Non-Profits Frequently Disclose Inadequate Information Regarding Social Returns
In the United
States, people donate billions of dollars each year to non-profits.[1] So the funding for non-profits, as a whole, across
the country, does not entirely appear to be inadequate. Yet a core issue for many non-profits is
often just that—a struggle to obtain sufficient financing.[2] Part of the problem is that those willing to contribute
to non-profits have little information about which entities provide the most
social value.[3] The donor may not know which non-profit is
ingenious with their current resources, providing much needed help in their
community and as such would be a great entity to donate to. Consequently, those willing to contribute, in
the aggregate, end up spreading around a small amount of money to a number of
organizations, which results in successful non-profits receiving little funding
as they are essentially just as likely to receive funding as a non-successful
non-profit.
While some individuals
donate because of the financial reasons, namely that donations often result in
a deduction from taxes, arguably the majority of people donate to non-profits
for a social return on their capital contribution.[4] That is, these individuals give money to
organizations in the hope that the organization provides some social value to
society. People may give to a non-profit
centered on education, homelessness, hunger, sports, or a number of other causes
because they believe that entity will help better society and is thus a good
use of their money.
Imagine a wealthy
individual who would like to provide funding to non-profits. Where can she turn? While there are a growing number of
organizations, including the Bill and Melinda Gates Foundation, that are
attempting to analyze and disclose the most socially beneficial entities, the
wealthy individual does not have any centrally located, clear disclosures about
the social value of non-profits.[5] That same investor can find audited annual
statements about the non-profits financial condition, but that is not
what the typical investor in a non-profit is after.[6] Rather, that investor is interested in social
returns. Compare this reality in the
non-profit sector to the for-profit sector where an investor can look at
thousands of pages of financial returns for any one company. Why can the same investor not find thousands
of pages of social returns for any one non-profit?
What Can Your Non-Profit Do?
Even with this
disappointing news, a non-profit can still take steps to ensure an investor is
aware of the entity’s positive social impact.
The non-profit can include social disclosures on their website and
attempt to disclose the information whenever given the chance, such as to news
organizations or in entrepreneurship contests.
Many non-profits issue annual reports documenting the organization’s
successes, such as the number of families helped or the number of books
distributed.[7] Achieving empirical results can be especially
motivating to investors.[8]
Further, there is
a developing concept that is called Social Return on Investment (SROI).[9] The idea of SROI is to capture social value
by translating outcomes into financial terms.[10] A non-profit can calculate SROI by
determining the cost to society if the non-profit did not exist.[11] For example, researchers have determined that
one homeless person costs society $35,578 per year.[12] So if a non-profit saved ten people from
homelessness, then it should publicize that its SROI was $355,780. Applying a clear number to the non-profit’s
social benefit to society allows potential donors a much clearer idea of which
non-profits their capital should be allocated to. SROI is therefore a great disclosure
mechanism for attracting financing for non-profits.
Following the Example of Brilliant
Detroit
Brilliant Detroit,
a non-profit based in multiple locations across Detroit, transforms vacant
homes into “community hubs,” which provide health, educational, and family
support services to young children.[13] The organization makes its last four annual
reports readily available on its website.
Each report provides empirical, objective data concerning Brilliant
Detroit’s social returns. In 2017, for
example, the organization served over 2,400 people and provided 18,000 hours of
programs to young children.[14] In 2019, the annual report boasted that families
are seeing improvements in 75% of the organization’s “key measures of kid
success,” which include categories like education and health.[15] To be sure, Brilliant Detroit also wisely
includes non-objective data concerning the strong relationships the
organization builds with communities and people—an undoubtably important aspect
to any non-profit.[16] But Brilliant Detroit’s strong usage of
empirical data allows for any prospective donor to better understand the
organization’s social returns.
Brilliant
Detroit’s strong disclosure of social returns may help explain why the
organization has so many donors.[17]
Surely the entity is well run and has a
great mission, which already make it more likely to attract donations, but it
is quite plausible that the strength of their social disclosures plays at least
some role in the organization’s financing success. In 2020, Brilliant Detroit raised over $2
million in contributions alone.[18]
While not every
organization may have as much data or success as Brilliant Detroit, the
organization sets a great example for other non-profits to contemplate. The extensive disclosure of social returns
allows for a slightly easier decision for any prospective investor. Given the choice of a non-profit that does
not divulge any social returns and one like Brilliant Detroit, it is likely
that an investor will choose the latter.
Brilliant Detroit’s model, therefore, helps to provide a roadmap for other
non-profits.
[1] See
Robert S. Kaplan & Allen S. Grossman, The Emerging Capital Market
for Nonprofits, Harvard Bus. Rev. (Oct.
2010), https://hbr.org/2010/10/the-emerging-capital-market-for-nonprofits.
[2] See
Ann Goggins Gregory & Don Howard, The Nonprofit Starvation Cycle,
Stanford Soc. Innovation Rev.
(2009), https://ssir.org/articles/entry/the_nonprofit_starvation_cycle.
[3] Id.
[4] Heather
Stombaugh, How to Prove Nonprofit Impact With SROI, The Balance (Nov. 20, 2019), https://www.thebalancesmb.com/using-sroi-to-show-your-nonprofit-s-impact-2501977.
[5] See
Kaplan & Grossman, supra note 1.
[6] Id.
[7] See
Brilliant Detroit, Ann. Rep. (2020).
[8] See
Stombaugh, supra note 4.
[9] See
id.
[10] Id.
[11] Id.
[12] See
Ending Chronic Homelessness Saves Taxpayers Money, Nat’l Alliance to End Homelessness (Feb. 17, 2017), https://endhomelessness.org/resource/ending-chronic-homelessness-saves-taxpayers-money-2/.
[13] See
Maria Kornacki, 8 Non-Profit Detroit Organizations Inspiring Us to Give
Back, Detroit Is It (Nov. 18,
2021), https://detroitisit.com/8-non-profit-detroit-organizations-inspiring-us-to-give-back/;
see also Our Story, Brilliant
Detroit, https://brilliantdetroit.org/who-we-are/.
[14] Brilliant Detroit, Ann. Rep. (2017).
[15] Brilliant Detroit, Ann. Rep. (2019).
[16] Id.
[17] See
Brilliant Detroit, Ann. Rep. (2020).
[18] Id.