Although some recent controversies have cast the third sector in a poor light, the fact remains that Britain’s 170,000 charities are essential to providing both day to day support, and vital research funding, for worthy causes that millions of people care about.
Despite this, and despite the fact that Britain is a very generous nation, charities’ ability to sustainably carry out their missions is under constant threat as they struggle to find a source of sustainable funding. One major cause of this uncertainty for charities is the reluctance of funders, whether individual donors, philanthropists, foundations and governments, to fund charity overheads – the money needed to cover their day to day operational costs.
Although intuitive, this ‘overhead aversion’, isn’t rational – how much a charity spends on utility bills or IT is not a good predictor of the charity’s effectiveness.
Overhead aversion has been studied by Uri Gneezy, a behavioural economist at the United of California in San Diego, and the phenomenon seems to be robust. Gneezy even offers recommendations about how to overcome this aversion – signalling to donors that an existing donor has already effectively paid for the overheads, so that their donation will be spent entirely on providing the charity’s services to beneficiaries.
Gneezy’s research, carried out with tens of thousands of people, supports this claim, as does similar research by John List from the University of Chicago, and by UCL’s Imran Rasul. What these experiments have in common, however, is that they exhibit a ‘first mover’ problem. If a charity is going to tell Clare that someone else – Michael – has already paid the overheads, what are they going to tell Michael? Without directly misleading their donors, this solution relies on charities having a large pool of potential funders who don’t experience overhead aversion – an unrealistic expectation given the evidence.
We’ve been giving a lot of thought to these issues over the last few months, working in collaboration with Charity Futures, a think tank set up last year by Sir Stephen Bubb, formerly the CEO of the Association of Chief Executives of Voluntary Organisations to tackle the issue of sustainable funding for charities. The results of our work have been published today by Charity Futures. The report, To the Core, looks at overhead aversion and a range of other phenomena from behavioural science that could contribute to uncertain charity funding.
Drawing on latest behavioural science, we make several recommendations for charities, including:
- Encouraging High Net Worth Individuals to support overheads and core costs, with the sector boosting prestige and recognition for this kind of role
- Improving evidence around impact and effectiveness to provide better indicators for donors. Overheads remain a highly salient metric for donors, even if they’re flawed
- Emphasise the marginal value of covering overheads. Because overheads allow the charity to exist, they can be key to unlocking disproportionate amounts of value relative to the funder’s contribution.