Uncharitable: How Restraints on Nonprofits Undermine Their Potential
by Dan Pallotta
Tufts University Press, 2008
312 pp., $35
Few claims are more likely to make leaders in the nonprofit world squirm than the charge that charities are acting too much like businesses. No such uneasiness usually accompanies the idea that charities should align themselves with government (at least not when liberals are in power). And a small but growing group of social entrepreneurs and “philanthrocapitalists” argues that taking a few lessons from the corporate world might help charities improve their finances and achieve their goals. But even so, “commercialization” remains a disparaging word to many in the nonprofit sector—and an accusation which is likely to attract unwanted attention from public officials responsible for policing charities.
Fundraising consultant Dan Pallotta believes the time has come for the nonprofit world to change this attitude and view “commercialization” as an asset rather than a liability. In Uncharitable: How Restraints on Nonprofits Undermine Their Potential, he argues that charities have for too long—going back to Puritan times, in his reading of the history—been hostage to an ideology that regarded making money as antithetical to doing good works. Relying heavily on the controversial experience of his own company, Pallotta TeamWorks (PTW), he seeks to show that by acting more like businesses, nonprofits could be more successful in attaining their charitable goals as well.
Among the steps they should take: pay salaries that are competitive with the corporate world to attract top-flight talent; commit substantially more to advertising and marketing; take more risks, even if they produce more failures; and focus on long-term success rather than short-term responses to immediate problems. Pallotta would even have charities explore an additional method of financing: enlisting investors with the promise that their funds would eventually be repaid with interest. In other words, move toward creating a stock market for charities.
However, the most important change they could make, he contends, would be to spend more money on what is normally regarded as “overhead.” Rather than limit themselves to a figure, such as 25 or 30 percent, as watchdog groups like the Wise-Giving Alliance and Charity Navigator usually advocate, charities should devote whatever they really need to adequately cover management costs, fundraising, and other administrative expenses. Indeed, relying on research done at the Indiana University Center on Philanthropy and elsewhere, he shows that many organizations already manipulate their financial reports to make overhead costs look as low as possible (in some cases, even zero) and that the line between administrative and programmatic costs can often be indistinct. So, he asks, why not do away with it altogether?
Pallotta is not unmindful of how radical his proposals are, or that they may require changes in the current laws governing nonprofits. But he justifies them in terms of the results he thinks they will produce. To Pallotta, the problem with the nonprofit world today is that its goals are worthy ones, but its operations fall far short of what is necessary to generate the resources needed to attain them. By emulating successful businesses, he believes, charities would be able to achieve better results.
This, at any rate, is the lesson Pallotta took away from his own experience with nonprofits. A for-profit company, PTW developed and managed fundraising events for charities working on AIDS, breast cancer, and other causes. Unlike most such affairs, PTW’s were elaborate ones, often stretching over days and professionally marketed and run. (A signature one was a three-day walk-a-thon to fight breast cancer.) The minimum donation required to participate in them was atypically large too; for example, $1,200 for the breast cancer walk. As a result, over a nine-year span, organizations working with PTW brought in unprecedented amounts of money—more than $500 million, Pallotta reports.
But PTWs efforts were also expensive, with fees averaging just above 40 percent of the revenues, covering not only the tents, meals, and other direct costs of the events (occasionally including massages for the participants), but also PTW’s corporate budget (including a mid-six-figure salary for Pallotta). Facing criticism from their supporters, the charities involved eventually decided they might realize more by running the fundraisers themselves. Amid charges and counter-charges (including a lawsuit), they canceled their contracts with PTW. The business collapsed.
Uncharitable can be read as an extended response to Pallotta’s critics and a defense of PTW’s record. According to the figures he reports, his clients seem to have erred badly in ending their relationships with his company; so far, their own fundraising events have not been nearly as successful as the ones PTW ran for them. But that is Pallotta’s side of the story. His critics were not only concerned about PTW’s costs, but also the extent to which they had ceded control of the events to PTW. They were especially concerned about the message conveyed, which they felt was doing more to promote PTW than their causes.
Whatever the case, Pallotta’s book also raises the larger issue of whether or not charities should abandon what he calls the “nonprofit ideology”and operate more like for-profits. Although his arguments are passionate and thought-provoking, they are not entirely convincing.
Part of the reason is that Pallotta largely ignores how much of what he recommends is already being done in various parts of the nonprofit world, such as colleges and universities or hospitals. High salaries, aggressive advertising and marketing, and reliance on investors for capital projects (through the sale of tax-exempt bonds) are increasingly commonplace. Nonprofit groups currently obtain half of their total revenues by selling their services: charging clients for tuition, health care, admission to performances, child care, and much more. In addition, some services, once offered exclusively by charities, such as hospice and day care, can now be obtained from a growing group of for-profit companies.
The evidence that such “commercialization” has led to either better or worse results is by no means clear (and apart from his account of PTW, Pallotta makes no effort to review it). Some studies suggest that for-profit hospitals, for example, provide as much care for needy people as nonprofit ones. Others reach a different conclusion. Little research has been done on what difference executive compensation or spending on fundraising and marketing make. In general, most observers of high-performing nonprofits have concluded that effectiveness has more to do with their goals and strategies than with their levels of funding, sources of support, or executive salaries.
Pallotta is on firmer ground in criticizing the use of fixed percentages as standards for how much an organization should spend on “overhead.” Few—including the watchdog groups he criticizes—really believe that such figures are meaningful by themselves or for all organizations at all stages of their development. In fact, despite efforts by state attorneys general and the Internal Revenue Service to impose them, legal limits on fundraising expenses or executive salaries have been difficult to enforce, unless proof of fraud or excessive greed can be shown. Short-changing administrative costs, experts now agree, can be harmful to an organizations programs as well.
Why, then, do charities still continue to minimize how much they spend on “overhead,” even to the point of disguising the amount on the forms they are required to submit to the Internal Revenue Service? Why do they proudly advertise their compliance with the standards promoted by the watchdog groups, even though they consider the standards unfounded? Why do groups, like the American Red Cross, claim that all donations go to their program activities, even though the funds they devote to administration may be crucial to their success?
Although Pallotta believes the reason is because they are still in thrall to the Puritanical belief that charities should operate austerely, a better explanation can be found in what makes them different from businesses. In the for-profit world, the person who pays for a product or service usually uses it, too. That person can then generally determine if the product or service was worth the money. In the nonprofit sector, however, donors are asked to give their funds for products or services that other people will usually use. As a result, they generally have less of a direct way of assessing quality and must rely instead on indirect (and imperfect) indicators, such as how much of their gifts actually go to those they want to help.
While they now depend substantially on businesslike transactions, donations remain significant enough that charities are reluctant to endanger them by embracing methods that may cause doubts among their donors. That is why, despite its apparent success in raising money for its clients, PTW eventually fell out of favor. For better or worse, in the nonprofit world, the business of charity is to be—and to look—charitable.
Contributing editor Leslie Lenkowsky is professor of public affairs and philanthropic studies at Indiana University.