Good Performance Is Not Measured By Financial Data Alone

I recently interviewed a foundation trustee about her institution's payout policy. In explaining why her foundation never strayed very far from the legally required minimum disbursement, she made a telling observation. It went something like this:

The charitable world has few good measurements of social impact and effectiveness. Staff members often contend at board meetings that programs are working. But when pushed, they really can't document performance very well or show what the money is buying in terms of programmatic results. On the endowment side, however, the situation is totally different. We all know the benchmarks of the investment world, we can assess exactly how well a portfolio is doing, and, most important, everyone around us can judge how well we are doing as institutional stewards when they look at our financial position from year to year.

The trustee went on to explain that in situations where the ability to measure is precise, as with endowment growth rates, a natural tendency exists to focus on organizational resources. Nobody, after all, wants to be accused of doing a bad job in areas where measurement is possible. The tendency is to focus less on areas where measurement is more difficult.

The problem that this creates in the nonprofit world is clear: From foundations and universities to hospitals and museums, nonprofit groups of all kinds, but particularly large institutions, are understandably led to focus on financial measures of performance because they are so much more concrete and robust than programmatic ones. They are also what outsiders can observe easily and compare quickly in sizing up one organization's management compared with another.

The lack of symmetry in the nonprofit world between financial performance and program performance would be amusing if it were not potentially so dangerous. Almost everyone should be able to agree that nonprofit organizations need to be about something bigger and more important than just financial performance, be it measured in terms of budget growth, endowment size, the relationship between debt and assets, or some other benchmark. While having resources and using them wisely may well be important to an effective mission, holding a good financial position is not the same as creating value and producing public benefits.

The trend toward focusing on financial measures is shaping both practice and research, however. In the real world of nonprofit fund raising, important decisions affecting nonprofit groups are increasingly being influenced by the wide electronic broadcasting of financial data. Online databases such as GuideStar have made measuring financial well-being easy and convenient for potential donors.

In academe, many researchers have also begun using large databases that draw almost exclusively on information from the Form 990 informational tax return that nonprofit groups file with the government.

Having used this financial data in my research, I have reluctantly accepted its strengths and limitations. Financial information can be helpful in understanding some of the managerial decisions within nonprofit groups and certainly lends itself well to statistical analysis and the testing of research hypotheses. But financial information does not always allow for complex questions to be asked and answered about what a group is doing and what it is accomplishing. The explanatory power of financial variables is narrow, limiting the ability of researchers to probe issues of consequence. Still, financial data shape much of the empirical research that is produced.

Although significant advances have been made in defining and measuring the financial performance of nonprofit groups, measurement on the programmatic side still lags far behind. To date, promises of new measures of "social return on investment" have not been translated into anything that can remotely begin to close the measurement gap between the financial and programmatic worlds. If anything, the gap appears to be widening. The result will likely continue to be a situation in which managers, donors, and researchers continue to focus on the financial bottom line out of convenience and necessity. Meanwhile, the definition of a programmatic bottom line will continue to be elusive.

All of this raises an obvious question: How can balance in measurement capacity be achieved between financial and programmatic sides of nonprofit activity? The most obvious way to redress this growing asymmetry is simply to argue -- one more time -- that we need to spend more on program evaluation and develop new ways to measure and track the social value of nonprofit groups. Some foundations have taken on this unglamorous but critical task over the years, and the quality and scope of evaluation data have increased over time. That work should continue.

The problem with this incremental approach, however, is that the data that have been built up over time rarely can be compiled and used to compare organizations operating in common fields, let alone those operating across fields of activity. Of course, financial-performance data allow this to be done, and that is an important part of what gives it its enduring power and appeal.

In the absence of easy ways to counter this asymmetry in ways that will be practical, one of the most important short-term strategies may lie in a readjustment of our thinking about the meaning and significance of financial performance.

It may well be that we need to become more questioning of financial measures before a more sophisticated analysis of effectiveness can develop. By challenging the ultimate significance of financial measures of performance and not allowing them to drive our thinking excessively, we may be able to buy some time for more meaningful measures of nonprofit performance to emerge.

None of this will be easy, given the climate of greater accountability and oversight that exists and the ease of using financial measures to meet the demands of donors and others with a stake in nonprofit performance.

Still, bringing some parity to the availability and comparability of financial and program measures of performance represents an intellectual and practical task with mammoth potential rewards. It's a task that could lead to a deeper understanding of what it means to be an effective nonprofit group.