Straddling the Fence Between Business and Philanthropy

The Wall Street Journal had a fantastic article on the principal constraints U.S. philanthropies face regarding growth potential and long-run positive impact. The author, Dan Pallotta, peppered in some great figures as well. Americans today are the most generous contributors to “non-profit/philanthropic” causes. Roughly 2% of GDP, $300 billion is given each year, almost twice as much as the U.K., the next closest nation. Of those households earning $100,000 or less per year, 65% donate something. Those earning above $100,000 record almost near perfect numbers in giving. The average rounds out to $732 for every man, woman and child per year.

Pretty staggering numbers at first glance I must admit. Yet, Mr. Pallotta goes on to lay out in great detail the standards the American public holds for non-profit organizations, our vision and expectations of their “altruistic” operating procedures. It is precisely our (speaking for the U.S. citizen) desire for non-profits to operate as lean as possible thus ensuring maximum impact for intended beneficiaries that is undercutting growth potential and stiffling the industry as a whole.

  • Two years ago, a group of senators raised questions about the compensation of the CEO of the Boys & Girls Clubs of America, which totaled $998,591 for 2008, nearly half of which consisted of catch-up obligations for her retirement. The critics ignored the fact that over the previous eight years, the CEO had tripled the Clubs’ network-wide revenue to $1.5 billion. Would the Clubs have been better off hiring a less talented CEO for $100,000 and leaving revenue stagnant, at a loss of $1 billion?

The CEO pay argument is an interesting one. It would appear from Mr. Pallotta’s example that in this instance supposed uproar over close to $1M in salary considering the performance of the organization was a bit unwarranted. Yet I would not feel 100% comfortable turning a blind eye to CEO compensation in the non-profit sector. I am not in favor of salary caps nor do I agree with predetermined ratios to apply to all non-profits based solely on staffing and overhead. But I do think a national clearinghouse of sorts, transparent and open to public critique, could do much in the way in understanding whether top talent warrants big $ if program goals are being met and program advancement is being registered.

  • Advertising and marketing. In 2006, the consulting firm Changing Our World estimated that charities providing health care and human services spent about $1.5 billion on marketing, versus $729 billion for marketing in the rest of the economy. That translates into one message for health and human-services causes for every 479 messages for something else. This imbalance is a big part of the reason that charitable giving has remained constant in the U.S. at about 2% of GDP since we began measuring it in the 1970s. In 40 years, the nonprofit sector hasn’t been able to take market share away from the for-profit sector. But how can it if it isn’t allowed to market?

This is troublesome and a quandary I have run into working on marketing campaigns for NGOs. Budgets for this sort of activity are frankly laughable. And I am not even talking about running ads alongside Coke, Honda, Aflac, etc. on prime-time T.V. Making the case for non-profit program support is like anything else in society – you need to spark people’s attention. If you are strapped in this regard and pressured to be as lean as possible it is difficult to achieve a critical mass.

  • The time frame during which nonprofits are supposed to produce results: immediately. Amazon.com went for six years without returning a dime to investors, who stood by the company because they understood its long-term goals. But nonprofits are expected to send every donation immediately to the needy. This demand is policed by tax forms that measure the amount spent on direct services every 12 months.

I have seen some wiggle-room in this area, but taking this concept at face value, if I am asked to give $75 per month and after 1 year I’m told the NGO will need another year or so (and my donation to of course continue) before they can potentially begin serving the intended population effectively, my patience would run thin. In this day and age, especially with direct online microlending initiatives for example, folks can see their charity at work in real time. This area will need some work.

  • The for-profit sector is allowed to pay investors a financial return to attract their capital. The nonprofit sector, by definition, cannot. So the for-profit sector monopolizes the multitrillion-dollar capital markets, and the nonprofit sector is starved for growth and risk capital. Why shouldn’t an investor be able to take a risk—and get a return—on an investment that allows a charity to double in size? And why wouldn’t we want to encourage it to do so.

This is another area that is changing, especially in the area of microfinance lending as well as new public, private, NGO initiatives such as social bonds. The greatest risk is mission-drift and program-drift with potential profits subsequently altering programming. Tight regulation and transparency to the “nth” degree would be critical.

But all in all, some interesting insight from Mr. Pallotta and food for NGO-thought moving forward.

2 Comments

Filed under Pole to Pole Development Posts

2 responses to “Straddling the Fence Between Business and Philanthropy

  1. This is an excellent analysis, and surely there is no non-profit in any area of actual development that isn’t struggling with these realities. I even find them in myself when considering other non-profits I’m supporting or considering supporting.

    We are very small by almost any standard with a small budget and largely operate with volunteers. We’re in about 11 countries with small staffs (a single or two, or one or two small families) except for one. In that one we’ve been involved for 20 years, and although there has been almost consistent growth in finances, staff and volunteers we are really only seeing much in the way of “visible” results unless you look well below the surface. So even as small as we are we have had to personally and intensely emphasize a comparatively long-range perspective. It seems for most Westerners ten years represents eternity.

    I’m looking forward to reading the WSJ article as well.

    I hope there is more discussion on this. Ideas on any of them, anyone?

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