Donations to Charity: Safe or "Wounded"?

It’s not looking good for the Wounded Warrior Project (WWP). If you haven’t read the news, The New York Times published an article on January 27th about how the largest and fasted growing nonprofit “spends lavishly on itself” in light of evidence of over the top salaries paid to its top executives as well as allegedly unusually high travel, lodging, conference, dining and other expenses. The point is, donors may not be getting what they paid for. Although this is an isolated event in the nonprofit sector, it would serve the sector well to move towards what I would call higher donor “investment” transparency.

When you invest in a stock or a mutual fund or bond, you usually know what you are getting yourself into because you read a prospectus and/or rely on your financial advisor.  You are educated about the risks and return on your investment.  When you “invest” in a charity, do you truly know that your dollars are being directed to their intended use and managed properly?

Insiders say that The Wounded Warrior’s “aggressive” fundraising tactics (to retirees, mainly), and atypical  focus on profits has partly been at the expense of program quality. Fundraising expenses have increased 66% on average in the last several years, according to WWP.  The Wound Warrior Project’s most recent (2013-14) and prior (2012-2013) fiscal year profit was reported at $94MM vs. $77MM respectively.

While the company maintains that it spends 80% of its donations on programs, the Times article suggests that something is afoot with this ratio. In my opinion, Wounded Warrior’s system of accounting for and allocating program, fundraising and other administrative expenses is at fault.  

Most donors and other funders assume their hard earned dollars are mainly supporting their favorite charity’s programs and mission, unless earmarked as unrestricted. But in Wounded Warrior’s case, it appears that a good portion of donations were supporting lavish non-program related expenses. In 2014, 40% ($124MM) of its donations were spent on overhead. (Overhead consists of fundraising expenses and any other expenses not related to programs.)

What comprises nonprofit fundraising expenses? Theses are costs incurred when asking for or intending to ask for funds from donors which includes fundraising events, direct mail expenses, staff time devoted to donor development, etc. It was reported that in 2014 WWP spent $34MM on fundraising efforts, raising $225MM in donations. The implication is that the organization was underestimating fundraising expenses (overestimating program expenses) by categorizing certain marketing expenses associated with fundraising, as program related.

Generally speaking, it wasn’t until the establishment of the nonprofit Overhead Myth “movement”, that some nonprofits started to reevaluate their costs of investing in organizational performance and sustainability and to reconsider their typically low administrative and fundraising costs. Wounded Warrior, however, appears to have taken the Overhead Myth to a new level by not only reporting relatively high overhead, but also mismanaging expenses.  Bad news for the rest of the sector fighting to spread the overhead myth!

In defense of the Overhead Movement, there’s nothing inherently wrong with a nonprofit spending money to fundraise and support the growth of infrastructure, but transparency and accountability should be key.  Donors and other stakeholders need to be educated about where their dollars are spent in order to make informed investment decisions.

In the end, I question whether WWP’s auditors, internal finance/accounting staff or Board members saw signs of financial mismanagement, errors or red flags and whether they too were fired like some of the others who spoke out against Steven Nardizzi, WWP’s CEO.  Oh to be a fly on the wall at WWP board meetings!

What advice do I have for retirees (or other individuals for that matter) investing in charities? Caveat Emptor! 

  1. Before donating funds, do your homework.
  2. Ask for and review the prospective charity’s IRS 990 returns and audited financial statements.
  3. Review the charity’s website and don’t hesitate to ask questions about the charity’s mission, values, strategies, board, fundraising tactics, programs, leadership, and financial performance.
  4. If assessing organizational finances, leadership, transparency and effectiveness is not your forte, ask for help.

And answer these questions:  

  • How effective are the philanthropic watchdog groups if despite warnings about higher than average spending on administrative and fundraising expenses, donors still flock to charities, as was the case with The Wounded Warrior Project?
  • Can we prevent something like this from happening again in the sector?