GiveWell notes that, of all nonprofits, only a tiny fraction are worth donating to. Why? Many reasons – but here’s one big one.
Suppose you, Alice, start a business. You have four co-founders, Bob, Carol, Dawn and Edgar. It’s a little bumpy at first, but in your third year, you start turning a profit. The business grows, and makes you all rich. Time to cash in on a cushy retirement, right?
But wait. Carol, Dawn, and Edgar have 60% of the stock. And, like almost everyone, they have some self-interest. What if they vote to take your and Bob’s shares? They have a majority. And they’ll each be much richer. Why not?
In real life, laws prevent this sort of theft. If they didn’t, business partners would rob each other left, right and center. The economy would turn to plunder instead of trade, nothing could get done, and we’d all starve. Most of corporate law deals with protecting minority shareholders.
But that’s exactly what nonprofits are like. Instead of owners, you have a board. And it’s perfectly legal for three board members to vote out the other two, because they don’t like them, or they’re having a bad hair day, or just because. And this happens all the time.
The consequences are what you’d expect. Everyone has to worry, every single day, forever, about either kicking someone else out or not getting kicked out themselves. (I speak from experience.) We blame politicians for only worrying about re-election. But what if elections weren’t every four years? What if, every time an approval rating went below 49%, voters put someone else in on the whim of the moment? Madness, that’s what.
In economics, everyone knows how important secure property rights are. People make more stuff if they get to keep it. The same applies on the organizational level.