PAUL SOLMAN: The floodwaters of the tsunami had yet to recede, but already pictures like these had prompted an outpouring of private American donations, even topping the U.S. government's pledge of $350 million.
PRESIDENT GEORGE W. BUSH: In the weeks since the tsunami struck, private citizens have contributed millions of dollars for disaster relief and reconstruction. In the coming days, Presidents Clinton and Bush will ask Americans to donate directly to reliable charities already providing help to tsunami victims.
PAUL SOLMAN: To those in the charity sector, the private response has been gratifying. The phrase "reliable charities," though, brings to the surface a question that's been bubbling up for years: How much can you trust charities to whom you entrust your money?
Trent Stamp of Charity Navigator, one of several new watchdog groups:
TRENT STAMP: Two hundred and fifty billion will be given to charity this year by individuals, corporations and foundations. But yet there's no third party source out there; there's no consumer reports.
We've always just trotted out benevolent-sounding names and some tragic photographs and said, "Give to us"-- that's enough-- "Trust us; give with your heart, not with your mind."
PAUL SOLMAN: The problem comes when the mind suspects a charity has taken advantage of the heart. The wrenching images of the flood opened hearts and wallets worldwide, but for some nervously, because they remembered what happened when the Red Cross had solicited donations for the victims of 9/11.
DR. BERNADINE HEALY: Shocking tragedies have occurred and America is in mourning.
PAUL SOLMAN: It then turned out the Red Cross set much of the money aside for other purposes. Professor Paul Light, who studies charitable giving, thought that made some sense. After all --
PAUL LIGHT: Some of the money was being reserved for future disasters. They have a relief fund so that when the next hurricane hits, they can get dollars out quickly.
PAUL SOLMAN: But when the story broke, so did a firestorm of controversy.
PAUL LIGHT: And the Red Cross started backing away immediately. They fired their CEO. Then they changed their board. Then they changed their policies.
PAUL SOLMAN: And they declared that all the money would go to victims of the disaster.
SPOKESMAN: America wants our liberty relief efforts directed solely at the affected... people affected by the Sept. 11 tragedies.
PAUL SOLMAN: The perception of a Red Cross double cross came at a bad time for the charity sector, in the wake of a number of recent scandals. Consider the case of New York City's Hale House just a few years ago.
TRENT STAMP: You couldn't think of a more charitable charity than Hale House. They were working with... with crack babies and with children who had been abandoned by their mothers in Harlem.
Mother Hale, who originally ran the organization, was well-known as one of those angels on earth when she started the organization and ran it; when she passed away, her daughter, Lorraine, stole somewhere around three-quarters of a million dollars basically for renovations to her home.
PAUL SOLMAN: Lorraine hale was indicted. Donations plunged. After this and similar scandals, and then the Red Cross affair, public confidence in charities sank to new lows, where it has stayed.
PAUL LIGHT: There's a lot of shock in the sector when I roll out these figures, for example, that only 14 percent of Americans believe today that charitable organizations do a very good job spending money wisely. And, I mean, they're becoming more and more aggressive in saying, "Look, I want to know what I'm getting for my money."
PAUL SOLMAN: But how can we know? Enter the likes of Charity Navigator. It rates charities on tax return data, primarily the percentage of donations spent on programs as opposed to overhead and fundraising.
TRENT STAMP: We rate organizations on nine different criteria, not just whether they're able to keep their program expenses high at the expense of their admin and their fundraising costs. But we absolutely measure what we call "fundraising efficiency," which is for every dollar raised, how much did you have to spend to raise it?
PAUL SOLMAN: But this raises a new and intriguing question: Are donors doing a good thing when they give to the most efficient charities?
PAUL LIGHT: It's a good thing at one level in the sense that charitable organizations should be held accountable for their performance; they should be able to explain how the dollars actually get to the cause.
It's a bad thing if donors end up expecting that 100 percent of every dollar they give is going to go directly to the victim or to the activity because it costs something to spend money wisely. So, what we see in the nonprofit sector right now is organizations that are kind of cutting themselves to the bone to meet this growing expectation that all of the money will make it to the victim or to the program.
PAUL SOLMAN: Take Oxfam, whose mission is to eradicate global poverty, hunger and social injustice. Visiting the New York office, where it sublets space from another nonprofit, one would be loath to accuse Oxfam of squandering money, though this is a step up from its former office in Nicola Reindorp's apartment.
NICOLA REINDORP: And then the empire expanded. Oxfam International in New York became two rooms in June of this year. Most of our colleagues are around the world, so it's actually around having the email, the email that works and a telephone line that works. That's the big thing for us.
PAUL SOLMAN: While Oxfam is generally considered one of the most reliable humanitarian organizations, however, its rating is far from the most efficient. Twent-two percent of donations go toward fundraising and administrative costs, compared to Charity Navigator's target range of 1 percent to 9 percent. But Stephanie Kurzina says a charity like Oxfam is at a statistical disadvantage for several reasons.
STEPHANIE KURZINA: There are two kinds of donation sources that are the big factors that trigger differences in efficiency rating: Those are government grants, large quantities of government grants, which are very large and come at low fundraising cost and large quantities of product donations like medicines. Those are no-cost and they go just to the program and it helps the ratings.
PAUL SOLMAN: But because of possible strings attached, Oxfam doesn't take government grants. Nor does it take most in-kind contributions. Think of the ratings implications, for example, of a recent offer Oxfam received: $1 million worth of equipment to desalinate the ocean water in the tsunami-hit Maldive Islands to make it drinkable.
STEPHANIE KURZINA: But when we looked at the needs of the people there, what we needed was lightweight desalination equipment that wouldn't break down, that could be transported with light weight boats, with people who weren't skilled and trained in operating them; that was what the need was.
So we turned down, graciously, this generous million-dollar donation and we went out and purchased with donor funds about $165,000 worth of equipment that was going to help. And that is what we did instead. Now, that wasn't the most efficient solution according to the rating guides, but it was, we believe, the most effective way to get the job done.
PAUL SOLMAN: Despite the problems with efficiency ratings, however, their growing prominence has put charities on the defensive. Whatever you do, don't let donors think you're diverting their money.
Within a week of the tsunami, for example, the esteemed medical relief group Doctors Without Borders, winner of the 1999 Nobel Peace Prize, announced it had taken in as much as it could for the disaster.
NICOLAS DE TORRENTE: And we decided to tell people that we would no longer accept restricted donations, or any more donations, for the tsunami that we encourage people to consider giving to us for other emergencies that we're continuing to tackle around the world. We're not taking our eye off of the situation in Darfur, the situation in the Congo or the fight against AIDS and TB, and our general programs.
PAUL SOLMAN: Donations kept coming, but at a much lower rate, meaning less in reserve for future catastrophes. But, to Director Nicolas de Torrente, the whole notion of efficiency is misguided, because what any donor ought to worry about, he says, is effectiveness. And there are ways to measure it-- when ministering to a camp of refugees, for instance.
NICOLAS DE TORRENTE: Keeping the death rate below one death per 10,000 people per day. Anything above that is worrisome. Anything above two per 10,000 per day is an emergency situation.
PAUL SOLMAN: Similarly, a malnutrition rate under 5 percent is the metric of a well-run food and nutrition program. But such data are specific to each project and not part of any current rating system. And thus the question: Might actual effectiveness be obscured or even undermined by a good efficiency rating?
PAUL LIGHT: It doesn't tell us whether the food actually made it to Sri Lanka. It doesn't tell us whether the doctors made it to Sri Lanka. It doesn't reveal anything about the actual program performance of the organization, and taken by itself, it's deceptive and misleading.
TRENT STAMP: But should we not measure efficiency because we can't measure effectiveness at this point?
PAUL SOLMAN: And, says Trent Stamp, for those still skeptical about efficiency as a metric, Americans give about the same amount to charity, adjusted for inflation, year after year; thus, giving tsunami aid, for example, to a charity that spends a lot on corporate headquarters or massive marketing campaigns means depriving not only tsunami victims but every other charity out there.
TRENT STAMP: The tsunami-giving will, for the most part, come out of the other charitable giving later in the year. People make choices between charities. It's the last thing in your budget. So, if you give to an inefficient charity, that means that there's less money going to charity in general, which means less money goes to efficient charities.
PAUL SOLMAN: The bottom line then: Measuring efficiency could be leading to an unproductive race to the bottom, who can show the lowest overhead. But not measuring efficiency could let some charities become money machines that simply spend your donations in order to build their own organizations, giving precious little to those in need.