To improve non-profits, mandate disclosure of their results

All non-profits should be required to disclose the results of their efforts to impact social systems. Let me explain why. CONTEXT

I firmly believe that social impact business models (whether or not they are for profit) will only take off once the sector knows how to measure impact. Moreover, I firmly believe that we won't really make headway on solving social problems until we start measuring social impact.

Why? Because we can't work smarter or efficiently without measurement. Measurement provides two critical benefits to any organization in any sector, whether it's for social impact or in a traditional for-profit company.

1) Measurement provides Managers objective feedback about their performance. Without measurement, Managers can't tell (with much clarity or precision) whether the plans they enact are actually improving how their organization operates or whether they are achieving results.

2) Measurement provides investors data about whether their capital is being used efficiently. Can you imagine capital markets working without public companies releasing reliable, accurate financial statements? We're surely not allocating capital efficiently in the social impact sector if we can't objectively compare one organization against another.

I've been zeroing in on this idea of social impact measurement (and that it's crucial for moving the needle on social issues) for some time and I've come to a stark conclusion. We should mandate that non-profits disclose their results rigorously and uniformly.

THE ARGUMENT

Put yourself in the shoes of a non-profit CEO. Fundraising is your organization's lifeblood. You're constantly stressed about staying solvent and carrying out your mission. Say you're evaluating whether or not to rigorously disclose your organization's impact through a uniform set of audited social impact measures.

As a non-profit CEO I would never voluntarily disclose my organization's impact results in a rigorous way because the downsides (the costs of data collection /reporting, the risk of looking bad compared to someone else) far outweigh the upsides (the potential for increased funding because my results are good). In other words, as a non-profit CEO I would never voluntarily disclose results because it's not in my organization's individual interest.

Moreover, even though it's the right thing to do, I think it's unlikely that a movement from within the non-profit community will compel non-profits to rigorously and uniformly report their results. Even though uniformly reported metrics are good for the sector and for the public, it's not in the interest of individual organizations. Moreover, the sector is incredibly decentralized, making it operationally difficult for a movement within the sector for impact reporting to actually come to fruition.

This leaves us with one simple option: create a uniform set of impact metrics and mandate that all non-profits disclose their results on a regular basis. (I do see one unlikely way of creating a movement inside the non-profit community, which I'll discuss a bit further down).

Here's the summary of the argument:

1) Rigorous, uniformly reported disclosures of impact metrics would help solve social problems faster 2) It's not in the interest of individual non-profits to rigorously disclose their own results, so they will not 3) It's unlikely that a movement within the non-profit community will compel rigorous disclosure of a uniform set of impact metrics

Therefore, we should create a standard set of impact metrics and mandate rigorous disclosure on a regular basis

I don't think the mandate I'm suggesting is unreasonable. Non-profits are allowed to operate without paying taxes or having their donations be taxed. This is an enormous operating benefit. Non-profits are given their tax status because it's presumed they are operating to provide social welfare. We (whether as a regulator or as a funder of non-profits) currently have no way of screening whether they are actually providing social welfare. If they're getting such a big benefit, why not ask non-profits to justify it so that funders can make good decisions about how they allocate capital?

Moreover, business have to disclose audited financial statements all the time which demonstrates that uniform disclosure is possible with the right set of reports.

Many people I know would argue that "it's too hard and/or not fair to measure social impact" and I don't think that's a reasonable counter argument. Here's why:

•  Existing efforts to create social impact metrics are not impressive, nor do they seem like earnest attempts. We haven't even really tried to do this yet (as a sector and society) so how can we say that it's too hard?
• A lot has changed in the world, with the proliferation of digital infrastructures and technologies. One of the biggest challenges to measuring social impact (data collection) becomes more and more feasible every day
• If every non-profit starts at the same time and is held to the same standard, it'll even the playing field between different non-profits. In other words, no organization gets punished for disclosing first

AN ALTERNATIVE

If not mandated by the federal government, I think funders and mayors can play a big role in pushing for a standard set of impact metrics. Foundations for example, are a narrower set of players in this ecosystem which means its easier to coordinate their actions. For example, if a group of the 25 largest foundation funders in the country came together, created a system, and required their grantees to publicly disclose reports, they'd be able to compel a substantial amount of non-profits to disclose results.

Similarly, a mayor of a major city wanting to improve the performance of local social sector organizations (whom governments often partner with) could be a convener to get this to happen. If a lot of the big players started after such an intervention, the littler non-profits would have to follow-suit to compete for dollars.

CONCLUSION

To conclude, I think rigorous, uniformly reported impact metrics are crucial for performance improvement in the social sector. I can't even believe non-profit CEOs have gone so long without such data to manage operations.

I don't think that will ever happen without a mandate, despite being good for the sector and good for citizens.