Ken Stern: What's Wrong With the Charitable Sector, How to Fix It

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In the video below, Ken Stern, former CEO of National Public Radio, discusses his new book, "With Charity For All." In the book, Stern takes on the charitable sector, which he says, "operates with little accountability, no real barriers to entry, and a stunning lack of evidence of effectiveness."

Stern gives his take below on what's broken in the charitable sector, how to fix it, and how Americans can best make a difference. Given Stern's unique perspective from his days at NPR, we also discussed the future of radio and the technologies that are disrupting it. A full transcript follows the video.

Brendan Byrnes: Hey folks, I'm Brendan Byrnes and I'm joined today by Ken Stern, the author of "With Charity for All." Ken, thank you so much for joining us.

Ken Stern: Thanks for having me.

Byrnes: My first question is -- this is maybe an under-appreciated topic, with charities. A lot of people just put their money into it and don't think about it, or at least think they're doing the right thing. Why did you decide to get involved with this, and why did you decide to write the book?

Stern: A lot of the reason I got involved was my past experience with the charitable world. I actually ran a charity, National Public Radio, for about eight years, first as a COO, then as a CEO, and I saw some of the challenges I faced. When I left, I wondered whether those challenges were unique to NPR or really more broad-based.

What I found out actually really surprised me. How large the charitable sector is -- 1.1 million charities, $1.5 trillion in annual revenues, 10%-15% of the American workforce -- and a lot of what I saw as problems was in terms of effectiveness, and that really led to this book.

Byrnes: What's the most surprising thing that you found in the book, in your estimation?

Stern: I think two things -- well, there's lots of surprising things; I could go on all day -- but one is how many charities actually look, feel, and operate like for-profit businesses. The best example of that in my mind is charitable hospitals, which are more profitable than for-profit hospitals, compensate their executives in the millions, and most importantly, actually provide no more charitable services than for-profit hospitals.

There are lots of examples of charities like that. That really surprised me, as well as some of the effectiveness challenges.

Byrnes: Why be a for-profit hospital instead of a charitable hospital, if you can do seemingly most of the same things?

Stern: Well, for investment purposes. I think the real difference between charitable hospitals and for-profit hospitals are the ability of a for-profit hospital to distribute profits to shareholders. It's really an investment distribution issue.

On the charitable side, the question is really whether the government and donors should be supporting these hospitals, which are really essentially for-profit businesses.

Byrnes: One of the things that surprised me about the book is you talked about the college bowl games, which were actually described as non-profit entities as well, despite the multi-million dollar contract with ESPN, through Disney there.

Why are they allowed to do that and still make a profit? Do you see any signs of this changing in the future?

Stern: They're allowed to do it because no one's watching. The IRS, which is the exclusive entry point to become a tax-exempt charity, approves 99.8% of all applications to be public charities. If you have a form, you have a pen, and you have a stamp, with a small check you can start a charity, essentially today.

The results are, not surprisingly, a lot of charities don't really look like charities. The bowl games, the organization that governs the US Open golf tournament, roller derby, beer festivals are all actually organized as charities.

The bowl games are, to me, a stand-out example of that. They are really, essentially large-scale parties with large contracts with TV organizations. They have standing committees on (inaudible), they put on cruises, they entertain the commissioners and big sponsors. That's what they're about -- nothing to do with charitable purposes as people ordinarily know it.

Byrnes: You talk about these deep structural flaws in the charitable sector. What are these flaws, and how do you think they can be addressed the best way?

Stern: Once we cut below the issue of the uncharitable charity, what I found was that a lot of charities are either ineffective -- actually there's data to show they're ineffective, or in some cases even harmful -- or most charities actually don't know, one way or the other, whether they're effective or not.

In part they don't know because their donors don't care. Charities are subject to the same market mechanism as any sort of business, and the donors really don't focus on effectiveness; that's individual donors, that's government donors.

Americans are actually quite generous with donations to charity -- on average about $2700 per household per year. It's a lot of money, but they spend virtually no time assessing the charities they donate to. They're not investors.

Until they start focusing on who they're donating to and whether those charities are actually effective in terms of service to their stakeholders, the charitable system is going to be one that's more described by narrative than it is by results.

Byrnes: Let's talk about companies giving to charity. According to the Chronicle of Philanthropy, Wal-Mart, Goldman Sachs, ExxonMobil, Wells Fargo, and Chevron were the top five that gave the most cash to charities in 2011. What do you think is the main reason for them to do this? Is it self-serving, or do you think there are other purposes overall?

Stern: First, let's put that in a little bit of context which is, corporate donations to charities accounts for about 1% of private citizen -- if you can call a company a private citizen for these purposes -- donations. It's actually not a big part of the revenues for charities.

I think companies do it for a number of reasons. One is because it's important to their employees; often we'll see that type of investment in their local communities. Secondly, it's often good public relations and good relationship-building for these companies. Third, I think a lot of companies now buy into the notion of social capital, "doing well through doing good."

I think that's why companies do that, and why I would expect and hope that companies will be putting more and more into community resources, community activities, whether it's through charities or otherwise in the future.

Byrnes: These companies -- we mentioned Wal-Mart, Goldman Sachs, ExxonMobil -- are they doing the kind of due diligence that individuals do not do, or do you find that they're throwing their money into all sorts of charities in much the same way?

Stern: It's actually a mixed story, with respect to corporations. I think companies tend to do a little bit better in terms of due diligence and effectiveness investigation or research than individuals do. It's interesting to see that people who are employees of companies actually do more due diligence in their corporate role than they do in their own individual role.

One example I know of that is with the American Red Cross. One of the challenges of the American Red Cross, one of the signature charities this country has, is that people are unwilling to invest in infrastructure, and they're really an infrastructure company. They're a supply line company.

Think of the other supply line companies -- FedEx, Wal-Mart, the United States military -- put billions into that infrastructure. No one wants to give the Red Cross money for that. When a tragedy occurs, they want to get money to the victims but they don't ever invest for the next victim down the road, but companies do.

The American Red Cross has actually been somewhat effective in getting companies to help them invest in infrastructure and help them prepare for the next disaster. Only companies, not individuals, because I think companies think a little bit differently than individuals do.

Byrnes: A couple of the individual charities, or at least individual charitable sectors you talk about -- one is D.A.R.E., another one is the water charities in Africa and Latin America -- could you talk about those specifically, and what's going on with them? Maybe more than meets the eye.

Stern: Yeah. I'll tell you a couple of stories. There are lots of stories in my book. It tells you in loving detail; I'll give you the skim read of it.

D.A.R.E., which is -- sorry, I can't actually remember what the acronym stands for -- is the principle educational charity in this country for educating children about the challenges of drug abuse. There is 20 years of high-quality research that shows that D.A.R.E. is actually ineffective, and in some cases harmful, because it's where kids actually can learn about drugs.

What is extraordinary to me, it's actually on a list of social programs that don't work, yet it still remains because it has a good public narrative, it has good political connections and good ties to local police departments and schools. It still remains the principle charitable educational program in this country and, because no district is going to have more than one drug awareness educational program, it blocks other more effective programs from getting in.

Water charities to me are very interesting because water charities are very good ... what you'll find is charities are very good at the stories that sell. The stories that sell are drilling whole wells. The stories that don't sell is maintenance and repairs -- an engineer going out to tighten bolts -- so what you have is lots of wells and lots of wells that fall into disrepair and don't work anymore. It's actually a tragedy across Asia and Africa.

One story I tell in the book -- I'll try to tell this fairly quickly -- is the story of a group called Play Pumps, which was a very hot charity about 10 years ago. They had the idea of putting in merry-go-rounds that doubled as pumps so you'd have kids get on the merry-go-rounds. They'd go around and that would drive the pumps and water would come up into a tank.

It was this grand idea, great idea. Lots of money for the Case Foundation, it was a big star of the Clinton Global Initiative one year, they installed thousands of these across Africa until someone said that the emperor has no clothes.

The kids weren't using it. They had taken perfectly good pumps out of service to put on these merry-go-rounds, which no kids used so it left the women of the village laboriously pushing these heavy playgrounds around.

No one thought to actually test these things on the ground before they went and instituted 4000 of these across the continent.

Byrnes: I think one of the main things that confuses people is, not necessarily all water charities are ineffective. Some have to be effective, but which ones are they? What's the best way for an individual to know that they're giving to a charity that's actually going to make a difference?

Stern: It's very hard. It is very hard because as of today there is no one single source for finding information. If you're an investor into the stock market, you go to The Motley Fool, you go to mutual funds and there are lots and lots of resources.

There are 150,000 people whose jobs it is to help individual investors in the mutual fund industry make personal investments. There are less than 100 people across the country whose jobs are to help individuals make donations.

It's very hard to know. There's no substitute for doing the work yourself. I often encourage people to band together into groups, sort of like investing clubs -- charitable investing clubs -- and start sharing ideas and information and doing the work and figuring out what the best charities are.

I will give a shout out, if I can, to Charity Navigator. It's one of the charity rating services which I was unbelievably hard on in the book, because mostly what they rate are things that are actually irrelevant to charitable effectiveness; overhead and things like that.

I told the story about the American Red Cross, which needs more overhead, so I actually think they've been a disservice, but they announced last month after my book was to print, that they are launching something called Charity Navigator 3.0, which is the first attempt by any organization to rate effectiveness.

It's going to take a couple of years for them to roll out, but it's something I think everyone should keep their eyes on.

Byrnes: I want to transition really quick. I think you have a unique perspective on radio, being the former CEO of NPR. A lot of alternatives nowadays; you have SiriusXM, Pandora, Spotify, iTunes. Where do you see traditional radio going over the next decade or so?

Stern: It's a hard question. I've been making predictions about the demise of traditional radio for some years. About 10 years ago I said, "It has another 15 years." Now I'll sit here and say it has another 15 years. Someday I will be right in saying that it has 15 years.

Byrnes: It's inevitable, right?

Stern: [laughs] Right.

Let's face it; no one would build a radio tower now. It doesn't make much sense in terms of all the options, but in fact there's a built-in audience for it, a huge embedded audience for it now and the force of habit.

Someday, technology will overtake it. More efficient systems for delivering audio and information, they already exist. Someday they'll own the habits of American listeners, but I'll give it 15 years.

Byrnes: How about those I mentioned in particular -- there are obviously a lot more -- I mentioned SiriusXM, Pandora, Spotify, iTunes. Is there a winner in that group, or do you think they can all coexist because they do different things, in a way? Do you think one necessarily takes the cake, going forward?

Stern: I think if I knew I'd be a lot richer. I wouldn't have to write a book. I think, truthfully, there's a marketplace now for all of them. I think a lot of them make a lot more sense. I would say to SiriusXM -- which I'll be going over to do interviews later this afternoon -- it's a pretty good business now.

It has a great marketplace, but again no one would launch a bunch of satellites today, if they had the choice. Even though it's a relatively new technology, it's already an old technology, and for the long run I think probably newer and better technologies will win out, but that takes time.

Byrnes: Absolutely. Ken Stern, author of a very interesting book, "With Charity for All." Thank you so much for your time.

Stern: Thanks for having me.


The article Ken Stern: What's Wrong With the Charitable Sector, How to Fix It originally appeared on

Brendan Byrnes owns shares of Apple and Wells Fargo. The Motley Fool recommends Apple, Chevron, FedEx, Goldman Sachs, Walt Disney, and Wells Fargo. The Motley Fool owns shares of Apple, Walt Disney, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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