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How Non-Profits Can Improve Financing Through Social Disclosures

 

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.

By Alex Kornfeld

[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.

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