Accountability and transparency

Donors demand clearer view of station reality

Commentary by Bob Ottenhoff

Fundraisers got an outsiders’ view of pubradio from a former insider at the Public Radio Development and Marketing Conference, July 10 [2003], in Snowbird, Utah. This article is adapted from remarks by longtime public broadcaster Robert G. Ottenhoff, president of GuideStar, a leading source of information for monitoring the performance of nonprofits of all kinds. Ottenhoff founded Newark’s WBGO-FM, served as executive director of the New Jersey Public Broadcasting Authority and then became chief operating officer of PBS.

Bob OttenhoffI was asked to come here today and give you an outsider’s perspective on public radio.

I’m an avid listener of public radio. I’m a solid financial supporter of my local radio stations. And let’s face it, public radio has been a big part of my professional life. So let me give you the comments of a recovering broadcaster.

First, the good news: Compared to commercial radio, public radio is an intelligent alternative. It’s an oasis of creativity. Compared to public television, public radio appears to be prospering, with a promising future.

The bad news: Public radio is a small part of a rapidly expanding nonprofit sector. Competition with other nonprofits for mind-share and donor support will intensify.
Moreover, public radio lacks the financial transparency that donors increasingly expect.

Since leaving the cozy island of public broadcasting, I’ve discovered shocking news I feel compelled to tell you: You are not the center of the universe. There is a big world out there, full of great nonprofits doing very important things, and the competition for attention and donations is growing at an amazing rate.

I know that 700 public radio stations seem like a lot. But do you realize that there are more than 900,000 public charities and private foundations registered with the Internal Revenue Service? And that’s not even counting all the churches, educational organizations and smaller groups that aren’t required to register with the IRS.

The sector gets bigger every year. The number of nonprofits grew 76 percent over the past decade, and 30,000 new nonprofits are registered each year.

At the same time, Americans’ charitable giving has been increasing only slightly—actually declining in 2001, if you adjust for inflation. according to Giving USA. Bottom line: more nonprofits competing for less money.

And where does public radio stand in all of this? Giving USA estimates that in 2001, donors contributed $161 billion to charity. Of that $161 billion, only about $200 million went to public radio stations. A drop in the bucket.

Public radio is not only a small part of the nonprofit sector, it’s a very small proportion that is getting smaller every year.

Transparency and accountability

Competition is getting tougher at a time when givers are demanding more transparency and accountability. We’re seeing it happen all over our society. There is a massive effort under way to hold our schools accountable and test whether they are really educating our children. We expect our religious institutions and government agencies to be more transparent in how they operate and more accountable for their actions. In the corporate world, the Enron and WorldCom scandals have heightened the public’s distrust of financial dealings that take place behind closed doors.

People are expressing the same concerns about nonprofits. In a 2002 donor trend study, the Epsilon and Barna Research Group found that American donors’ confidence in nonprofits is at the lowest level in the past two decades. Most troubling is that this study found that confidence is declining most drastically among the most generous givers.

Donors’ expectations are changing. They are more discerning than ever before. They’re looking at more than just tradition and reputation. They’re demanding transparency. They want to know details—where their money is being spent and why. They’re demanding accountability: Prove to us that our donations are being spent wisely.

I’ve observed that public broadcasting has not been particularly effective in this area. You’ve tended to be closed, insulated, sometimes downright defensive. In most cases, it’s not very easy to get financial and administrative information about a local public station. And because so many stations are part of large institutions, the information is often not available or extremely difficult to find. And when a controversy arises, you haul out the heavy armor— the First Amendment or principles of editorial integrity—in an effort to get those seeking information to go away.

You’re going to need to find ways to respond to donor demands for transparency and accountability. You are part of the big picture, as one of hundreds of thousands of other organizations that need money to realize their missions. Many now realize that being open and transparent is actually good for business.

There’s another part of this change in donor expectations that we’re seeing more of, and that is donor involvement: direct, active engagement. There’s a new breed of donor out there—active, involved donors who are rapidly taking the place of yesterday’s passive donors as the nation’s primary givers.

Today’s philanthropists see their contributions less as gifts and more as strategic investments in issues they care about. When they don’t see the returns they hoped for, they take action, much in the way they would with other investments. This increased accountability, one hopes, eventually translates into increased effectiveness for nonprofits.

We see these active, engaged donors every day at GuideStar. Our website, with the national database of information on nonprofits, displays basic programmatic and financial information about the nation’s charitable organizations.

Our site gets about 20,000 visitors daily, and the GuideStar database is used by more than 20 other sites, including Network for Good, Fidelity Charitable Giving and American Express, to name just a few. Users work for foundations, corporations, financial institutions. Some are individual donors who care about nonprofit accountability, who demand nonprofit transparency. They are your funders. They are coming to GuideStar to read your mission statement, learn about your programs, and review your IRS Forms 990 to see how you spend your money. But they want more than just the numbers; they come to GuideStar to see how well you state your tax-exempt purpose, how well you describe your programs, how openly you describe your activities.
I’d like to suggest that you consider the following steps for your station:

  • If you haven’t done it already, post your Form 990 immediately on your website. Your donors are expecting it.
  • If your station is part of a large organization, post your audited financial statements or even your CPB financial reports. Your donors are looking for it.
  • Your Form 990 is automatically posted at GuideStar. Don’t let that be your only message to potential funders and donors. Be as transparent as possible by providing information about your mission, your plans and, most importantly, how donors will judge your effectiveness and impact. As a public service, GuideStar gives you free space at our website, www.guidestar.org, to do just that.

Efficiency and effectiveness

In addition to being more transparent and accountable, it’s clear that nonprofits will need to be more efficient and effective if they expect to get donor support. As government funding gets more difficult to generate and competition for donor support increases, your donors will demand more attention to reducing your operating costs.

By now you’ve probably all seen the report former Sen. Bill Bradley recently released on the results of a study he conducted in conjunction with McKinsey & Co. The gist is that the nonprofit sector could save $100 billion by adopting more efficient practices:

  • reducing administrative costs,
  • reducing program service costs,
  • expediting payout of investments, and
  • reducing fundraising costs.

Bradley’s study suggests that if donors researched the financial practices of nonprofits and supported only those that spent their money efficiently, underachieving nonprofits would be “squeezed” out of business. That’s a sort of Darwinist approach to philanthropy, I guess, but one that might be necessary if our “species” is to survive. Nonprofits that adapt will prosper and those that don’t will become dinosaurs, outmoded and unable to compete.

I’m not here to judge whether this report is right or wrong. I do know it has been roundly criticized by nonprofit leaders for thinking simplistically and jumping to easy conclusions. But I think the authors are on to something that we need to give serious consideration. Let me offer a few observations:

Key ratios. Donors and an increasing number of evaluators are starting their analyses by looking at ratios of total revenues to three categories of expenses: program-related, fundraising and management/general.

These measures are studied by many analysts who prepare evaluations similar to those you see in Consumer Reports, Morningstar or U.S. News and World Report.

GuideStar acknowledges the importance of the three ratios, but we also urge donors to look at many other factors. We suggest that they put charities’ financial information into context and to look at trends and similar organizations doing the same kind of work. In other words, we don’t think it’s fair to compare a homeless shelter to a museum because they are doing different things, have different responsibilities and bear different operating costs. But when you are looking at organizations that do the same kind of work, making comparisons about efficiency and effectiveness is not only reasonable but an important thing to do.

Fundraising costs. It’s been my impression for a while that these costs are higher than the public thinks they are and probably higher than they should be. I’m pleased to see that folks in public radio are starting to look at ratios such as:

  • fundraising cost as percent of revenue,
  • net underwriting support, and
  • net listener support per listener-hour.

I don’t pretend to know the right numbers in each case, but I think they’re the right kind of questions for you to be asking about your operations.

Suffice it to say that your donors are interested in these questions. If they haven’t already asked you for this kind of information, they’re likely to ask you for it soon. It’s time to get ready.

The national/local relationship

Which leads me to a third area of donors’ concern about efficiency: finding the right balance between national and local activities.

This tension has existed in public broadcasting from the beginning, and it’s not letting up.

One of the things I’ve always loved about public radio is that I can travel from city to city and hear the same quality programming from NPR and PRI, along with the local programming that reflects the community’s character and idiosyncrasies. It would be a shame if that wonderful individuality were ever lost.

When I compare public broadcasting to other sectors in the nonprofit world, I think you have a lot of things going for you. You have many strong, well-known national brands that deliver valuable high-quality services for which donors are willing to pay. And in many cases you have strong local stations that attract contributions and build local identity and relationships. You probably benefit more from aggregation and economies of scale than many parts of the nonprofit world.

But I don’t think the local side is contributing as much as it once did. As the national brand has gotten stronger and the technology more sophisticated, it’s become harder to understand where the local station adds value. I’m not advocating technologies that bypass stations to deliver the network directly to listeners. Local organizations have a lot to add. In an era when commercial broadcasting is fast losing its local identity, being a local institution should be a huge competitive asset for you. I say “should,” because it’s sometimes seen as a liability. The local institutions become targets for your critics, who think you overlap other stations too much and invest too much in redundant local infrastructure. You need to figure out the right national/local balance before your critics try to figure it out for you.

I recommend that you start by looking at your fundraising costs. Studies by the Center on Philanthropy at Indiana University have found that small organizations have higher fundraising costs than large ones. The same thing happens with management and general expenses. In other words, large organizations are able to take advantage of economies of scale.

If your fundraising costs are unacceptably high, what can you do? Look for better harmony and better coordination between national, regional and local activities. What types of activities need to be conducted at what level? Your donors are counting on you to find solutions that demonstrate a smart approach to efficiencies and effective organizations.

Changing as society demands

You may be a small part of the big nonprofit picture, and you may not be the center of the universe, but that doesn’t mean you aren’t important. You are important — vitally important. We need what you do more than ever.

You are the keepers of something very precious. You offer an alternative to the drudgeries of commercial radio, you defy the corporate logic of maximizing profits by minimizing expectations.

So where does the public radio community fit in to the big picture? The real question is: Where do you want it to fit in?
Do you want to be part of the vanguard that embraces accountability and works with today’s active, involved donors to make nonprofits more efficient?

An element in the nonprofit sector is resisting these changes, but this is a mistake. These changes are not about us. It’s society that is changing, and it is up to us to change with it. If we don’t, others will.

Today’s nonprofit sector is a sector in exciting transition. We’re crafting a blueprint for the way things will be done in the future. Our successes will be emulated and our mistakes learned from. As society changes the way we do things, we are also changing, I hope, the way society views us.

Public broadcasting often serves as the “public face” of the nonprofit sector and public radio as our voice. What other branch of the sector has such great daily access to the homes and hearts of millions of Americans, rich, poor, old, young, East Coast, West Coast? I hope you will all stand together with us and serve as models of efficiency, honesty and compassion as we craft new nonprofit standards and best practices to pass on to the next generation.

Copyright 2003 by Philanthropic Research Inc., aka GuideStar®. Republished by Current with permission.

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