Tara Suri at Harvard pointed me to her experience of what, if true, can only be described as gross fraud by an Indian NGO called Apne Aap. Tara says that at least in the one village that she supported through donations, the NGO is not only absent, but in fact sends misleading and patently false updates on its work.
This stands in sharp contrast to the public record of the NGO, which supports survivors of sex trafficking and has received support from many reputable sources. Indeed, the NGO’s website includes prominent endorsements from the likes of Ashley Judd and Shirin Ebadi.
Whatever the truth, it would not be surprising if there were fraud in the NGO world. It has been known to happen before – by one estimate in 2008 an estimated USD 40 billion was lost to misuse in the US. However, it does raise two important questions of broad relevance.
First, how can it be that a charity that could be grossly fraudulent has managed to garner such a good reputation? And more important, should such fraud occur, why is it so hard to uncover and act upon it?
How do donors pick a charity?
The answer to the first question is partially in Nathaniel Whittemore’s assertion that donors have a front-loaded definition of impact – personal impact happens at the time of donation and not later on.
However, there is a further explanation as well. It lies in how donors pick the charity they choose. Simply put, donors choose charities and decide on impact based on the recommendation of others.
I base this assertion not on statistics but merely on my experience as an advisor to philanthropists. Websites such as Kiva, ProPoor, DonorsChoose, Vittana, and CharityNavigator have increased the information available to young, connected, individual donors. Everyone else, however, does not use such platforms. Instead, most donors – especially the very wealthy kind – generally discover charities through personal contact.
This should not be surprising and follows the pattern of deal-making in business. When looking for an investment, investors – particularly the venture capital type – will often learn of potential deals through friends, colleagues, acquaintances, and at investment conferences. The same happens in the non-profit sector – retail donors learn of charities from their real (as opposed to online) environment. Wealthier donors meet NGOs at the Clinton Global Initiative or the World Economic Forum.
What is different in the NGO world, however, is that while the profit motive encourages individuals to subsequently do their own due diligence for investments, there is little need to do the same for non-profits and the effort required to do so is often unreasonably high. Thus, it is not that donors do not care about impact. Rather, peers become a proxy indicator for impact.
Using the word of peers is not bad, per se, but leads to some twisted incentives when it is the sole indicator. For one, it encourages leaders to focus more on the public perception of their work, than on the work itself. In such a world appearing at conferences becomes an end in itself, rather than a means to an end (of raising resources).
That illustrates the other problem – that such a system suppresses diversity within the social sector. A “good” charity with strong recommendations will be seen by more people and will thus receive even more support. Other equally good charities will remain forgotten because they did not make it to the A-list in time. Anyone that has been to multiple global conferences would know this – one is likely to see many of the same speakers repeatedly. Such speakers are often invited based on their presentations at prior conferences, or because of the recommendations they get from within this network.
Of course, change does happen and new charities do emerge. But this does not happen because of competition – rather it happens when donors move on to other issues or get bored of the same organization. Alternately, in a few cases, a charity may well get caught involved in fraud.
What is one to do?
When that happens what is one to do? Unfortunately, there is very little one can do because the system does not at present allow for a feedback loop – in two ways.
First, any system of peer review discourages criticism, except in the early stages of such review. Should Apne Aap be found to be fraudulent today it would be severely embarrassing to the many organizations that support it, to say nothing of Ashley Judd.
Second, acting on the discovery of fraud is made more difficult by the decentralized nature of the civic sector. When the only proxy for quality is the word of peers, the only possible remedy is to change the public perception. Yet, that is not easy to do, particularly given the often closed nature of communities such as the Clinton Global Initiative and the WEF.
Independent ratings, suggested as one solution, do not address the core problem – the lack of a feedback loop. Rather, they simply replace one proxy of quality (the word of peers) with another (the word of an unknown organization). As such, donors have every right to be wary of such ratings, which would hardly take into account the many definitions of impact. Nor are they likely to be infallible – ratings did not prevent, and in fact contributed to, the sub-prime crisis. In short, such ratings will simply create a new possible source of failure.
Fixing the feedback loop
Any fundamental solution to this problem of how donors pick their charity has to be two pronged. First, it must encourage greater due diligence by donors – something that is already happening in the foundation world.
Second, it must allow for a reality check on the word of others by introducing a feedback loop into the perception of peers. For this the communities of donors and NGOs that perpetuate this system – including CGI, WEF, and Ashoka, to name a few – have to become more open. This will not happen overnight, but the increasing diversity of donors will inexorable pull them towards more openness.
Finally, when all else fails, there must be mechanisms such as a charity watchdog mandated – and equipped – to look into malpractice in the non-profit sector. This will also emerge in time, as the sector becomes increasingly important and inevitably receives government scrutiny.
Till then, one can only count on the altruistic desire of most donors to actually do good with their money.