Dan Pallotta: The Way We Think About Charity Is Dead Wrong
The things we’ve been taught to think about charity and the nonprofit sector are actually undermining the causes we love and our profound yearning to change the world.
If we really want a world that works for everyone, with no one and nothing left out, then the nonprofit sector has to be a serious part of this. However, what the nonprofit sector is doing doesn’t seem to be working; poverty and homelessness still exist and cures for cancer haven’t been found. This is because these social problems are massive in scale and our organisations are tiny up against them, and we have a belief system that keeps them tiny. We have a different set of rules for the nonprofit sector than for the rest of the economic world. This apartheid discriminates against the nonprofit sector in 5 different areas:
The more value you produce the more money you can make. However, we don’t like the nonprofit sector to use money to incentivise people to produce more. We have a visceral reaction to the idea that anyone would make very much money helping others although we don’t react this way to people making money not helping other people. For example if you want to make 50 million dollars selling violent video games to kids that’s fine, but if you want to make half a million trying to cure kids of malaria you’re considered a parasite yourself.
- Advertising and marketing
The profit sector spends an unbelievable amount of money on advertising, but we don’t like to see our donations spent on advertising in charity even though the money invested in advertising has the power to produce much more money and actually solve some of these social problems in the long term.
Charitable giving has remained stuck at two percent of GDP in the U.S since the 1970s. This shows that in 40 years the nonprofit sector has been unable to wrestle any market share away from the profit sector. This is unsurprising considering that consumer brands are allowed to advertise the benefits of their products but charities are not allowed to advertise all the good they do.
- The risk in pursuit of new ideas for generating revenue
When you prohibit failure, you kill innovation. If Disney make a 200 million dollar movie that flops it doesn’t matter, but if a charity community fundraiser doesn’t produce a 75 percent profit within a year the charity is called into question. This is why nonprofits are reluctant to attempt anything brave; for the sake of their reputation. Without innovation, revenue won’t increase and charities can’t grow and actually solve large social problems.
Amazon went for six years without returning any profit to investors but people had patience and understood that there was a long-term objective down the line of building market dominance. If a nonprofit organisation ever had a dream of building a magnificent scale that meant no money goes to the needy for six years we would expect a crucifixion.
The profit sector can pay people profits in order to attract their capital for their new ideas but you can’t pay profits in a nonprofit sector, so the for –profit sector as a lock on the multi-trillion dollar capital markets and the nonprofit sector is starved for growth and risk and idea capital.
So if we put these 5 things together, you can’t use money to lure talent away from the for-profit sector, you can’t advertise anywhere near the scale the for-profit sector does for customers, you can’t take the kinds of risks in pursuit of those customers that the for-profit sector takes, you don’t have the same amount of time to find them as the for-profit sector and you don’t have a stock market with which to fund any of this even if you could do it in the first place and above all you’ve just put the nonprofit at an extreme disadvantage to the for-profit sector on every level. The social problems that we are dealing with are massive in scale and our organisations can’t generate any scale.
Why do we think this way? These ideas come from old Puritan beliefs. The Puritans were pious people but really aggressive capitalists- However, they were also taught to hate themselves and that self-interest was a sure path to eternal damnation. So charity became their answer: they could do penance for their profit making tendencies. Financial incentive was exiled from the realm of helping others and in 400 years nothing has intervened to say that’s counterproductive and unfair.
This ideology gets policed with a very dangerous question: “what percentage of my donation goes to the cause versus overhead?” There are a lot of problems with this question- Firstly it portrays overhead as a negative and not part of the cause when it is especially if it’s being used for growth. Secondly it forces organisations to go without the overhead and things they really need simply in the interest of “keeping overhead low”. It is not true that if charities spend as little as possible on overhead then they have more money available for the cause: investment in fundraising actually raises more finds and results in growth. We have confused morality with frugality. We’ve been taught that the bake sale with 5 percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we’ve missed the point which is, what is the size of these endeavours? Say the bake sale netted 71 dollars and the fundraising enterprise netted 71 million dollars; which do we think would the needy prefer?
As already mentioned, charitable giving is 2 percent of GDP in the United States. That’s 300 billion dollars a year, but only 20 percent of that (60 billion dollars) goes to health and human services causes. The rest goes to religion, education and hospitals. 60 billion dollars is not nearly enough to tackle these problems but if we could move from two percent to three percent of GDP by investing in that growth that would be an extra 150 billion dollars a year, and if that money could go to health and human services charities because that’s where the growth was invested then that would represent a tripling of contributions to that sector. The potential for real change. Real change is never going to happen by forcing these organisations to lower their horizons to the demoralising objective of keeping their overhead low.
Our generation does not want its epitaph to read, “We kept charity overhead low.” 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. We want a real social innovation.
This is a summary of a tedtalk.
Listen to the talk: www.ted.com/talks/dan_pallotta_the_way_we_think_about_charity_is_dead_wrong
Have something to say? Comment on it at the bottom of the article.
This talk has been summarised by Robyn Darbyshire