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Over the past few years, philanthropic leaders have begun to successfully challenge the “overhead myth” — the belief that high administrative costs reflect a charitable organization that is poorly run and not worthy of support.

The well-intentioned and generous family, corporate and foundation donors we regularly work with often recite versions of the overhead myth. They tell us, “I want my money to go directly to the cause, not to overhead.” Or donors state that an executive director’s salary “just seems too high.”

The traditional notion of the overhead myth holds that the less a nonprofit organization spends on administrative overhead, the more effectively it will achieve its mission. To determine fundability, many potential donors apply a litmus test that consists of the percentage ratio of administrative costs to overall program outlay.

Adherence to the overhead myth creates a “starvation cycle” that undermines the actual capacity of nonprofits to achieve their missions, according to a groundbreaking 2009 article in The Stanford Social Innovation Review.

“The cycle starts with funders’ unrealistic expectations about how much running a nonprofit organization costs, and results in nonprofits misrepresenting their costs while skimping on vital systems — acts that feed funders’ skewed beliefs,” authors Ann Coggins Gregory and Don Howard wrote.

In a seminal 2013 TED Talk, activist and fundraiser Dan Pallotta provided a stimulating analysis. In “The Way We Think About Charity Is Dead Wrong,” which has been viewed more than 3.6 million times, Pallotta concluded:

“The next time you’re looking at a charity, don’t ask about the rate of their overhead. Ask about the scale of their dreams — their Apple-, Google-, Amazon-scale dreams. Ask how they measure their progress and what resources they need to make them come true regardless of what the overhead is. Who cares what the overhead is if these problems are actually getting solved? If we can have that kind of generosity … then the nonprofit sector can play a massive role in changing the world for all those citizens most desperately in need of it to change.”

In a 2013 campaign to end the overhead myth, Guidestar, BBB Wise Giving Alliance and Charity Navigator wrote an open letter to U.S. donors. In 2014, they wrote to nonprofits, encouraging them to do their part to focus donors’ attention on the real costs of their work. Both letters can be read at overheadmyth.com.

All of these efforts underscore the fact that a nonprofit organization is a business — a business with a social bottom line. Any business that intends to successfully address huge challenges requires at the very least:

Adequate work space and physical facilities

State-of-the-art technology

A sufficient number of well-trained, well-compensated and “best and brightest” employees

Marketing and communication budgets and staff (including experienced fundraising professionals)

Accounting and human resources professionals and best practices

Financial resources to meet short- and long-term needs

One of the biggest issues for donors and nonprofits alike is executive compensation. According to reputable data, nonprofit leaders are routinely underpaid — especially at the management level. To tackle today’s difficult problems, however, we need the most talented leaders. Improved compensation in the nonprofit sector will eliminate the mutually exclusive choice currently faced by many qualified candidates: Do well or do good.

Of course, a careful look at overhead can offer some insight into how well a nonprofit is being managed. At the extremes, it may even uncover waste or fraud. Overhead is one factor among many that should be examined.

But overhead is not automatically the enemy of any particular nonprofit and its programs. To unthinkingly buy into the “overhead myth” can undermine the very purpose of your philanthropy: to help find solutions to the serious problems we face, to inspire and preserve lives, and to leave the world a better place than we found it.

Bruce DeBoskey is a philanthropic strategist working with The DeBoskey Group to help businesses, families and foundations design and implement philanthropic strategies. He is a teaching fellow with Boston College’s Center for Corporate Citizenship.

bruce@deboskeygroup.com

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