Manville (2007) also explores the implementation of the ..... The Nonprofit Techonology Gap - Myth or Reality? Johns. Hopkins University. Guthrie, J., & Parker ...
Assessing approaches to reporting charities' outputs and outcomes
Cherrie Yang* Department of Accounting Faculty of Business AUT University Auckland New Zealand
Rowena Sinclair Department of Accounting Faculty of Business AUT University Auckland New Zealand
Keith Hooper Department of Accounting Faculty of Business AUT University Auckland New Zealand
* Address for correspondence: AUT City Campus, Private Bag 92006, Auckland 1142, New Zealand
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Assessing approaches to reporting charities' outputs and outcomes Abstract: Charities provide a diverse range of services and make a significant contribution to communities. They assist government and other stakeholders to further social objectives by increasing support to those members of society in need and the provision of community benefits (Cullen & Dunne, 2006). In the current economic downturn, funders have had to reduce the supply of funding, which makes charities compete with each other in getting more resources. In order to maximize the chances of funding applications, charities need to provide the achievements in terms of outputs and outcomes. Alternatively, stakeholders are increasingly interested in this information as they wish to support those entities making the most improvements in social benefit. Framjee (2004) points out that stakeholders may stop supporting charities if they cannot satisfy stakeholders’ information needs. Although the demand for the outputs and outcomes is increasing, literature identifies many problems with regard to the recognition, measurement and disclosure of charities’ outputs and outcomes. As a result, this article finds there is a need for more extensive studies in the area of recognition, measurement and disclosure of charities' outputs and outcomes. Also, there is a need to focus on more feasible approaches to address and improve the problems of recognition, measurement and disclosure of outputs and outcomes. This article uses legitimacy theory as a theoretical framework to explain why charities might change their behaviour to meet changing stakeholders' information demands. More specifically, legitimacy is a way of explaining the reasons for charities to recognize, measure and disclose their outputs and outcomes. A review into the existing problems and approaches of recognition, measurement and disclosure of charities' outputs and outcomes will provide a useful foundation to future empirical studies.
Keywords: outputs, outcomes, recognition, measurement, disclosure, NFPs, charities, legitimacy
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Assessing approaches to reporting charities' outputs and outcomes 1
INTRODUCTION
Not-for-Profit Organizations (NFPs) make a significant contribution in almost every sphere of services including culture, sports and recreation, education and research, social services, development and housing, religion, business and professional associations, unions and all other groups (Statistics New Zealand, 2007). Salamon (2010, p. 177) develops a “structural operational definition” of the NFP sector that applies in a cross-national context. Under this definition, the NFP sector is composed of entities that are “organizations, private, not profit-distributing, self-governing and non-compulsory” (Salamon, 2010, p. 178). These five components in the definition comprise NFP sector in a broad term and highlight the fundamental features of NFPs.
NFPs encompass different types of organizations, such as charities, non-governmental organizations (NGOs), voluntary agencies and any such organizations that do not distribute profits from their services (Singh & Pooja, 2006). This article will focus on charities as they are established for a charitable purpose which has a special meaning in law. Section 5 (1) of the Charities Act 2005 states that “charitable purpose includes every charitable purpose, whether it relates to the relief of poverty, the advancement of education or religion, or any other matter beneficial to the community”. Charitable purpose determines the reason why charities exist and indicate the social impact charities have on the communities. Without a clear charitable purpose, funders and donors may find it difficult to determine how their funding and donations benefit these communities (Salterio & Legresley, 2010). By focusing on charities, the charitable purpose would provide a structural basis in the area of assessing charities’ outputs and outcomes. Charities’ mission and objectives would be developed from this structural basis and direct charities’ services. Charitable purpose also provides a foundation to communicate the charities’ mission and objectives to their internal and external stakeholders (Chew & Osborne, 2009) and deepen their commitments to communities in need (Stone & Ostrower, 2007). In the current economic downturn, a convergence of forces is creating opportunities and challenges for the charitable sector. Funders and donors have had to trim their budgets and reduce the supply of funding, some funding that had been promised to charities has not been delivered (C. Harris, 2009). The limited amount of funding available makes charities compete with each other in getting more resources (Huang & Hooper, 2011; Lampkin et al., 2006). Other forces include changes in the funding environment, more professional charities' management, and stakeholders’ demanding more information on charities’ achievements (Alexander, 2000; Cornforth & Mordaunt, 2011; Jackson & Holland, 1998). 3
More challenges are highlighted on charities’ abilities in providing a high quality response to reporting on outcomes and the impacts to their stakeholders (Framjee, 2004; I. Harris, Mainelli, & O'Callaghan, 2002; Hyndman & Anderson, 1991). In particular, charities in the community services sector appear to experience the greatest difficulties in attracting and retaining their volunteers and paid employees (Productivity Commission, 2010). Framjee (2004) further points out that stakeholders may stop supporting charities if they cannot satisfy stakeholders’ information needs.
In this article, the terms NFPs and charities are used interchangeably, as some of the research cited focuses solely on charities or sectors for which charities are a sub-group. The article is organised, first, to introduce the outcome framework for charities to report outcomes. Second, various problems with regard to the recognition and measurement of outputs and outcomes are discussed. Third, existing recognition and measurement approaches which address these problems are identified. Then, disclosure of outputs and outcomes is assessed, particularly on ‘to whom’ and ‘by what means’ charities disclose this information. Next, legitimacy theory as a theoretical framework is used to explain why charities recognize, measure and disclose their outputs and outcomes. Finally, the conclusion summarizes the findings expressed in this article.
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THE OUTCOME FRAMEWORK
In order to cope with these challenges and grasp opportunities to standout, charities need to prove not only what they do by providing services and assisting needy beneficiaries, but more importantly, what difference they are making, i.e., how these services impact on their beneficiaries and change their lives for the better. An outcomes framework is utilized to demonstrate the achievements charities made (Buckmaster, 1999; Hatry, Houten, Plantz, & Taylor, 1996). Therefore, whether the services charities deliver make positive changes to their beneficiaries’ lives and whether charities efficiently used resources provided by and for their stakeholders can be assessed.
2.1
A framework to report outcomes
The outcome framework in figure 1 emphasizes the outcomes, which are a more meaningful measure of charities’ value than outputs (Hendricks, Plantz, & Pritchard, 2008). Measuring outcomes is the ultimate goal for charities as it provides a practical umbrella for more detailed outcome reporting (Street, 2011). The outcome framework flows from charities’ inputs to processes, which produce outputs and outcomes to stakeholders. Neither inputs, processes, nor outputs are real results, they only count when they help to produce the desired outcomes (Behn & Kant, 1999). Moreover, other information is required from this outcome framework which includes clarified mission statement and outcome-related objectives, measures that link to such mission and objectives, valid and reliable data collection methods and established techniques and tools to measure outputs and outcomes (Buckmaster, 1999).
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INPUTS
PROCESSES
OUTPUTS
OUTCOMES
Figure 1: The outcome framework (Hatry et al., 1996)
2.2
Inputs, Processes, Outputs and Outcomes
Inputs are the resources used by charities to produce the outputs (Snively, 2008). Inputs provide information about what charities have spent money on e.g. paid employees, volunteers, facilities, materials and equipment. Volunteers are important inputs as they bring immense value to charities (Fisher, 2010). Processes require inputs to fulfil charities’ mission and objectives and design to produce the expected outputs and outcomes to needy beneficiaries (Buckmaster, 1999).
Outputs are the direct results of services and are measured in units (Buckmaster, 1999). For example, number of service activities and hours spent on each activity, frequency of services and number of clients served. Outcomes are defined as impacts or changes for individuals or communities after participating in the services of charities (Norman, 2007). Outcomes tend to be less tangible and therefore less countable than outputs. Whether these impacts or changes are the intended results of charities’ services is the important information for the stakeholders. The outcome framework effectively requires that implementation be an all-embracing system. It can be expressed in terms of how collectively inputs, processes, outputs and outcomes contribute to the charities’ service deliveries for their stakeholders. The outcome framework also assesses the results of changes to the environment in which charities operate and demonstrates whether the charities achieve these results in an economic, efficient and effective way.
2.3
Economy, Efficiency and Effectiveness
The outcome framework in figure 1 not only aims to produce outcomes, but focuses on monitoring charities to reduce inputs (economy) whilst simultaneously improving the efficiency and effectiveness of service delivery (Buckmaster, 1999; Malcolm, 2001; Productivity Commission, 2010). Assessing economy, efficiency and effectiveness through the outcome framework is therefore important information for stakeholders. Economy assesses whether the inputs charities 5
spend on their processes are reasonably priced. This also refers to the careful use of scare resources. Efficiency assesses the ability of charities to process their services. Whether the same level of service are delivered for less cost, time or effort can be considered (Sargeant, Jay, & Lee, 2006). On the other hand, effectiveness refers to the relationship between charities’ outputs and outcomes. Outcomes are achieved if the outputs are delivery in an effective manner and align with charities’ mission and objectives. It also assesses whether the units of outputs produced are the right outputs (Schmaedick, 1993).
Therefore, the outcome framework demonstrates the evidence of the difference charities make to their beneficiaries’ lives, which is the information stakeholders demand. Charities need to continuously monitor and disclose economy, efficiency and effectiveness of their service delivery to their stakeholders by understanding the nature of the engagement between the charities’ inputs, processes, outputs and outcomes. Nonetheless, the outcome framework still has various problems with regard to the recognition and measurement of outputs and outcomes which will be discussed in the next section.
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PROBLEMS OF OUTPUTS AND OUTCOMES RECOGNITION
The literature highlights a number of problems that charities have about the recognition of outputs and outcomes against their mission and objectives (C. Harris, 2009; Hedley et al., 2010; Snively, 2008).
3.1
Mission and Objectives
The outcome framework requires that charities have a clarified mission and objectives. Some authors have concerns about the recognition of mission and objectives (Birrer & Stango, 2005; C. Harris, 2009; Stone & Ostrower, 2007). These researchers suggest that charities must have a clear understanding of their mission and objectives that directs all aspects of their work and deepens their commitment to society. A well-defined mission serves as a constant reminder of measures of success and drives charities’ services and commitments. The objectives charities are working towards need to be SMART – “specific, measurable, achievable, relevant, and time bound” (Murrary, 2001, p. 40).
How well charities are upholding their mission and objectives, and how responsive they are to their stakeholders are questions charities need to consider. Therefore, charities need to recognize that their mission and objectives are supported by high-demand beneficiaries. Then, the alignment between charities’ services and their mission and objectives to prevent mismanagement of resources can be established.
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3.2
Recognition of only outputs, not outcomes
There are strong concerns about the lack of recognition that charities have of outcomes, as opposed to outputs, and the impact this has on communities they serve (Hedley et al., 2010; KPMG, 2011; Snively, 2008). Without useful outcome information, funders cannot establish if the funds they provide are being used to deliver the projected changes in society. This may be a determinative factor around whether funders continue to fund a particular cause (Patel & Cordery, 2011).
As described in the outcome framework, outcomes provide more meaningful information than outputs. Outputs only quantify the various services that occur, rather than demonstrate the achievements of charities in addressing societal needs. Therefore, there is a need for charities to go beyond simple outputs and shift the recognition emphasis to outcomes (Hyndman, 1990; Productivity Commission, 2010).
3.3
Recognized outputs and outcomes ≠ Mission and objectives
Another concern is that the recognized outputs and outcomes are not related to the mission and objectives of the charities. Researchers support that recognition of charities’ outputs and outcomes must be aligned with their mission and objectives, to demonstrate they add value to the society (I. Harris et al., 2002; Hedley et al., 2010). However, achieving alignment may be difficult for many charities. Sheehan (1996) reports that although many charities had clear mission statements, very few have revealed whether they had an impact on their mission.
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PROBLEMS OF OUTPUTS AND OUTCOMES MEASUREMENT
After discussing the problems of recognition, problems of outputs and outcomes measurement are identified.
4.1
Problem of outputs measurement
Many charities only provide outputs which are the easiest to measure, but these outputs might not link to the actual results or provide a meaningful indication of efficiency (Ridge, 2010). Outputs which can be measured the easiest, such as client counts, numbers served or referrals made have not carried the evidence of mission achievement in charities. These outputs measurement may be easy to collect, easy to compare and easy to understand, but they are not the ultimate results charities and their stakeholders desire.
4.2
Problem of outcomes measurement
Since the services charities deliver are mainly intangible, sufficient robust evidence is hard to obtain. Thus, it is difficult to quantify their outcomes (Kanter & Summers, 1987; McCurry, 2010; Vogt, 1999; Wilson, 1989). A timing issue is another difficulty to measure outcomes (Buckmaster, 7
1999; I. Harris et al., 2002). Outcomes have a longer life span to obtain accurate and reliable data (Buckmaster, 1999).
Many charities have realized that it is a problem not to measure their achievements, but they do not provide accurate outcomes information. Instead, a large amount of information on the facets of services or copious pages of data have been provided e.g. by telling successful stories, but not the failures (Scoringe, 2010). Also, some outcomes measurement are indirect and subject to external influences (Wilson, 1989). Moreover, another problem of outcome measurement is some charities may fear that attempts to assess outcomes will reduce their legitimacy since the outcomes they measured might not be the outcomes they desired (I. Harris et al., 2002). Alternatively, some funders only demand output statistics rather than assessment of outcomes (I. Harris et al., 2002). Therefore, it is hard to promote an evidence-based outcomes measurement if these problems have not been addressed.
4.3
Resources constraints
Lack of funding, limited staff time, limited expertise and the high costs can restrict many outputs and outcomes measurement (Murrary, 2001; Salamon, Geller, & Mengel, 2010). Measuring outcomes can be expensive and require consideration time to obtain comprehensive feedbacks (Buckmaster, 1999; Salamon et al., 2010). Charities are experiencing considerable frustrations in balancing the demands from their stakeholders with the reality of limited resources and difficulties of measurements (Alexander, 2000).
To cope with the various challenges and problems of outputs and outcomes recognition and measurement, charities need to use some kind of approach which addresses these challenges and problems. There is a growing emphasis on the approaches in terms of the techniques and tools, which were initially used in the business sector, but are widely used in the charitable sector (Myers & Sacks, 2003).
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RECOGNITION AND MEASUREMENT APPROACHES
There are a number of approaches charities are currently utilizing to recognize and measure their outputs and outcomes. These approaches will be discussed in terms of techniques and innovative tools.
5.1
Techniques
To assess whether charities are fulfilling their mission and objectives and identify the difference they made, techniques are utilized to recognize and measure the outputs and outcomes. Techniques, in this context, are the technical methods in which charities’ management and the Board select to recognize and measure the outputs and outcomes. There are a wide variety of 8
techniques have been applied to or developed for the charitable sector which are used to measure the efficiency and effectiveness of charities. 5.1.1
Output Techniques
Hyndman and McKillop (2006) indicate accounting ratios draw attention to information that guides stakeholders in measuring performance and making better decisions. For example, if the ratio of inputs to outputs suggests the resources are not being used efficiently, managers in the charities may react by implementing cost control strategies. More output techniques are identified in Salamon et al ’s (2010) research which includes program output measures, efficiency measures and benefit/cost ratios. However, their study provides strong evidence that even if output measures are still the most common measurement technique, outcome measures have become increasingly widespread (Salamon et al., 2010). 5.1.2
Outcome Techniques
Key Performance Indicators (KPI) help charities to understand how well they are performing in relation to their mission and objectives (Carson, 2010). Norman (2007) claims charities should focus on measuring outcomes against key indicators to reflect the mission and objectives of the entity. Torres and Pina (2003) consider that the financial reports of charities are incomplete until the implementation of performance indicators. By identifying a set of indicators to record, monitor, evaluate and report charities’ performance, charities are empowered to continuously improve performance (Snively, 2010). KPI measurement can go beyond numbers and can includes words, graphs, pictures and even video clips to describe, assess and communicate charities’ performance (Carson, 2010). Social return on investment (SROI) is another way of measuring the social value of charitable services. It enables charities to demonstrate the worth of their services and articulate the added social value they create (Pro Bono Australia, 2009). In SROI, financial values are used as proxy indicators for measuring the outcomes of charities’ activities (Guthrie & Parker, 1989) which draws on the principle of cost-benefit analysis (Productivity Commission, 2010). Benchmarking is a further widely accepted technique to measure charities’ outcome achievement. It allows charities to compare their commitments with a reliable scale to measure the variety of differences. Then, the areas for improvement can be identified and strategies to implement such improvement can be developed (Rutowski, Guiler, & Schimmel, 2009). 5.1.3
Output and Outcome Techniques
The Balanced Scorecard (BSC) was developed for profit organizations in 1990s, but it also has been widely used in NFPs (Kaplan & Norton, 1992). It focuses on the long term value creation and measures and monitors both charities’ outputs and outcomes (Kaplan, 2001). The BSC provides 9
measurement of performance from four perspectives: 1) financial; 2) customers; 3) internal processes; and 4) learning and growth (Kaplan & Norton, 1992). Charities might have difficulties to place the financial perspective at the top of the BSC since their success or failure is not measured by spending in relationship to budgeted amounts. Kaplan (2001) suggests that the charities consider placing their mission and objectives at the top of their BSC. Martello, Watson and Fischer (2008) examines that use of BSC in a NFP which has placed equal emphasis on the financial and consumer perspectives. The emphasis on both of these perspectives has become a necessity to ensure efficiency and effectiveness in the NFP (Martello et al., 2008). Manville (2007) also explores the implementation of the BSC within a NFP small and medium sized entity and finds that the motivations for adopting it were from both internal and external stakeholders.
These are the various techniques charities currently using to measure their outputs and outcomes. Each technique has its own way of addressing different problems of performance. However, which ones are the most suitable techniques to assess charities’ outputs and outcomes is unknown at the stage.
5.2
Innovative Tools
Another way to address the existing challenges and problems is by using innovative tools. Salamon et al (2010, p. 2) define innovation as “a new or different way to address a societal problem or pursue a charitable mission that is more effective, efficient, sustainable, or just than prevailing approaches”. Thus, one way of assisting charities in addressing the existing challenges and problems of recognition and measurement of outputs and outcomes is to adopt innovative tools. 5.2.1
Innovative practices in Charities
Innovative practices are not overarching solutions, but aid along the recognition and measurement of outputs and outcomes. They allow charities’ outputs and outcomes to being reported efficiently and effectively. Two studies have further discussed how innovative practices are applied in the charitable sector which has changed the ways charities recognize and measure their outputs and outcomes.
Salamon et al (2010) report the findings of a survey of 417 NFPs. They identified many positive effects from adopting innovative practices, such as the increased focus on the services’ long term goals, reputations of charities are enhanced, the services delivery has been improved and more funding generated and increased media exposure (Salamon et al., 2010).
Geller et al (2010) reports the findings of a survey of 1,100 NFPs engaged in using information technology to support and enhance service delivery. The majority of the NFPs rely on a range of current information technologies for service delivery activities, such as, tracking clients in a database, encouraging communication with clients and among clients, assisting organizations in the 10
development of services and provide virtual experience e.g. exhibits online (Geller et al., 2010). Thus, innovative practices can increase the chances of funding applications by delivering better services. 5.2.2
Existing Innovative Tools
There are a range of innovative tools that have been designed, or adapted, for use by charities. In general, innovative tools in the charitable sector represent computerized programs developed to evaluate the outputs and outcomes of charities. Four existing innovative tools that evaluate charities’ outcomes will be discussed here.
Easy Outcomes is a comprehensive approach which consist of ten steps to monitoring outcomes and it can be implemented by DoView software (Duignan, 2008). DoView is an outcome and evaluation software which visualizes the high-level outcomes. It shows various steps to achieve them and work out whether charities are on track. A communication function to the funders and stakeholders is also available (DoView, 2012). Therefore, Easy Outcome approach is using DoView as a visual tool to report outputs and outcomes.
My Outcome is another client-driven outcomes management system that requires direct customer feedbacks. It encourages individualized service delivery and enables on-going monitoring of effectiveness for charities (My Outcomes, 2011). It is a web-based tool that supplements the Outcomes Rating Scale and Session Ratings Scale with instant calculations, graphing, and feedback (My Outcomes, 2011). Both scales are techniques My Outcome use to measure and report outcomes at each stage of service delivery. It not only provides evidence of services internally on staff performance, and also gives beneficiaries an opportunity to express their feeling of the services, thus improve outcomes measurement.
The third innovation tool is called Efforts to Outcomes. It is a software program that helps charities to track efforts, outcomes and progress to human and social services (Social Solutions, 2010).
Another innovative tool that addresses both financial and non-financial information is integrated reporting (IR). IR is identified as a new principles-based approach that is under development and applies to charities reporting (International Integrated Reporting Committee, 2012). It enables stakeholders of organizations such as charities to understand how they are really performing (International Integrated Reporting Committee, 2012). It also helps charities to integrate their values, mission, strategies and performance in a more systematic and over-arching way (Adams & Simnett, 2011). Therefore, IR may be considered even more applicable to the charitable sector than the profit sector as charities are mission driven, have intangible services and a high dependence on trust and reputation (Adams & Simnett, 2011; Roos, 2005).
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As identified in the Salamon’s study (2010), charities using outcome measures were significantly more likely to disclose outcomes of adopting recognition and measurement approaches than entities not using such approaches. Therefore, the next step is to assess the disclosure of outputs and outcomes, after recognizing and measuring them.
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DISCLOSURE OF OUTPUTS AND OUTCOMES
There are many problems identified in the literature with regard to the disclosure of charities’ outputs and outcomes. Funders have requirements on charities to report back whether they meet their contractual targets, but there are no standardized reporting systems to disclose charities’ outputs and outcomes (Williams & Moxham, 2008). Another problem is that the audited financial reports only disclose outputs, not outcomes (Hyndman, 1990). In the same vein, Connolly and Dhanani (2009) consider that there is an absence of performance-type information disclosure in annual reports. This may due to the lack of approaches to capture outcomes or charities seeking to demonstrate the legitimacy of their services on the nature of their work rather than from evidence of the resulting societal change (Connolly & Dhanani, 2009). Recognition and measurement approaches should be treated as guides or aids to decision-making (Torres & Pina, 2003). They cannot be properly understood without consideration of to whom and by what means are these information disclosed (Ebrahim, 2005).
6.1
Classification of stakeholders – to whom
As identified earlier, stakeholders of charities include funders, donors, regulators, beneficiaries, staff (paid employees), management and the Board, volunteers, and the public at large (Connolly & Hyndman, 2003). These can be classified into two categories of stakeholders: external and internal (refer table 1).
External stakeholders can be further classified into upward and downward stakeholders. Funders, donors and regulators refer as upward stakeholders, while beneficiaries refer as downward stakeholders (Connolly & Dhanani, 2009; Dhanani, 2009). Upward stakeholders provide resources and perform an oversight function to the charities and downward stakeholders are those who benefit from charities’ services and are considered to lack a voice (Connolly & Dhanani, 2009).
Internal stakeholders can be further classified into decision makers and implementers. As the decision markers, charities’ management and the Board play an essential role. The success of management and the Board in charities is measured by the success of charities’ abilities to fulfill their mission and objectives (Lee & Wilkins, 2011). However, many charities are struggling with using the appropriate recognition and measurement approaches to track their impacts and align with charities’ mission and objectives (Poole, Nelson, Chepenik, & Tubiak, 2000). Therefore, the decisions of selecting the appropriate approaches in terms of the techniques and innovative tools 12
fall on the charities management and the Board, who need to ensure that the meaningful information can be produced from the selected approaches. On the other hand, staff who are paid employees of charities. Their responsibilities are to implement the recognition and measurement approaches selected by the management and the Board. They are the implementers.
Classification of Stakeholders External Internal
Upward Stakeholders
Funders, donors, regulators *
Downward Stakeholders
Beneficiaries
Decision Makers
Management and the Board
Implementers
Staff *
* Volunteers may be considered as both external and internal stakeholders Table 1: Classification of Stakeholders
Volunteers are important resources for charities and to the charitable sector as a whole (O'Brien & Tooley, 2010). For example, Statistics New Zealand (2007) found that 90 percent of charities were only dependent on volunteering support. This represents significant volunteer contributions to the community. However, it is difficult to classify volunteers into external or internal stakeholders as they may be classified into both categories (refer table 1). Volunteers can be classified as upward stakeholders as they provide valuable resources i.e. donate time, talents and skills to charities (Hayghe, 1991). On the other hand, volunteers can also be classified as implementers. This is because many charities may lack of staff to implement management and the Board’s decisions, they depend on volunteers to assist their implementation process (Mook, Sousa, Elgie, & Quarter, 2005; Salamon et al., 2010).
6.2
Disclosure Approaches – by what means
After identifying and classifying stakeholders, questions arise as to what approaches outputs and outcomes are disclosed to stakeholders in each category.
Most charities publish their annual reports and disclose them to their stakeholders. Sometimes, for fundraising and administration purpose, the financial percentage is given to expenditures in relation to the funding income (Williams & Moxham, 2008). Although traditional financial statements contained in charities’ annual reports enable stakeholders to assess the financial position of the entities and how its funds were acquired and spent, they play a limited role in disclosure of outputs and outcomes as they provide little information about services they deliver and impacts they made to the community (Hyndman, 1990).
For upward stakeholders, periodical reports are usually required to be submitted to the funders and donors based on funding agreements. With regard to the regulators, some legislation requires charities to provide information to their stakeholders. Such as, in New Zealand the Charities Act 13
2005 requires all charities registered with the Charities Commission1 to file an annual return. It consists of a copy of the charity's financial accounts which includes a statement of the financial performance of the charity. This information is available on the publicly Charities Register (Charities Commission, 2012). Downward stakeholders can obtain additional information about the services charities deliver from their websites (Connolly & Dhanani, 2009; Wenham, Stephens, & Hardy, 2003).
On the other hand, internal stakeholders have more direct disclosure of outputs and outcomes as they work inside the charities. For management and the Board, their disclosure approach is the regular meetings include board meeting where reports of outputs and outcomes, daily management activities and issues of implementations can be addressed. For staff or volunteers who work for the charities, they can obtain outputs and outcomes by receiving internal newsletters or emails correspondence which contains outputs and outcomes.
After assessing recognition, measurement and disclosure approaches to reporting outputs and outcomes, the next section explains the reasons why charities have different behaviours to reporting this information by using legitimacy theory as a theoretical framework.
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THEORETICAL FRAMEWORK
Suchman (1995) defines legitimacy as “a generalised perception or assumption that the actions of an entity are desirable, proper and appropriate within some socially constructed system of norms, values, beliefs and definitions” (p. 574). This definition attempts to view entities including charities as a component of the larger social system.
7.1
Social Contract
Within this social system, there lies a social contract between an organization and the society in which it operates (Deegan, 2002). The social contract is used to describe social expectations of an organization’s conduct and the organization is expected to comply with the expectations embodied within the social contract (Deegan, 2006). Consistent with this view, charities are part of a broader social system. They exist to the extent that the stakeholders include funders, donors, beneficiaries, and the public at large consider that they are legitimate.
1
In October 2011, it was announced that the Charities Commission was disestablished and its core functions was transferred to the
Department of Internal Affairs ("Crown Entities Reform Bill," 2011). The Charities Commission’s registration and other related functions was delegated to a statutory board (Charities Commission, 2011). How these changes impact on the detailed operations is unknown at this stage.
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Since producing profits are not the purpose of charities’ operations, reporting of bottom line surplus or deficit is relatively unimportant to their stakeholders (Cherny, Herson, & Gordon, 1992) and should not be considered a criteria of legitimation. The information stakeholders need is not focused on how much has been spent, but rather how much has been achieved in addressing societal needs (Framjee, 2004). Therefore, stakeholders expect charities to provide some evidence of the difference they made to their beneficiaries’ lives and charities need to comply with these expectations to be legitimated. Legitimacy in the eyes of stakeholders must be constantly reinforced by charities to demonstrate their values. In return, charities are benefiting from the rewards such as funding and donations that have society’s approval (Shocker & Sethi, 1973). Otherwise, if organizations including charities break the social contract, they risk sanctions such as loss of funding and donations forced upon by the society (Deegan & Rankin, 1996).
Nevertheless, what might be considered legitimate at one point in time might not be considered legitimate at a future point in time because of changing community attitudes (Deegan, 2006). As an example, many donors donate to charities and never request information about where charities spend their donations and what happens to their money (Kendall & Knapp, 2000). With changing community attitudes towards the recognition, measurement and disclosure of outputs and outcomes in the charitable sector, donors are beginning to signal that they are not happy with the current level of information provided by charities and would like to know more about what is actually happening to their support and donations (Bekkers, 2003). Also, some criteria on the effectiveness are established for donors to select charities in relation to their giving (Roger & Moxham, 2009). These selection criteria assist donors in supporting charities which provide the required information. As community expectations change, legitimacy theory would suggest that organizations including charities must also adapt and change or else their survival will be threatened (Deegan, 2006). Pursuant to the social contract, if a group of stakeholders question the legitimacy of charities, these charities will in turn have difficulties in attracting and maintaining their funding and support. Therefore, charities’ legitimacy is always threatened, giving rise to a legitimacy gap (Dowling & Pfeffer, 1975).
7.2
Legitimacy Gap
A legitimacy gap describes “a lack of correspondence (or a gap) between how society believes an organization should act and how it is perceived that the organization has acted” (Deegan, 2006, p. 163). Figure 2 symbolizes the legitimacy gap between the charities achievements and stakeholders’ expectations. This depiction is adapted from O’Donovan (2002) research and is applicable with modifications to the charitable sector. In figure 2, the area Z represents the expectations from stakeholders on the results charities should achieve, based on social values and norms.
The area Y represents the actual results charities have achieved. It reflects the outputs and outcomes charities recognized and measured by various approaches. However, Deegan (2002, p. 15
165) explains that “for an organization seeking to be legitimate, it is not the actual conduct of the organization which is important, it is what society collectively knows or perceives about the organization’s conduct that shapes legitimacy”. This indicates that the key to determining charities’ legitimacy not only depends on the outputs and outcomes they achieve, but the results they have disclosed to stakeholders. Therefore, the area Y of charities achievements is not limited to the actual outputs and outcomes charities recognized and measured, but more importantly, the results charities disclosed and made available to their stakeholders. Also, the information charities disclosed to the public are the information stakeholders perceived, which could be used to determine the legitimacy of charities.
No charity can completely satisfy all stakeholders by meeting their expectations. The degree of satisfaction reflects on the congruence between the results charities have achieved and stakeholders expected, which is identified in the area X. It demonstrates how important charities’ management and the Board perceive the stakeholders’ expectations on the results, and made this information available to these stakeholders. On the other hand, the difference between the area Y and X and the area Z and X shows the incongruence between the results charities have achieved and the results stakeholders’ expect. It might also be due to the challenges charities face and the various problems with regard to the recognition, measurement and disclosure of outputs and outcomes. The larger the area X in the figure 2 is, the more importance charities’ management and the Board place on stakeholders’ expectations and the more recognized and measured outputs and outcomes are disclosed to stakeholders.
Y Charities Achievements
X
Z Stakeholders Expectations
Z - Stakeholders' expectations on the results charity achieved Y - Charities achievements X - Congruence between the results charities achieved and stakeholders expected Y-X & Z-X - Incongruence between the results charities achieved and stakeholders expected
Figure 2: Legitimacy gap between charities achievements and stakeholders’ expectations - adapted from O’Donovan (2002)
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7.3
Strategic Approach
Suchman (1995) draws attention to the strategic and institutional approaches to legitimacy. The strategic approach assuming a larger level of control by management over the legitimacy process by adaptation of symbols and rituals. Researchers like Dowling and Pfeffer (1975), Pfeffer (1981), and Ashforth and Gibbs (1990) view legitimacy as an operational resource to be used by management and this line of thinking is to the fore of this article. Since charities “lack the discipline of the bottom line”, management and the Board play an essential role to guide implementations and disclose achievements to their stakeholders (Drucker, 1989, p. 89). The success of charities is measured by management and the Board’s abilities to fulfill the mission and objectives (Lee & Wilkins, 2011). To demonstrate the abilities, charities’ management and the Board need to focus on the recognition, measurement and disclosure of outputs and outcomes to achieve legitimacy in the eyes of stakeholders. Charities’ management and the Board not only anticipate changing community expectations, but also try to close the legitimacy gap and sustain charities’ legitimacy. Thus, a high level of managerial control over the legitimation process is identified in charities.
Legitimacy theory gives explicit consideration to the expectations of stakeholders, and whether charities are complying with the expectations of their stakeholders. Parsons (1960) argues that organizations that pursue goals in line with social values have a legitimate claim on resources. Dowling and Pfeffer (1975) continues this line of thought and argues that legitimacy efforts help to explain organization adjustment to the society. A failure to comply with stakeholders’ expectations such as not providing charities’ outcomes has implications for charities’ on-going survival. For this reason, managerial control over the legitimation process may be a determinant factor of charities’ success. The managerial control might be reflected on the selection and implementation of recognition, measurement and disclosure approaches of outputs and outcomes. However, the selection and implementation of these approaches is largely influenced by the legitimacy typology which will be discussed in the next section.
7.4
Legitimacy Typology
According to Suchman (1995), legitimacy is being driven by pragmatic, moral or cognitive considerations, that help to explain why charities might change their behaviours to meet changing social values. All three typology of legitimacy (pragmatic, moral and cognitive) are relevant. 7.4.1
Pragmatic Legitimacy
Pragmatic legitimacy rests on the self-interested calculations and determination of practical consequences of an organization’s most immediate audiences (Suchman, 1995). Charities’ responses to stakeholders’ expectations for legitimacy leads to persistence as Parsons (1960) 17
argues that stakeholders are most likely to supply resources to organizations that appear desirable or appropriate. Pragmatic legitimacy calculate the expected value of focal organizations’ service activities, aims, objectives and policies to immediate stakeholder groups (Suchman, 1995).
Upward stakeholders such as funders and donors might be the most immediate audiences of charities. They may find charities services pragmatically legitimate as such services provide some solutions to the social problems. The self-interested calculations reflect on to what extent charities use the funding and donations to address the beneficiaries in need. The recognized, measured and disclosed outputs and outcomes provide the evidence of the difference charities made to the beneficiaries’ lives, thus, making them pragmatically legitimate. Also, downward stakeholders such as beneficiaries are another immediate audience who have their self-interested calculations. They would only support those charities they think are legitimate to provide sufficient help to them. This exchange-based idea of legitimacy denotes an attribution of social acceptability by stakeholders if a service provides them with anything of value. 7.4.2
Moral Legitimacy
By contrast, moral legitimacy is harder to achieve. It refers to legitimacy that is normative and based on an evaluation of whether the services of a focal organization is “the right thing to do” rather than whether it specifically benefits those who are making the evaluation, and it “reflect(s) beliefs about whether the activity effectively promotes societal welfare” (Suchman, 1995, p. 579). The rightness of charities’ purpose drives many stakeholders such as staff, volunteers and broad community to trust and support charities. Thus, charities may be deemed morally legitimised because of their charitable purpose. For example, upward stakeholders such as donors or volunteers may donate to the Cancer Society and Breast Cancer Foundation and voluntarily help them, because they believe this is the right thing to do. 7.4.3
Cognitive Legitimacy
Cognitive legitimacy establishes the taken-for-granted quality of organizational pursuits, in that stakeholders come to believe the way their organizations work is the most appropriate, and perhaps the only acceptable approach (Suchman, 1995). Some upward stakeholders, such as volunteers, may support charities as necessary or inevitable due to this taken-for-granted quality. Also, donors may donate to charitiesand are literally unthinkable and unquestionable. For instance, when people donate money on the Poppy day to the Royal New Zealand Returned and Services Association, they don’t usually query where the money has been spent, but only donate because it is taken for granted.
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8
CONCLUSION
In conclusion, there has been a lot of research in the area of charities’ outputs and outcomes' recognition, measurement and disclosure. For many charities, they have realized the opportunities, challenges and problems in the charitable sector. To overcome these challenges and problems, and grasp the opportunities, they need to recognize, measure and disclose their impacts and convince funders of their value. Legitimacy theory is used as a theoretical framework to explain why charities might change their behaviour to meet changing stakeholders' information demands and achieve legitimacy in the eyes of stakeholders. More specifically, why charities need to recognize, measure and disclose their outputs and outcomes.
However, only limited studies suggest approaches to recognize and measure outcomes, rather than simply identifying the needs for and the difficulties of outcomes measurement. Among previous researchers who report outputs and outcomes, there is minimum empirical research focused on evaluating them in terms of techniques and innovative tools, as well as, further assessing what disclosure is made available. There is a need for more extensive studies in the area of recognition, measurement and disclosure of charities' outputs and outcomes. Also, there is a need to focus on more feasible approaches to address and improve the problems of recognition, measurement and disclosure of outputs and outcomes. Therefore, further studies might focus on this area by assessing what techniques and innovative tools charities are using, why they have been selected, how these approaches have assisted charities and to whom and by what means are outputs and outcomes disclosed.
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