Summary: Overhead expenses’ (CEO salary, percentage spent on fundraising) are often deemed a poor measure of charity effectiveness by Effective Altruists, and so they disprefer means of charity evaluation which rely on these. However, ‘funding cannibalism’ suggests that these metrics (and the norms that engender them) have value: if fundraising is broadly a zero-sum game between charities, then there’s a commons problem where all charities could spend less money on fundraising and all do more good, but each is locally incentivized to spend more. Donor norms against increasing spending on zero-sum ‘overheads’ might be a good way of combating this. This valuable collective action of donors may explain the apparent underutilization of fundraising by charities, and perhaps should make us cautious in undermining it.
The EA critique of charity evaluation
Pre-Givewell, the common means of evaluating charities (Guidestar, Charity Navigator) used a mixture of governance checklists ‘overhead indicators’. Charities would gain points both for having features associated with good governance (being transparent in the right ways, balancing budgets, the right sorts of corporate structure), but also in spending its money on programs and avoiding ‘overhead expenses’ like administration and (especially) fundraising. For shorthand, call this ‘common sense’ evaluation.
The standard EA critique is that common sense evaluation doesn’t capture what is really important: outcomes. It is easy to imagine charities that look really good to common sense evaluation yet have negligible (or negative) outcomes. In the case of overheads, it becomes unclear whether these are even proxy measures of efficacy. Any fundraising that still ‘turns a profit’ looks like a good deal, whether it comprises five percent of a charity’s spending or fifty.
A summary of the EA critique of common sense evaluation that its myopic focus on these metrics gives pathological incentives, as these metrics frequently lie anti-parallel to maximizing efficacy. To score well on these evaluations, charities may be encouraged to raise less money, hire less able staff, and cut corners in their own management, even if doing these things would be false economies.
Funding cannibalism and commons tragedies
In the wake of the ALS ‘Ice bucket challenge’, Will MacAskill suggested there is considerable of ‘funding cannabilism’ in the non-profit sector. Instead of the Ice bucket challenge ‘raising’ money for ALS, it has taken money that would have been donated to other causes instead – cannibalizing other causes. Rather than each charity raising funds independently of one another, they compete for a fairly fixed pie of aggregate charitable giving.
The ‘cannabilism’ thesis is controversial, but looks plausible to me, especially when looking at ‘macro’ indicators: proportion of household charitable spending looks pretty fixed whilst fundraising has increased dramatically, for example.
If true, cannibalism is important. As MacAskill points out, the money tens of millions of dollars raised for ALS is no longer an untrammelled good, alloyed as it is with the opportunity cost of whatever other causes it has cannibalized (q.v.). There’s also a more general consideration: if there is a fixed pot of charitable giving insensitive to aggregate fundraising, then fundraising becomes a commons problem. If all charities could spend less on their fundraising, none would lose out, so all could spend more of their funds on their programs. However, for any alone to spend less on fundraising allows the others to cannibalize it.
Civilizing Charitable Cannibals, and Metric Meta-Myopia
Coordination among charities to avoid this commons tragedy is far fetched. Yet coordination of donors on shared norms about ‘overhead ratio’ can help. By penalizing a charity for spending too much on zero-sum games with other charities like fundraising, donors can stop a race to the bottom fundraising free for all and burning of the charitable commons that implies. The apparently-high marginal return to fundraising might suggest this is already in effect (and effective!)
The contrarian take would be that it is the EA critique of charity evaluation which is myopic, not the charity evaluation itself – by looking at the apparent benefit for a single charity of more overhead, the EA critique ignores the broader picture of the non-profit ecosystem, and their attack undermines a key environmental protection of an important commons – further, one which the right tail of most effective charities benefit from just as much as the crowd of ‘great unwashed’ other causes. (Fundraising ability and efficacy look like they should be pretty orthogonal. Besides, if they correlate well enough that you’d expect the most efficacious charities would win the zero-sum fundraising game, couldn’t you dispense with Givewell and give to the best fundraisers?)
The contrarian view probably goes too far. Although there’s a case for communally caring about fundraising overheads, as cannibalism leads us to guess it is zero sum, parallel reasoning is hard to apply to administration overhead: charity X doesn’t lose out if charity Y spends more on management, but charity Y is still penalized by common sense evaluation even if its overall efficacy increases. I’d guess that features like executive pay lie somewhere in the middle: non-profit executives could be poached by for-profit industries, so it is not as simple as donors prodding charities to coordinate to lower executive pay; but donors can prod charities not to throw away whatever ‘non-profit premium’ they do have in competing with one another for top talent (c.f.). If so, we should castigate people less for caring about overhead, even if we still want to encourage them to care about efficacy too.
The invisible hand of charitable pan-handling
If true, it is unclear whether the story that should be told is ‘common sense was right all along and the EA movement overconfidently criticised’ or ‘A stopped clock is right twice a day, and the generally wrong-headed common sense had an unintended feature amongst the bugs’. I’d lean towards the latter, simply the advocates of the common sense approach have not (to my knowledge) articulated these considerations themselves.
However, many of us believe the implicit machinery of the market can turn without many of the actors within it having any explicit understanding of it. Perhaps the same applies here. If so, we should be less confident in claiming the status quo is pathological and we can do better: there may be a rationale eluding both us and its defenders.