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The Red Cross and Other Charities Have Failed Their Donors, Recipients: Ken Stern

Daily Ticker

Charities are a booming business. According to Ken Stern, the former CEO of NPR and author of With Charity For All: Why Charities Are Failing and a Better Way to Give, U.S. charities take in $1.5 trillion every year in revenue. They employ about 10% to 15% of the American workforce (approximately 13 million people) and have assets worth almost $3 trillion. There are 1.1 million charities in the U.S. and that number grows by 50,000 every year (in good times and bad), Stern notes. The average annual charitable contribution is $2,700 per U.S. household, and more than 61 million Americans are volunteers.

Stern did not write his book to discourage charitable giving; he just wants charities to behave more like the private sector and provide tangible evidence that they’re fulfilling their missions. They should be “transparent and accountable to their stakeholders and donors,” Stern says in an interview with The Daily Ticker.

Stern argues that the majority of nonprofits “can't demonstrate any commensurate return on their investments.” The copious amounts of ephemera and glossy fund-raising brochures delivered to mailboxes around the country “mask problems that range from inefficiency and effectiveness to outright fraud and waste,” he writes. One charity that has failed its donors (and recipients) is the American Red Cross – probably the most internationally recognized and revered charity of all.

The Red Cross’s efforts in New Orleans, Haiti and on 9/11 were ineffective, according to Stern. Private companies were on the ground first in New Orleans after Hurricane Katrina hit and it was Walmart (WMT) – not the Red Cross or the U.S. military – that responded quickly to the needs of storm-ravaged residents, handing out emergency supplies and establishing fast-action distribution centers. Yet it’s Haiti – one of the poorest countries in the world and one that has been repeatedly buffeted by devastating earthquakes and hurricanes over the past few years – where the Red Cross has failed the most egregiously, Stern says.

“Within weeks of the 2010 Haiti earthquake, the Red Cross had raised more than $450 million in the United States and more than $1 billion in total assets across its worldwide network," Stern writes. "Two years after the Haiti earthquake, the Red Cross was still sitting on more than $150 million in unspent and unallocated donations, a surprisingly large amount given the acuteness of Haiti’s needs.”

The Red Cross cannot be flagged because of its lack of resources or organizational talent; it attracts some of the best individuals from the top levels of business, government and military, Stern notes. But despite its leviathan stature in the nonprofit space, the Red Cross lacks the ability to “make the necessary internal investments that are the hallmark of all good organizations,” Stern believes. These investments include infrastructure, innovation, research, strategy and new products, elements that "make a great company," Stern says.

Right now charities are too concerned with keeping overhead costs low, which hinder their effectiveness. More charities should follow the procedures implemented by the New York-based Robin Hood Foundation, Stern says. The charity, which is dedicated to fighting poverty in New York City, analyzes its performance by publishing metrics and using benchmarks to compare its social impact across various disciplines.

Above all, the federal government and individual donors must demand that charities meet their targets and goals – and that results be know internally and externally. Stern acknowledges that charities cannot become more effective and productive without regulatory oversight. Individuals also need to do more research and read more published reports on the charities they give to every year.

“[Individuals] give to common brands, they give to charities of their friends; they don’t research effectiveness,” Stern notes. “We spend more time watching TV than researching charities.”

One factor that could reduce charitable giving in the U.S. is the elimination of the tax credit for charity donations – an idea Congress has proposed as part of a broader tax reform package. Stern says the tax deduction needs to be modified, not necessarily eradicated.

“We should question the value system behind it,” Stern argues. “The working poor actually give a greater percentage of their income to charities than the rich do, even though they get no incentive from the tax deduction because most of them don’t itemize.”

Stern also points out that it costs the Treasury Department $50 billion a year in charitable tax deductions -- a larger amount than what is actually given.

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