The way we think about charity is dead wrong

The way we think about charity is dead wrong.

“I want to talk about social innovation and social entrepreneurship” … Dan Pallotta, founder of AIDS Ride, starts his TED Talk.

His talk is about charity and nonprofits and how many nonprofits are rewarded for “how little they spend – not for what they get done”.

This is a great point – great for discussions as well – and  I will get back to it after a short introduction into the talks as Dan did.

In his eyes businesses will lift up the developing economies and social businesses will take care of most of the other problems. But there are still missing 10 percent of problems which can´t be solved by money or be monetized. He talks about for example disabled people who needs love, needs laugther and people spending time with them. “That´s where nonprofits and philanthropy come in.”

But it doesn’t seem to be working. Why have our breast cancer charities not come close to finding a cure for breast cancer, or our homeless charities not come close to ending homelessness in any major city? Why has poverty remained stuck at 12 percent of the U.S. population for 40 years?

Dan Pallotta shows the most problematic and biggest issue with almost all nonprofits out there: There are two rulebooks – one for the nonprofit sector and one for the rest of the economic world.

This discriminates against the nonprofit sector in 5 different areas:

1. Compensation:

Not as in the for-profit sector where companies make more money the more value they produce, nonprofits can´t make money without getting a negative reaction from people. Money they could use to incentivize people to produce more in social service, money they could help other people with.

“And we think of this as our system of ethics, but what we don´t realize is that this system has a powerful side effect, which is, it gives a really stark, mutually exclusive choise between doing very well for yourself and your family or doing good for the world…”

Thousands of smart people and students could make a huge differencts in the nonprofit sector but they are just not willing to make that kind of lifelong economic sacrifice. And that´s the point and in my eyes actually one of the most interesting points in Dan´s speech:

Businessweek did a survey, looked at the compensation packages for MBAs 10 years of business school, and the median compensation for a Stanford MBA, with bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was 232,000 dollars, and for a hunger charity, 84,000 dollars. Now, there’s no way you’re going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.

 

Some people say, “Well, that’s just because those MBA types are greedy.” Not necessarily. They might be smart. It’s cheaper for that person to donate 100,000 dollars every year to the hunger charity, save 50,000 dollars on their taxes, so still be roughly 270,000 dollars a year ahead of the game, now be called a philanthropist because they donated 100,000 dollars to charity, probably sit on the board of the hunger charity, indeed, probably supervise the poor SOB who decided to become the CEO of the hunger charity, and have a lifetime of this kind of power and influence and popular praise still ahead of them.

I love that example as a great eye-opener for the nonprofit sector. A phrase came in my mind while listening to his great example: “Do well by doing good“.

2. Advertising and Marketing:

People don´t like to see their donations spent on advertising in charity. It´s the next big fault of the people´s way of thinking.

Charitable giving has remained stuck, in the U.S., at two percent of GDP ever since we started measuring it in the 1970s. That’s an important fact, because it tells us that in 40 years, the nonprofit sector has not been able to wrestle any market share away from the for-profit sector. And if you think about it, how could one sector possibly take market share away from another sector if it isn’t really allowed to market? And if we tell the consumer brands, “You may advertise all the benefits of your product,” but we tell charities, “You cannot advertise all the good that you do,” where do we think the consumer dollars are going to flow?

3. Taking risk in pursuit of new ideas for generating revenue:

This point is connected to “money” again. If in for-profits money is spend to start a failing project it´s just a loss. In nonprofits you are always under the gun. Even a loss of a small amount of money the responsible persons are called into question.

4. and 5. are Time and Profit itself.

Putting those five things together, we can see the huge disadvantages of nonprofits. Dan points out that from 1970 to 2009, the number of nonprofits that crossed $50 mil annual revenue barrier, is 144 – the number of for-profits is 46,136.

Now this ideology gets policed by this one very dangerous question, which is, “What percentage of my donation goes to the cause versus overhead?” There are a lot of problems with this question. I’m going to just focus on two. First, it makes us think that overhead is a negative, that it is somehow not part of the cause. But it absolutely is, especially if it’s being used for growth. Now, this idea that overhead is somehow an enemy of the cause creates this second, much larger problem, which is, it forces organizations to go without the overhead things they really need to grow in the interest of keeping overhead low.

 

So we’ve all been taught that charities should spendas little as possible on overhead things like fundraisingunder the theory that, well, the less money you spend on fundraising,the more money there is available for the cause.Well, that’s true if it’s a depressing worldin which this pie cannot be made any bigger.But if it’s a logical world in which investment in fundraisingactually raises more funds and makes the pie bigger,then we have it precisely backwards,and we should be investing more money, not less,in fundraising, because fundraising is the one thingthat has the potential to multiply the amount of moneyavailable for the cause that we care about so deeply.

To underline his statements Dan gives examples of his charity AIDS Ride.

We’ve all been taught that the bake sale with five percent overheadis morally superior to the professional fundraising enterprise with 40 percent overhead,but we’re missing the most important piece of information,which is, what is the actual size of these pies?Who cares if the bake sale only has five percent overhead if it’s tiny?What if the bake sale only netted 71 dollars for charitybecause it made no investment in its scaleand the professional fundraising enterprise netted71 million dollars because it did?Now which pie would we prefer, and which piedo we think people who are hungry would prefer?

He closes his TED Talk with a great statement:

Our generation does not want its epitaph to read, “We kept charity overhead low.” (Laughter) (Applause) We want it to read that we changed the world, and that part of the way we did that was by changing the way we think about these things. So the next time you’re looking at a charity, don’t ask about the rate of their overhead. Ask about the scale of their dreams, their Apple-, Google-, Amazon-scale dreams, how they measure their progress toward those dreams, and what resources they need to make them come true regardless of what the overhead is. Who cares what the overhead is if these problems are actually getting solved?

 

I really like his talk and above all his way of thinking about charity. He shared great ideas and points out that we thwart ourselves with a dead wrong thinking.

A very inspiring and eye opening talk about a topic which is becoming bigger and bigger in these days.

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