What was the last charity that you donated to?
It might have been a racial justice organization– non-profits like Color of Change and Black Lives Matter saw huge spikes in donations following the police killing of George Floyd.
Many of these organizations have resources that they never imagined as their disposal as racial justice is at the center of the national conversation. But, as the New York Times reported in June, “Few (fundraisers) expect the largess to last. As the protesters recede, so too will the donations.”
This spike in donations, followed by a sharp drop as the cause falls out of the news cycle, isn’t isolated. It happens after natural disasters, like the wildfires in Australia, and other humanitarian crises, such as the explosion in Beirut.
This phenomenon points to a weakness in how nonprofits function. Not only are they subject to the whim of the culture’s ever-changing sympathies, but nonprofits lack the business and financial tools to do their best work– independent of whatever crisis is currently capturing national attention.
In Uncharitable: How Restraints on Nonprofits Undermine Their Potential, Dan Pallotta highlights the assumptions that cripple nonprofits and proposes a set of reforms to unleash the potential of charities. At the center of his argument is the idea that nonprofits are forced to play by a different set of rules– one that prevents them from reaching their full potential for impact. Here’s what I learned.
Why Are Nonprofit Professionals Paid Less than For-profit Professionals?
Pallotta questions why those in the nonprofit sector, specifically executives, are compensated far less for their work than they would be for comparable positions in the private sector. The common thought is that people shouldn’t profit from helping others, especially those with the most need. Pallotta takes issue with the core assumptions behind that belief. One particular illustration made his argument clear to me: why should the CEO of Coca-Cola make more money than the CEO of an international nonprofit? If they have comparable skills, they should be compensated accordingly. But in reality, nonprofit professionals are paid a fraction of equally skilled
The argument that someone working at a nonprofit shouldn’t make a lot of money just doesn’t hold up. Why should someone creating opportunities for economic development or bringing vaccines to Africa be compensated less than someone who sells sugary beverages? Some might argue that if nonprofit executives are compensated highly, that money could have gone to programs or vaccines instead. But couldn’t the Coca-Cola CEO’s salary also be reduced to put more money towards expanding the company’s business?
Nonprofits are beholden to a different set of standards than private businesses– one that makes them the subject of intense scrutiny if ever broken. One that prevents the nonprofit sector from attracting the best talent.
Why Can’t Nonprofits Take Risks?
Pallotta points to the enormous value in taking risks. Private businesses grow on both calculated and not-so-calculated decisions to launch a new product or attempt to expand into a new market. And sometimes, although definitely not always, these for-profit businesses are handsomely rewarded in the form of increased profits. Taking risks isn’t seen as wasteful in the private sector. Rather, risks are seen as necessary in order to grow.
Conversely, nonprofits are actively discouraged from taking risks. This is largely out of fear that a risk might not pan out– and that a failed project means “wasted” money. This is another example of the artificial, largely unspoken rules that apply to nonprofits. While private businesses can innovate and pivot, nonprofits are punished for their courage when they try something new and fail.
This vulnerability of the nonprofit sector goes hand-in-hand with the discouragement of long-term planning. Rather than investing in long-term vision, nonprofits are expected to spend the money they fundraise immediately– rather than setting money aside for strategic use. This effectively institutionalizes suffering.
Why Can’t Nonprofits Use the Same Marketing Techniques as Private Businesses?
Advertising and marketing are foundational to the success of traditional businesses. As you can probably expect at this point, nonprofits aren’t allowed to utilize these strategies to the same degree. Like executive compensation, money spent on marketing could go to programs– and the prevailing standards set for nonprofits dictate that as much money as possible should go to programs, period.
Advertising could greatly increase overall donations to any nonprofit– but the unwritten rules of the nonprofit sector don’t allow it.
Why are Nonprofits Restricted in How They Raise Capital?
One of the largest barriers that nonprofits face is how they raise capital. Namely, most nonprofits depend solely on donations and fundraising. Not only does this leave the organization’s financial health at the whim of the funder’s altruism and pocketbook, it leaves money on the table– quite literally.
As social enterprise becomes more mainstream and we expect private businesses to have positive environmental and social impact, why don’t we provide nonprofits with the same tools to do that work?
Like most of the issues that Pallotta highlights, restrictions on raising capital are a financial issue. They severely limit the impact of nonprofits.
Pallotta suggests a stock market for nonprofits in which investors would receive a turn on their investment. It’s an ambitious idea, to say the least, and would require a massive culture shift. But as social enterprise becomes more mainstream and we expect private businesses to have positive environmental and social impact, why don’t we provide nonprofits with the same tools to do that work?
Perhaps my favorite part of Uncharitable is its annihilation of the prevailing efficiency metrics used in the nonprofit sector. Most of these measures focus on the amount that nonprofits spend on overhead, which includes costs like payroll and rent. However, Pallotta points out that this metric doesn’t actually measure efficiency– it simply shows how an organization spends its money.
Simply put, the existing efficiency measures don’t measure efficiency. A more thorough impact evaluation framework would focus on the actual outcomes and impact that a nonprofit produces.
This might look like demonstrating how many lives are saved by a health intervention, or how many additional children are educated as a result of a nonprofit’s textbook donation. Granted, many nonprofits do report statistics like these. Pallotta recommends an external evaluator to measure and report nonprofit impact.
Uncharitable gave me a new vocabulary and framework to voice the frustrations that I’ve experienced in the nonprofit sector, from the reliance on donations to limited use of “regular” business tools. I recommend this book to anyone passionate about effecting real change
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