The Challenge Dividend

A Challenge to Charities

Challenge can drive improvement in any organization.  Usually I focus on business or political organizations in this space, but one of the most important opportunities for improvement through challenge is not-for-profits. 

Not-for-profits hold a special place in this space because: (1) charities' core mission is to improve lives, whereas businesses improve lives as a by-product of generating profit; and (2) they typically get a "free pass" from many challenges and traditional competition, meaning that they have less pressure to improve. 

Light must be shed on the inner workings of charities now, more than ever, as the organizations can be as scandal prone as Enron or Congress.  For example, the United Way, the country's largest charity, has seen scandals that would lead businesses executives into painful prosecution.  For example:

• In 1992, the United Way's national leader, William V. Aramony, was accused of fraud and embezzlement, while receiving a surprisingly large annual salary.  He was convicted in 1995 on 25 counts including conspiracy to defraud, mail fraud, wire fraud, transportation of fraudulently acquired property, engaging in monetary transactions in unlawful activity, filing false tax returns and aiding in the filing of false tax returns.
• In 2002, the New York Times uncovered that the United Way had double counted donations and included the value of volunteers' time in order to artificially depress expenses as a percentage of donations.  While this may seem small, the United Way uses claims of low expenses as a way to (unfairly) win dollars away from competing charities.

Not-for-profits need the pressure to improve just like the rest of us, and, thankfully, the Internet is fostering new challenges for charities.  One of my loyal readers recently informed me of Charity Navigator, a not-for-profit itself that was created to allow givers to see unbiased information regarding specific charity efficiency. 

To test Charity Navigator, I ran a search of the Aloha United Way in Honolulu, Hawaii.  Within seconds I was able to see a report on this charity's overall rating, efficiency index, mission, leadership salaries, and a comparison to other United Way chapters.  Users can also compare any two charities in a vast database.

Independent ratings, expert opinions, key financial indicators, and competitive comparisons are all measures that can drive the Challenge Dividend payoff.  They provide an even playing field of comparison for donors to choose where their dollars are best directed.  As a result, the better, more efficient not-for-profits are more likely to get additional funding.  And these measures become targets for charities to use in driving improvement.  Finally, with the help of a third party like Charity Navigator, we can trust that the numbers are legitimate, apples-to-apples comparisons.

Result: not-for-profits try harding to spend our dollars wisely, and more people benefit from our giving. 

Bono Still Hasn't Found What He's Looking For

Bono has an open question on Yahoo! Answers this week: "What can we do to make poverty history?"  (Full disclosure: I'm a huge U2 fan).  Here's my pro-competitive answer, which is number 29,276:

"Pleas for more aid, whether financial or food, are a failure of colossal proportions. For decades countries in the West have been shamed to donate, yet the results themselves are shameful. As U2 sings in the song "40": "How long...to sing this song..."

A functioning free market system will make poverty history without wasted billions in aid. The only way to reach "developed" nation status is for the people to build themselves up. But we can help them put these systems in place. Mainly, a change in government is needed in most poor countries.

Corruption must be eliminated so that workers and businesses are free to rise and fall on their own merit, versus by payoffs to bureaucrats or mobsters. Similarly, import taxes and other laws that protect local companies from global competition must also be removed. Only by full, free competition will these countries build working economies that can succeed on their own. Western nations in turn must eliminate subsidies and import protections for poor nations to compete.

Bono, I urge you to move away from pleas for aid and debt forgiveness, and toward encouraging a path of self sufficiency through fair government and free markets. You have a powerful voice, but now it must be aimed at shaming corrupt regimes into setting their people and markets free. Free market systems worked in the West, they worked in Asia, and now it's time for reform in Africa as well.

Let's build a system of fair competition that will help poor nations pull themselves up to the rest of the world. Bono, as U2 finishes "40", will you "sing, sing a new song"?"

To date, I have mixed feelings on Bono's politics.  I love that he is moving beyond music toward a greater goal of improving the world.  But I am not a fan of his calls for more aid and reduction of debts.  These solutions only provide temporary relief at best; at worst they instill a culture of handouts.  Only by reaching self-sufficiency can a nation rise to developed status.

Maybe Bono is tacitly acknowledging that more aid is not the answer, hence his question on Yahoo! Answers.  If only he can keep reading all the way to my post #29,276...

Thanks to Micro Persuasion for the link

The Spoils of Success: Gates Foundation?

The Series:
Does lack of challenge lead to poor performance, or in worst case, failure?  I contend that when you look across the field of champions both past and present, they do, in fact, fall when their power is at its height.  From ancient Rome to Enron, defeat is often born in the jaws of victory.  Previous examples covered here include Apple, Google, Starbucks, and the Republican Party.  While I was planning to end the series last week, this topic and my next on China were too hard to pass up...

Today's Entry: The Bill and Melinda Gates Foundation.
Warren Buffett's decision to give the bulk of his fortune to the already rich Bill and Melinda Gates Foundation is big news.  Pundits are mainly positive. Most say that this could lead to a breakthrough in cures for everything from major diseases to global poverty; and it could spur others to give more.  I think it's a bold and smart move by Buffett.  Instead of spending his time building a new foundation and finding the right investments, Buffett is turning the responsibility over to his trusted bridge partner and successful business mind, Bill Gates. 

On the other hand, when I heard of the enormous size of the foundation's resulting budget, my "Spoils of Success" radar went up.  As this series of posts shows, an excess of power and resources often leads to spectacular failure and waste.  In Venezuela, for example, we see that a soaring price of oil is funding huge public giveaways in order to keep a dictator in favor and power.  A similar phenomenon happened in the Internet Bubble of the late 90s.  Too many bad ideas got funding and the result was a lot bad businesses, SuperBowl commercials, and Aeron chairs.

My fear is that this huge fortune will simply result in a spending free-for-all.  After all, the nature of charity itself is giving away money.  And when money is given, rather than hard-earned, there is already a bias away from the benefits of challenge.  On the other hand, Gates is arguably the best business manager in history; if anyone can crack the code, it's probably Bill.  Here's where I think the possibilities lie:

Why it Could Work:

• The Gates Foundation is already "results oriented".  Building on a recent trend, Gates has worked to ensured that his donations are proving an ROI.  (See this previous post for more).
• Now that Gates is retiring from Microsoft and focusing on his foundation, there could be a big burst from his focus.  At only 50-years-old he is still in his prime.
• Adding Buffett to the team brings the best investor in the history of business.  He will be pressuring Gates for results just as he does with the CEOs of the companies he invests in.

Why it Could Fail:

• Tax rules require that 5% of a family foundation's assets must be distributed each year.  At $60 billion, that means a stunning $3 billion each year will go hunting for worthy causes.  Some believe it might be too hard to find that many results-oriented projects.  Think Net Bubble for Charities.
• The Gates Foundation is specifically targeting poverty and disease in developing nations.  However the biggest, ongoing barrier to improving these decades-long issues is corruption in the target nations.  A chunk of any gift is regularly siphoned off by government bureaucrats.
• Already the results of the Gates Foundation's work is mixed.  BusinessWeek recently showed that its efforts to improve public schools in the U.S. is earning low grades. 

Suggestions: In order to maximize the potential of these gifts, I believe Gates should use tactics that encourage challenge, and thus improvement.  For example:

• Challenge Grants. Set up "X-Prizes" for those organizations that find solutions to major problems.  Say $5 billion to the inventor of the first affordable AIDS vaccine.  This would create a market and spur many additional investments and alternative approaches.
• Pay-for-Performance.  Today, charities spend too much time and resources on pursuing the next dollar from donors.  Instead, the Gates Foundation could "guarantee" them an annual budget as long as they hit results targets.  This, again, provides a market-based incentive and challenge.  And it puts more staff in the field driving results, versus dialing for dollars and dining with donors.
• Challenge Corruption.  As stated above, government corruption in many target nations is hurting every charity.  Perhaps it is time for Bill Gates to publicly "out" the governments and individuals that are blocking or siphoning dollars.  In addition to reducing corruption today, a proper government is the only thing that will allow self-sustainability long term.

Although I remain somewhat doubtful of this new charity and its massive resources, I am warmed by Bill and Warren's gift and attempt to improve society.  It will be an interesting chapter in both their lives and the development of the world.  I'll be rooting for them.

Final Note: As is obvious from their charitable gifts, as well as their public statements, both Bill Gates and Warren Buffett are in favor of the "death tax" that Congress has fought hard to phase out for years.  See here and here for my previous posts on the topic.

Update: The July 10, 2006 Fortune magazine has a cover story about Warren Buffett's decision to give his $40 billion fortune away.  Once again he uses the space to talk about the importance NOT giving a fortune away to your children.  His quote:

"Certainly neither Susie or I ever thought we should pass huge amounts of money along to our children.  But I would argue that when you kids have all the advantages anyway, in terms of how they grow up and the opportunities they have for education, including what they learn at home - I would say it's neither riht nor rational to be flooding them with money.  In effect, they've had a gigantic headstart in a society that aspires to be a meritocracy.  Dynastic mega-wealth would further tilt the playing field that we ought to be trying instead to level."