How ‘ethical overhead’ can help us think differently about how nonprofits spend money

Tivoni Devor’s “Getting Good Done” column focuses on new models of enacting impact.

The standard story is that nonprofit “overhead” is the money that nonprofits flush down the toilet by spending it on administrative or fundraising costs instead of using it to help people.

It’s a myth so strong even some nonprofits believe it, and they starve themselves to death in the process.The simple truth is that it takes something like 36 cents to properly manage the other 64 cents of every dollar donated to a nonprofit organization. We shouldn’t hide from it, and we shouldn’t lie about it. In some cases, especially in cities with higher costs of living, true overhead costs are even higher.

You may have seen a lot of nonprofit orgs sweating minimum wage increases, changes to overtime regulations and the Affordable Care Act’s 30-hour rule. You may have also seen people delighting in the irony of nonprofits that are pushing back against these rules and looking for exemptions. The simple truth is that all nonprofits want to pay their staffs more, and they all want to provide better health benefits, but they are afraid funders will only see this as overhead increases.

While individual donors and institutional funders need to realize moral implications of their biases against overhead, nonprofits need to do a better job at explaining how this overhead is spent and that it is done in an ethical and mission-driven way. Nonprofits are obligated to, at some point, spend every dollar that they get from a donor or funder. Nonprofits can and should spend every dollar they have in an ethical way that maximizes social impact.

We need to look at the fair trade movement which has adopted a set of principles that includes things that increase overhead costs, such as fair wages, capacity building and opportunities for disadvantaged producers, all of which increase the cost of the product. Consumers are happy to pay a premium if they know their dollar is being spent wisely and fairly. With transparency and accountability, nonprofits can begin to talk about the true costs of program delivery.

Ethical overhead should mean that nonprofits focus spending their overhead dollars on local independent businesses, certified Disadvantaged Business Enterprises, B Corps, etc., which generate local economic development. Ethical overhead means that nonprofits pay their staffs fair and prevailing wages, which in turn reduces more costly staff turnover. Most importantly, ethical overhead should allow the nonprofit and the funder to have a frank conversation on the true cost of running an operation in a way that maximizes its benefits to society.