This Q&A is part of a series of interviews with six PhiLab researchers about their areas of study.
This Q&A is part of a series of interviews with six PhiLab researchers about their areas of study. PhiLab is a Canadian research network on philanthropy based in Montreal, on the campus of UQAM.
Antoine Gervais, development coordinator, Nature Conservancy of Canada
What did you want to be when you were 15?
I wanted to write. I was fascinated by the creative environment of the 1940s and ’50s – Jack Kerouac, William S. Burroughs – and jazz. I thought the nomadic lifestyle these authors led was just fascinating. I even worked as a tour guide for a few years.
You did a bachelor’s degree in music followed by a certificate program in philanthropic management. What led you to philanthropy?
I ran the Quebec City Marathon in 2018 and raised money for cancer research, in memory of my father. This led me to do an internship at the Canadian Cancer Foundation, and then to do the certificate in philanthropy. It’s a good fit for me. I like the idea of serving a cause.
How did the research project on administrative costs come about?
I got a request from Jacques Bordeleau, executive director of the Béati Foundation. The foundation had changed its vocation in 2015. It had been a private foundation that ran on income generated from the interest of its endowment. In 2015 it became public so it could collect donations, particularly from religious communities. That was the context in which the issue of administrative costs emerged.
What was the issue exactly? What question did your research seek to answer?
Jacques Bordeleau wanted to know if there was a benchmark for acceptable administrative costs in the charitable sector.
You started your research with the Canada Revenue Agency (CRA). What did you learn there about the benchmark for administrative costs?
The benchmark set by the Canada Revenue Agency actually disappeared in 2010. Before that, the administrative expenses of charities were not supposed to exceed 20% of their total expenses. If they did, the charity could have its charitable status revoked. But this requirement, deemed too restrictive, was eliminated. It was thought to be incompatible with the multiplicity of contexts in which organizations operate. The 20% rule prevented many of them from making the investments necessary to carry out their activities over the long-term.
As we all know, nature abhors a vacuum. So what replaced the CRA benchmark?
The arrival of valuation firms, such as Charity Intelligence and Imagine Canada, brought about a number of new policy approaches to management and administration fees. Roughly speaking, acceptable ranges started to vary from 15% or 20%, on one end, to 35% on the other.
And where are we today?
Even though there hasn’t been an official benchmark in place since 2010, you can find lists of non-standardized norms. They all communicate the same message: the need, more or less justified, for organizations to cap administration costs at a certain level. To a certain extent, the quality of a charity’s management is still judged by looking at the proportion of its administrative costs in relation to overall expenses.
Your literature review highlighted something called the “non-profit starvation cycle,” which is triggered when maximum administrative expense thresholds are imposed. What is this?
The term “starvation cycle” was coined in 2009 by consultants from Bridgespan. They found that while charities recognized the need to invest in their infrastructure and management quality, they were reluctant to do so. Because donors have unrealistic expectations about the actual costs of running charities, charities avoided increasing their ratio of administrative costs to total costs.
Non-profit organizations respond to this problem in one of two ways: they either reduce the level of administrative costs or underreport them by adjusting their responses to the T3010 Registered Charity Information Return. This behaviour perpetuates unrealistic donor expectations. To satisfy donors, organizations keep on cutting their organizational costs, to the point that it reduces their ability to deliver their services. This is the “starvation cycle” of non-profit organizations.
In your research, you highlight protagonists who defend the legitimacy of administrative spending, like the Canadian lawyer Mark Blumberg. Could you explain?
That’s right. Toronto-based Mark Blumberg, of the law firm Blumberg Segal, argues that administrative spending is what allows non-profit organizations to fund measures of accountability and transparency through actions such as publishing an annual report, communicating with donors, evaluating programs, and so on. He underlines the fact that it is less costly to run the same program indefinitely than it is to regularly validate and adjust it to make sure it is adequately responding to needs. That led Blumberg to conclude that administrative costs of 25% to 30% may be legitimate for some foundations, while for others, they should not exceed 10%.
You refer to the crusade of American Dan Pallotta of the Charity Defense Council. How does he defend non-profit organizations?
The Charity Defense Council works to deconstruct the culture of low administrative costs fostered by the media and the wider public. Its motto is “Don’t ask if a charity has low overhead. Ask if it has big impact.”
Does your research show a cultural shift happening in the issue of administrative costs?
Yes, there is a shift underway in the United States. In 2019, five foundations, including the Hewlett Ford Foundations, announced revisions to their grantmaking policies that would increase the share of income being allocated to administrative costs. And the MacArthur Foundation has raised that share from 15% to 29%. There is a recognition that these expenses contribute to the sustainability of non-profit organizations.
Your report makes five recommendations to grantmakers. What are they?
- Use their influence to transform public attitudes toward administrative costs, especially with legislative bodies such as the CRA.
- Transform their funding policies in order to take into account the true costs of non-profit organizations.
- Encourage an approach that favours dialogue with non-profit organizations about the true costs of philanthropy.
- Undertake proactive self-regulation and reporting initiatives, going beyond known reporting requirements. For example, the Meadows Foundation in Dallas has developed an in-house reporting form that discloses more information than is required by the government.
- Break down the charitable/management expense dichotomy by encouraging the development of graphic tools that are more representative of the true costs of a philanthropic initiative. One such presentation places administrative expenses in the centre of the pie to better express their importance.