This first appeared in The Guardian, and is co-authored with Kurt Hoffman, DIrector of the Institute of Philanthropy

Joe Saxton suggested last month that charities must do more to explain their finances but it’s charities’ results that matter.

The public don’t know what charities do with their money. On this, we agree with Joe Saxton’s article last month. But his solution, that we publicise more prominently the proportion of charities’ budgets spent on “charitable activities”, would be disastrous.

We say this not because we are, in his rather good term, “apologists for opaqueness” about charities’ activities. In fact, the converse: we campaign vigorously for more openness but about charities’ results, which are what matters, rather than about badly labelled and misleading segmentations of their cost structures.

What’s in there?

The first problem with the Charity Commission’s segregation of a charity’s costs into those which pertain to its charitable activities and those which don’t is that it’s meaningless. In a well-run charity, all expenditure pertains to charitable activities. Where else would it go? Something unrelated to the charities’ goals and legal mandate? Shoes and handbags? That’s not a matter for a donor to rumble: rather it would be fraud for the regulator and police to sort out. Expenditure on raising more money to finance more work, or on governance to improve its work, is absolutely appropriate because it can help beneficiaries.

And so we see the flaw in the conventional notion that “admin costs” or fundraising costs are separate from the charity’s “real work” – that they’re waste and should be minimised. Of course, waste should be minimised, but let’s not conflate waste with admin. Admin includes all manner of useful things such as deeply researching the problem they’re trying to solve, co-ordinating with other organisations and figuring out how to improve. Since charities are addressing problems which are difficult to resolve, what the investor Warren Buffett calls “problems which have already resisted great intellects and often great money”, then preventing charities from properly understanding those problems is unlikely to help.

And hence it turns out that high-performing charities spend more on their administration than do poorer-performing charities. More, not less – perfectly counter to the common “wisdom” that a higher percentage spend on supposed charitable activities is desirable. Professor Dean Karlan, an economist at Yale University, compared the admin spend and fundraising spend of charities ranked highly by the analysts at Give Well, and found it to be higher than the admin spend of charities ranked lower.

The US Centre on Non-Profits and Philanthropy concluded the same in 2004 after interviewing a quarter of a million nonprofit organisations: “No organisation in our study was an extravagant spender on fundraising and administration. Yet contrary to the popular idea that spending less in these areas is a virtue, our cases suggest that nonprofits that spend too little on infrastructure have more limited effectiveness than those that spend more reasonably.”

Dan Pallotta in his 2008 book Uncharitable: How Restraints on Nonprofits Undermine Their Potential spends an entire 47-page chapter on the same topic and uses 137 references to refute the notion that low admin correlates to high performance.

So Saxton’s proposal that the Charity Commission put a big cross sign next to charities with a high spend outside of their “charitable activities” would probably guide donors towards low-performing charities.

We also note in passing that the accounting rules governing the segregation are pretty vague. So there’s no reason to believe the percentages used by different charities are even consistent and comparable. Saxton’s proposed tick/cross system would not even be unreliable.

A more subtle problem is that it penalises charities which are cost-effective. Suppose Charity A hires doctors to work in less developed countries and buys equipment. It incurs some admin costs to secure and co-ordinate those resources. Suppose Charity B does similar work but gets doctors to volunteer and gets companies to donate the equipment. Pretty much the sole costs in Charity B are admin, but that’s because the other costs aren’t there – its model is cheaper. But if you only look at the admin costs as a percentage of the whole (small) cost base, Charity B would look awful precisely because it’s cheap. The admin percentage analysis fails because it doesn’t ask: “a percentage of what?”

These are just a few of the problems which arise from analysing charities based on the percentage they spend on admin or charitable activities. Hence we oppose suggestions which promote that because they demonstrably harm beneficiaries.

So what should a donor look at?

We absolutely agree with Saxton that donors need to know what their donations achieve, and that, as an industry, we should guide donors towards the most effective charities.

Which metrics that should involve is a much harder question. Why? Because social science is (necessarily) hard: charities work in a wide range of fields which makes their results incomparable, their results appear over a range of timescales, and they rightly take risks meaning that their work may sometimes fail. There is no single algorithm of human happiness which we can apply to all charitable activity.

As advocates for effectiveness, we both work to get charities to report more clearly on the impact of their work. And we know that choosing between charities is a fundamentally comparative exercise – often, many charities working on an issue will each achieve some results but some charities will achieve more than others. The issue isn’t finding whether there are results, but whether those results exceed other charities’ results. Hence we very much support work by Bond to get international development agencies to share metrics and by the Inspiring Impact group to get other charities to do likewise. Such approaches have been hugely valuable in medicine, for example.

We also support US-based Charity Navigator, the world’s largest charity-ranking agency, which is moving away from assessing charities just on their admin percentages towards measures of transparency and effectiveness, including beneficiaries’ views of charities’ performance.

Einstein would have agreed with us on the danger of using admin costs simply because they’re relatively easily available. Not only did he observe that “not everything that counts can be counted; and not everything that can be counted counts”, but also that “everything should be as simple as possible – but no simpler”.

Evaluating who’s making the world a better place simply isn’t simple.