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Maximizing philanthropic impact: Why capacity building and unrestricted giving matter most

Graham Hoffman

Philanthropy is increasingly a hands-on endeavor. Donors, particularly in making sizeable philanthropic investments, want to understand the impact of their donations on the causes they support. This approach has influenced the philanthropic landscape, resulting in many nonprofits soliciting program-designated or restricted donations rather than unrestricted support in an attempt to cater to donor preferences.

The restricted giving model may seem to have a satisfying internal logic, but it does not always lead to positive outcomes for organizations or the populations they endeavor to serve. Many nonprofits need the same kind of infrastructure and resources that businesses do to successfully address complex social issues and achieve their challenging missions. Stockholders would never question a pharmaceutical or technology company that invests enormous resources in attempting to achieve a technological breakthrough. Nor would they attempt to restrict their investment to a specific program or product of the company that they valued most. Nevertheless, in the non-profit sector, too many donors have become too comfortable with narrowly investing in what they perceive as programs that achieve critical impact — while dramatically under-resourcing the critical capacity nonprofits need to successfully deliver the very same programs.

The Jewish philosopher, Maimonides, also known as Rambam, offered a model of hierarchical prioritization for philanthropic giving that is often referred to as “Rambam’s Ladder.” At the top, the highest form of tzedakah is philanthropy that enables the recipient to achieve self-reliance. In an organizational context, giving at its best achieves this highest rung of Rambam’s Ladder by helping organizations help themselves through critical investments in the fundraising, governance, systems, and professionals that enable each nonprofit to become increasingly effective and self-reliant. Moreover, unrestricted gifts can have the added power to magnify the impact of the entire nonprofit — including all of the programs that individual restricted gifts would seek to augment — and ensure the nonprofit is able to continue its work now and for generations to come.

Donors want to feel comfortable that their philanthropic investment will be managed wisely, carefully, and well. To assist in that, several charity watchdogs including GuideStar, Charity Navigator, and the Better Business Bureau (BBB) Wise Giving Alliance have grown dramatically over the past decade to provide comparative analyses of nonprofits informed largely by publicly reported financial disclosures.

In part, because their analyses are based on the most readily available data from nonprofits’ 990s and annual reports, and compounded by a desire to draw comparisons between nonprofits that work toward vastly different goals across myriad fields of social impact, these watchdogs rate nonprofits on several common factors, including and especially their overhead ratio. This simple calculation, which has become a common measure of nonprofit performance, was intended to provide insight into the backend cost of operating the organization relative to the resources allocated to direct service or achieving its mission.

Yet, looking only at the overhead ratio devalues crucial pieces of a nonprofit’s infrastructure, oversimplifying what qualifies as work in support of the organization’s goals.

In order to create a path forward, donors and organizations need to build trusting, stable relationships that result in increased willingness to empower nonprofit professionals to prioritize financial resources for the areas most critical to their organizations’ success. In turn, organizations must deliver predictable, reliable results, instead of leaning on well-packaged and well-meaning, but nonetheless anecdotal, demonstrations of success. As donors see the increasing achievement of measurable results, they can be more confidently engaged in increasing unrestricted support for the organization’s work.

The trend toward more informed and data-driven philanthropy is altering the nonprofit landscape and has brought with it an influx of knowledgeable, engaged philanthropists. It has also stewarded some trade-offs around restricted giving and capacity building, the complexities of which are important for every donor to begin to grapple with and understand as they move forward in their philanthropic journeys. In the Jewish philanthropic sector, we will continue to prioritize and invest in Rambam’s most highly-prized self-sufficiency for nonprofits by undertaking the critical capacity-building work that ensures growing, successful, sustainable, and increasingly impactful organizations equipped to address and support the evolving needs in our community. We hope that by elevating the philanthropic sector beyond the limitations of overhead ratios — and supporting nonprofits in delivering predictable, reliable results — we will forge great partnerships between the benevolent commitments our funders undertake for our community and the critical organizations that carry out the work every day.

Graham Hoffman is the president and CEO of the Jewish Community Foundation of Southern Arizona.