It then can’t afford to find out if these projects still work, much less put donor dollars into repairs and replacements.
Then there’s nonprofit B, which has 10 talented staff being paid close to the industry average. Its spending on “projects” is only 70%. This is bad as per charity rating websites, but here’s the thing: Nonprofit B is building projects that last, as 90% of what it has built is sustainable, and it’s responsibly tending to any mitigation needs.
Collectively, nonprofit B is having a much greater impact, but it just received a failing score. The structure within which we are required to operate isn’t allowing us to make a dent in the issues we want to tackle, which leads to the next problem.
The board is not equipped to provide proper governance.
Nonprofits are typically required to keep a volunteer board of directors. Many organizational headaches come from funders and board members. In international development, I’ve found it’s rare to find people who represent our beneficiaries or who have even traveled to the regions where we work. So, leaders are managing a group of generous and well-meaning people who are unpaid, legally “own” the organization and turn over every one to three years.
Unlike a for-profit organization, whose board members have skin in the game and a vested interest to see the company succeed, nonprofit board members are volunteers tasked with governing a company they could never know enough about to make the best decisions for the beneficiaries and health of that organization. Then, they come and go without repercussions for themselves, but with potentially devastating repercussions for the cause.
Spending is restricted in a way that prohibits innovation and hiring.
The Great Resignation is hitting the nonprofit sector in potentially catastrophic ways, and most significantly in leadership roles. Why? Because many were already underpaid, swimming upstream against a broken structure, tackling soul-crushing issues and now feel hopeless to make the change they thought they could when they started.
If you’re wondering why they were underpaid, I think Dan Pallotta explains it well in his Ted Talk. In summary, because of archaic notions and the way charities are rated, organizations, in order to meet their mission, are forced to hire people for well under what they could be earning elsewhere.
This is dangerous for a few reasons. Most simply, turnover is expensive. Small to medium-sized nonprofits lose staff frequently due to a combination of burnout and personal finances. When the charity rating website restricts spending on talent, and the organization has donors to please and a board to answer to, there’s no room for benefits, much less an industry-standard salary.
So here we are with a mass exodus in NGO leadership, and boards are now legally tasked with replacing them.
The sector lacks people who represent the cause.
Moreover, the talent that many NGOs hire typically have some kind of privilege; they’re people who have financial support elsewhere and a safety net to take this on. Forget about DEI—we’re just trying to keep the lights on.
So, here again, we are functioning without people who represent our beneficiaries. We are running a company without a substantial segment of the population who should be sitting at this table, and we need them there to take on systemic change.
The “100% funding model” is perpetuating this problem. The idea that charities shouldn’t pay the people who do the work is bolstering this harmful dynamic. And to be clear, it’s not that they are not paying people, they just have another NGO doing that to keep the reality of running an effective organization behind the curtain.
Nonprofit organizations were already struggling, and now it’s becoming critical. Where governments are backsliding on their commitments to societal improvements, NGOs are trying to fill the gaps, albeit ineffectively within these restrictions and outdated structures.
Leaders can take action.
The good news is that these challenges are being discussed at the executive level in nonprofit organizations. Beyond discussion, consider these steps: As soon as you have reliable funding, start compensating your team members appropriately and educate donors on the importance of this industry shift to yield better outcomes for our beneficiaries.
Create a separate board for fundraising support and keep the governing board on governance tasks. Trying to merge these two important and different jobs has proven, time and time again, to be ineffective and dangerous for organizational health.
Donors and supporters can consider asking about the results over time of the organization with detail. Considering only, or even primarily, the spending on a nonprofit organization isn’t providing accurate information on that company’s true impact.