Redefining Acceptable Business Practices for Non-Profits


Do we need the non-profit sector?

My focus for Paper 2 is Susan G. Komen for the Cure, so I searched for a Ted Talk on the business strategy of charities. Dan Pallotta created the Avon 3 day walk for the cure (that supports Komen), so I was pleased to find his talk on “The Way We Think About Charity is Dead Wrong.” His premise is that charities are necessary to create a world in which everyone benefits because the for profit sector will only aid those with at least some form of spending power. Social problems of the world are massive, and the organizations that combat them are tiny in comparison. Pallotta argues that the capacity of charities to enact change is limited by the different sets of rules that govern the for profit sector and the philanthropic sector.

5 Rules of For Profit vs. Charities

1. Compensation: People are uncomfortable when charity executives are compensated well. Pallotta is baffled by the basic concept that “we have a problem with people who make money off of helping other people but no problem with people who make money off of NOT helping other people” (3:37). In this case our system of “ethics” deters the brightest business minds from entering the philanthropy sector, and for good reason. On average, MBA’s ten years out of Stanford are making $400,000 (with bonus), while the CEOs of Medical Charities make an average of $232,568, and the CEOs of hunger charities make an average of $84,028.

That means that a smart business person would enter the for profit sector, make $400,000 after ten years, donate $100,000 to a hunger charity, still take home over $250,000 after taxes, and probably sit on the board of the hunger charity.

It makes good business sense for ambitious business students to avoid the philanthropic sector.

2. Advertising and Marketing: We encourage the for-profit sector to heavily market their product in order to get a desired return, yet we don’t want our donations to non- profits to fund marketing. Pallotta argues that growth is essential to ANY business, but charities are discouraged or even called “unethical” when they spend heavily on fundraising and marketing efforts to grow their business. The 3 day Breast Cancer walks would have been small, community events, rather than national phenomenon without their extensive advertising campaigns. Investing donations in marketing and fundraising allows a company to increase the scale of its operations, creating more desired change. When charities have large overhead expenses, the public views the organization execs as greedy, inefficient, and distracted from their goals, when in reality it may just be good business practices.

3. Taking Risks on New Venture Ideas: The non-profit sector is discouraged from taking risks. Risk taking is key to innovative fundraising that can up the scale of projects and create more social change.

4. Time: Non-profits are not afforded significant amounts of time to make a difference. The public likes to see differences being made. In the business world, it may be acceptable for a firm to wait years before making profit on a project, but it wouldn’t be considered ethical for a non-profit to not deliver its promise almost immediately.

5. Profit to Attract Risk of Capital: Non-profits cannot use money to attract investors, “So the for-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 has a lock on the multi-trillion-dollar capital markets, and the nonprofit sector is starved for growth and risk and idea capital” (9:05).

In all, the non-profit sector cannot use money to attract the best and brightest, can’t effectively advertise to grow the business, is discouraged from taking risks, must show immediate results, and lacks access to funds through the organized market.

Overhead, Growth, and Change

When making a donation, many ask, “How much of my donation goes to overhead?” We have an ethics-rooted perception that overhead is bad, that it is somehow detached from the cause. Charities adapt to this perception by keeping overhead costs low, limiting their potential to grow and create social change. For this reason, “We’re confusing morality with frugality” (15:15). The concerns about overhead would be valid IF the firm was stuck with the same amount of money every year. But, there is a larger economic system that will supply more money to the non-profit if it markets itself in the correct way. Upping scale should be a priority of charities.

Dan Pallotta gives an example of the impact high overhead can have, “We launched the breast cancer three-days with an initial investment of 350,000 dollars in risk capital. Within just five years, we had multiplied that 554 times into 194 million dollars after all expenses for breast cancer research. Now, if you were a philanthropist really interested in breast cancer, what would make more sense: go out and find the most innovative researcher in the world and give her 350,000 dollars for research, or give her fundraising department the 350,000 dollars to multiply it into 194 million dollars for breast cancer research?”(13:20).

spendingPie

Upon preparing for Paper 2, I made a list of the ethical and unethical facets of Susan G. Komen for the Cure. Before watching this Ted Talk, I had issues with Komen’s budgeting, as they spend a larger proportion of their donations on overhead than other breast cancer foundations. This Ted talk encouraged me to look at the other side of the coin and showed me that this large overhead had enabled Komen to become the largest breast cancer charity (by revenue). 

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3 comments on “Redefining Acceptable Business Practices for Non-Profits

  1. What an extensive post! I learned a lot from reading your post this week and I especially liked how you broke down your post into different sections with headers. I think this is the first post I have seen like that. I will probably make my remaining posts more organized like yours.

  2. I am sympathetic to what he is saying. It would be interesting to think about how much more impact the non-profit world could have if we adopted some of his ideas. In general, people who want social change tend to look at the world as it is and come to the reasonable conclusion that massive social problems can only be solved by the deeper pockets and greater power of government.

    I try to describe the civil sector, or civil society, or third sector. Non-profit is really only a legal definition; it is not a strategy nor an organizational design.

  3. Pingback: Dan Pallotta: The way we think about charity is dead wrong | GerritWeb

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