Investment Selection Criteria: An Engine for Radical Reform of the Nonprofit Sector

There is little mystery about what to look at when assessing organizations as prospective investment opportunities. While one might organize these categories in a variety of ways, inevitably they will include evaluating these organizational characteristics:

• leadership (board and executive),
• management (senior, mid-level and program),
• financial robustness,
• organizational depth, capacities and operational processes,
• infrastructure,
• strategic partners and other key stakeholders, and
• legal exposure.

These characteristics tell us whether a nonprofit is sound and running well, and something about its likely sustainability — all legitimate investment concerns. What they don’t tell us is whether the organization is actually doing any good, actually helping improve people’s lives and life prospects, actually creating social value.

Consider the illustration that follows on below. Most social service nonprofits and their funders focus on the left side of the diagram. They want to know what the agency is doing and how many people it has served. They ask: How many meals were cooked and served in the soup kitchen, to how many people? How many middle schoolers attended the after-school program, and in what kinds of activities did they engage? How many newly released felons participated in the reentry program, and what curriculum does it use? How many unemployed people visited the job center and used the computers? How many job seekers took work readiness classes, and what skills were being taught? How many pregnant teenage mothers were served, and did they receive case management with or without wrap-around services?

New York City, September 2009 - Hunter Consulting LLC

These are the questions we ask when we look at the boxes on the left. And certainly, they are important questions. Doing all these things well does have some — albeit very limited — social value. But this limited social value is inherently short-lived. Once the meal is eaten and digested, what has changed? While of course it is necessary for children to have safe havens, is that enough to set them on course for successful living? Once the felon has finished his or her coursework, what difference has this made? And if one finds a job but can’t get it, or gets a job but can’t keep it, or keeps a job but remains stuck in poverty, where is the benefit? And does it matter what kinds of case management services a pregnant teen receives if, as is so often the case, she will have a strong likelihood of abusing her baby, staying in poverty, abusing drugs? And if her baby is likely not be to as healthy as other children and not ready to make use of school when the time comes and soon languishes at the bottom of the class, what is the use of all that case management?

So, when we want to know about the social value produced by a nonprofit, we have to shift our focus to the right-hand side of the illustration. If we look at those boxes, a whole set of different questions arises. Who is receiving the meals in the soup kitchen, and what is it about their lives that needs to change? Are we linking them with services that can help them break out of their cycle of need, and how many people using those services actually reach self-sufficiency? Are the parents sending their children to the after-school program for anything more than to keep them safe? If so, what benefits do they expect their kids to get from participating, and what percent of these children actually do benefit as intended? Are felons in the reentry program changing their attitudes, habits and social networks? Are they getting and keeping jobs? And perhaps most to the point, are they breaking out of a criminal lifestyle and avoiding recidivism? And if so, what percentage? Are the unemployed people who are using the job center and perhaps also taking work readiness classes getting jobs? Keeping their jobs? Moving up a career ladder to self-sufficiency? And what are the percentages who do? Are teenage parents avoiding drug use? Taking good care of their infants and young children? Not abusing them? Are the children healthy and thriving and ready for school when the time comes? Are the mothers finding daycare and employment and moving out of poverty? And again, what are the percentages?

In other words, we have to know what outcomes (measurable changes) a social service nonprofit actually is delivering to the people it serves. Put differently, what can program participants reasonably expect will improve about their lives or life prospects as a result of their participating in a nonprofit’s programming?

And these are exactly the questions that social investors want answered. So social investors will add the following item to the selection criteria listed above:

• program or service value.

This is measured by looking at:

• Who, exactly, is the organization serving and what are their needs?
• How many and what percentage of the people they serve finish the programs or receive a large enough and long enough exposure to services so that they can benefit?
• What empirical basis is there for believing that an organization’s program(s) and service(s) are effective — that is, producing outcomes for the people they serve?
• What are those outcomes, what are the indicators used to assess them, and what is the rate of success for program participants in reaching them?

In my experience, the majority of nonprofits cannot answer these questions. Many don’t even know with much reliability who they serve, how often and for how long. And as long as grantmaking was considered a form of charity, that really was okay (at least for fundraising — I would argue it was decidedly not okay for the people relying on these agencies to help them in essential ways). But in this new age of accountability, nonprofits that cannot answer these questions will find it harder and harder to attract funding from social investors. And social investors will increasingly represent the larger sources of revenues flowing into the nonprofit sector.