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Everything You Know About Charity is Wrong

April 11, 2013

Dan Pallotta calls it “the most oppressed community I’ve ever known or seen” and he’s not talking about refugee camps a war-torn continent or two away. He’s talking about the men and women who manage and staff America’s charitable organizations, populating major sectors of the nonprofit community. Pallotta, the author of Charity Case, is a ranking member of that community, an entrepreneur and activist who created such banner events as the Breast Cancer 3-Day Walks, the AIDS Rides bicycle journeys, and the Out of the Darkness suicide prevention night walks.

The struggle to liberate this “oppressed” community merits careful attention. It’s a saga that speaks volumes about our collective attitude toward charitable endeavor, a mindset that has resulted in the waste of untold opportunity. But it also speaks volumes about the opportunity that still exists to unleash the full energy of this sector and the incalculable human benefit that will accrue as a result.

The oppression we speak of is driven by a belief system that dictates one rule of law for the for-profit sector and another for nonprofits. Based on this belief system, we heap praise on businesses that reap lavish profits as reward for derring-do even as we deny charitable organizations access to fundamental best business practices. Whole charitable organizations must take what are tantamount to vows of poverty as moral license to end poverty elsewhere. By any law of enterprise we know, that’s virtually impossible.

The fatal word is “overhead.” Charitable organizations aren’t supposed to have any lest it somehow compromise the integrity of their mission. So if I spend $10 million on research to manufacture a best-selling purple lipstick, I earn the admiration of a society that simultaneously castigates a nonprofit if it spends half that amount in order to raise twice that amount in a cause to save human lives.

As often happens among the oppressed, the charitable organizations have bought in on their own oppression. “The most fire-breathing radicals in any other cause you can imagine, from gay rights to the environment, suddenly start quaking if confronted by the Better Business Bureau,” quips Pallotta. They simply feel guilty for earning a decent living in an altruistic endeavor.

The oppression plays out at many levels, none more important than with regard to compensation. In one survey, MBAs ten years out of business school reportedly earned a $400,000 median salary while the CEOs of $5 million-plus charities averaged $232,000. For stop-hunger charities, that average plummets to $84,000. But let’s assume a good number of passionately caring and talented executives willing to assume these top executive slots, with all the attendant pressures, for such remarkably low pay.

Three questions get begged: First, how long before they feel they’ve done their part and move on? Second, even if they want to stay, how long can they do so without irreparably curtailing their own career trajectories? Third, where will lasting leadership come from, the leadership needed to raise a lot of money and distribute it efficiently?

Certainly not from advertising and marketing. Extensive online promotional campaigns or expensive television ads are often suspect. The implicit refrain: How dare you give away my donations to some graphic designer or TV station? My money is to feed the poor, period. Faced with that attitude, those who would lead opt instead to stay home and make donations.

It’s a total no-growth strategy confirmed by the fact that charitable giving hasn’t risen much above 2% of GDP since the 1970s. Yet even as charities are denied the same options as for-profits, in some ways they’re expected to out-perform businesses, at least in the short term. A private company can fail for years to return a strong profit to shareholders who still wait patiently because they love the grand plan and the projected returns a decade hence. But charities are not allowed to build for the future; they cannot amply invest in an organizational infrastructure that will, with patience, finally serve exponentially greater numbers of the needy than if they continue to hobble on with low-paid executives and limited marketing.

Many of those who give to charity want the instant gratification of helping someone somewhere somehow. The operative word is “instant.” Risk taking? Risk management? Forget about it. “If you do a little $1 million fundraiser and the results disappoint expectations, expect someone to call your character into question,” warns Pallotta. Yet the right to fail has always been confidently allowed entrepreneurs. The more they fail, in fact, the more we admire their final triumphs.

If the fatal word is “overhead,” the fatal question is: “how much of my donation goes to overhead rather than the recipient?” Here the major institutional foundations are part of the problem. To respectfully cite just one example, the Bill & Melinda Gates Foundation  disclaims any commitment to matching indirect cost rates and acknowledges that some grantees must therefore engage in costsharing between projects,  and “tap into unrestricted funds, or conduct other fundraising to cover operations.” Gates caps overhead subsidies at 15% for some applicants and 10% for others.

Thus do the most respected players in the charity game reinforce the idea that overhead is negative and intrusive, not really part of the business of charity because charity never was or will be a business. Yet if charities must cost-share or tap alternative reserves, doesn’t that denude charitable giving with one hand even as it bestows institutional largesse with the other?

Here’s a better idea. Why not reverse current practice altogether and set up grant programs just for overhead? Don’t make “direct” and “indirect” costs compete with each other. Invest in a charity’s infrastructure as you would invest in any promising for-profit business plan. Reward the charities that have the strongest growth strategies, not just the worthiest social causes.

It would seem the longest-term sort of philanthropy, empowering a whole generation of charitable organizations and leveraging their giving power on an ongoing basis. Far from a necessary evil, defraying “overhead” thus becomes the most valuable support that can be provided to a charitable program. The great business titans who set up the world’s major charitable foundations know better than anyone the value of R&D, of infrastructure, of overhead. They must surely understand the value of a radically different strategic model with respect to charities.

The good news is that people seem to be getting the idea. A TED Talks video of a presentation by Dan Pallotta attracted over 1.18 million viewers. But momentum needs to be built via organized national advocacy to expand on the work being done by Independent Sector, a network of some 600 nonprofits and giving programs. To that end, Pallotta, for one, is optimistically seeking seed money for a “Charity Defense Council” now on the launching pad.

There’s a grassroots movement just waiting for the right spark, for sufficiently prolonged public advocacy and communications to reverse commonplace notions of what really serves the ultimate aims of charitable giving. It’s not that hard a sell. Most people can understand that charities should have the same chance to succeed as for-profits peddling their socially indifferent wares.

Presumably, Mr. and Mrs. Gates can likewise understand how much more will be achieved once we stop treating charities like charity cases.

Follow Richard Levick on Twitter and circle him on Google+, where he comments daily on financial crises and corporate brands.

Richard Levick, Esq., Chairman and CEO of LEVICK, represents countries and companies in the highest-stakes global communications matters — from the Wall Street crisis and the Gulf oil spill to Guantanamo Bay and the Catholic Church. Mr. Levick was honored for the past four years on NACD Directorship’s list of “The 100 Most Influential People in the Boardroom,” and has been named to multiple professional Halls of Fame for lifetime achievement. He is the co-author of three books, including The Communicators: Leadership in the Age of Crisis, and is a regular commentator on television, in print, and on the most widely read business blogs.

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