Monday, February 10, 2020
David Schizer (Columbia) presents Innovation or Stagnation? Countering Inefficiency at Nonprofits With Better Disclosure at Boston University today as part of its Tax Policy Colloquium hosted by David Walker:
U.S. nonprofits spend $2.54 trillion every year. While some are laboratories of innovation, others are stagnant backwaters. This Article breaks new ground in explaining why nonprofits tend to operate inefficiently and in proposing a response: better disclosure. The literature attributes this inefficiency to a nonprofit’s inability to distribute profits; since managers and board members cannot keep a surplus, they have less reason to maximize it. This Article argues that the problem is not just motivation, but also information: measuring success is harder at nonprofits. Instead of tracking profitability, they use metrics that are less reliable or harder to measure (or both). When performance is harder to track, incompetence and self-interested practices are less visible, and thus are harder to prevent.
Board members and major donors can press management to operate more efficiently, but only if they have the right information. Yet mandatory disclosure under current law focuses on governance and solvency, rather than on the nonprofit’s work. To fill this gap, nonprofits should share data and analysis on the importance of their mission and on the impact and cost-effectiveness of their programs.
This disclosure empowers the board and major donors to monitor performance, helps donors make informed philanthropic choices, and disseminates information so nonprofits can learn from each other more easily. Obviously, time and effort are required to prepare disclosure and ensure its accuracy. To balance these competing considerations, this Article recommends that disclosure should be mandatory for large public charities, and voluntary for other nonprofits.