The Problem With Non-Profits: A Reader's View

We’ve said it before many times: the best feature of this blog is its readers. Case in point is a recent e-mail from one Chris Markl. It concerns philanthropy, a topic we’ve covered in various ways before on this blog: the economics of street charity; conservative vs. liberal giving; the efficiency of Smile Train; and most recently, Penn State’s THON fund-raiser.

Chris’s note is essentially a plea for everyone to read a book on the topic that illustrates what he sees as a huge barrier to efficient philanthropy.

We don’t usually publish unsolicited mini-book reviews, but this one seems worthwhile.

Hello,

I am writing to suggest a blog topic about a book I recently finished reading called Uncharitable [by Dan Pallotta]. Uncharitable concludes that the constraints society places on non-profits leave them unable to solve the great social problems of the world. The book argues for the capitalization of philanthropy, including: competitive wages to attract the best applicants, increasing spending on advertising to build demand for philanthropy, and allowing investors to purchase stocks in non-profit organizations so philanthropy is not capital barren.

One of the key points of the book is that the method we currently use to evaluate charities, through efficiency ratios, provides no information about the effectiveness of an individual charity and leads an organization to focus exclusively on the short term (at the cost of long-term planning) and develop extreme risk-averse preferences (which leaves them unwilling to take risks which could lead to innovations).

The book has been reviewed by Nicholas Kristof and in The Economist. There is also a companion site for the book.

I’m not a publicist and I’m just a 28-year-old who has seen the adverse effects of constraining charities through creating my own large-scale fundraisers (yesride.org), and through being priced out of the non-profit market because of the extraordinarily low wages.

If desired, I will use my limited community college teaching income to purchase and send you a copy of Uncharitable from Amazon; this is how much I believe in this book.

I appreciated Chris’s generous offer, but he easily persuaded me to buy it for myself.


Scott Supak

I have been advocating that we use this crisis to explore the cooperative idea further, e.g., credit unions, community owned utilities and resources (like my electric co-op), community supported agriculture (CSAs, time to buy shares), and the like. As we learn to scale and localize alternative power supplies, sustainable agriculture (food stamps for farmers markets, grants for local governments to purchase shares in CSAs for use in food banks, etc), and other essential goods and services, we should look into the non-profit models we already have, and find ways to further capitalize them, and encourage the use of them.

All of these examples offer direct ownership of the necessary goods and services by the community, which could be considered the ultimate in ownership society, a conservative goal under President Bush. Resilient communities that work together to solve their immediate problems at the local level will be better for all of us in the long run.

Self reliance, a long-held, core conservative principle, is no better demonstrated than by freedom from corporate profit motives provided by non-profits. As long as we can keep them free from the deregulated, robber-baron pillaged ghost town known as Wall Street.

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Bob Cawley

Hmmmm. Or maybe the plight of not-for-profits is really just another argument against relying so heavily on the private sector to provide social goods.

I would also be concerned that allowing NFPs to accumulate too much capital - which is a prerequisite of long term goals - would attract the same unscrupulous scavengers that beset many for-profit organizations. (Not that they aren't circling already ...)

kimr

I read Uncharitable last month. What detracted for me from the argument that charities are hamstrung by their inability to use the tools of capitalism was the lack of any recognition on his part that Mr Pallotta had some responsibility for the failure of his company. He said he was just a couple percentage points away from being on the "recommended" list -- he couldn't have tweaked his cost structure enough to make the cut? People complained about his cross-promoting other fund-raisers at his events -- how about just promoting other fund-raisers for the same cause, e.g. breast cancer research, but for other groups in other locations? It would have been much harder for folks to complain about that.

It's true that Mr Pallotta raised tremendous amounts of money and he should be commended for that. But he would still be in business if he had modified his approach to blunt the criticism of his methods. Then he would be leading the charge to change charity by the example of his continued success rather than from the postmortem of his failure.

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M.B.

Oh Scott #1

A severe economic downturn and a few well publicized corporate scandals... and now you propose the feudal Chinese model.

Isn't the problem the reverse? Government trying to out-spend private charities and "crowding out" the value of their dollars spent.

Mike B

It's actually interesting how much non-profits behave like for profit institutions. A friend of mine worked for the American Lung Association and they were actively trying to drive other Lung related charities either out of businesses or into mergers. Moreover they were always sure to guard their "territory" from perceived "competitors" like the American Cancer Society. The stories this fried told were just completely wild and nothing I would have expected in a supposedly benevolent "not for profit" foundation.

Like the old Twilight Zone episode said people are alike everywhere.

Tim

As a serial non-profit board member (at least a brown belt by now, by my estimation), the biggest problem I see in simple economic terms is the isolation- or insulation- of the non-profits from their constituencies and their consequences. Most non-profits feel roughly like an episode of The Office on the inside- vacuous, self-serving, self-referencial, and generally feckless. The main issue is the lack of pointedness in their pay and incentive structures, IMO- the enthusiasm of the charity's founders quickly wears away, and pretty soon you have just another organism that eats, breathes, and functions just like any other. It ceases to look for solutions to the putative problem and (invariably) becomes concerned chiefly with its own survival and those of its staff members. It is just the way of the world. I wish I knew the answer; I will certainly read Uncharitable and see if I can learn something...

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Elle

M.B
cooperatives are nothing like the Chinese feudal model. Many operate effectively and competitively in global markets and indeed many are surviving the downturn much better than their rivals.
Here in the UK the John Lewis partnership, including food retailer Waitrose, the co-op group of food retailers, travel agents, funeral directors and more, as well as lots of smaller local coops are very effective and make a lot of surplus for their members.

Sam

I work for a nonprofit as a low wage employee. From my perspective, the problem is that this nonprofit is extremely top-heavy and political. The "leaders" never lead. They simply tell everyone else what to do while those same "leaders" sit on their butts all day and make the most income of all of us. That's not so bad, but the intolerable part is that this is supposedly a "Christian" organization. So far, I've seen this organization define "Christianity" as being power hungry, insecure, and bullying. In this horrible economy, I hope I can find some other type of work so I can close this dark chapter of my life.

Irv Comstock

I work for the electric co-op industry and it's my belief that as business structures are concerned, one size does not fit all. Would Silicon Valley have worked as a consumer owned cooperative? No.

But independent sheet rock companies pulling their purchasing power together to lower input costs does work. These co-op members only have to agree to lower material input costs. Not a big stretch to grasp how this concept can work..

The electric co-ops I am happy to work for are community- owned, providing typically rural and small towns a critical lifeline. The co-op business structure does not serve distant investors. Its first and primary duty is to serve their member owners who can, if motivated, change the way the co-op is run. Management of these electric co-ops are motivated, through the member relationship, to work to provide "owners" electricity at the lowest cost (an increasinly daunting task) and with high reliability. The co-op structure works well here.

Could the retail store, a manufacturing plant or a corporate farm they serve work well as a co-op? This is a "that depends" proposition which leads me back to my basic premise, one size doesn't fit all. Each business has numerous financial, cultural, competitive, product profile, labor and "who knows what else" variables that pave the way in one direction or another.

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Gloria Miller

I work for a small, non-profit in Chattanooga, TN . This agency does amazing things on a small budget. If someone is going to contribute to a charity - time, resourses, dollars - they need to be intimately informed about that charity. The charity for which I work is completely transparent - we've always had to be - because we were competing for $ with the large, national charities - and have always known that if we do a good job with providing the services we say we do and with the dollars the community entrust us with, the ability to survive and provide critically needed services will continue.

My advice - know your charity!

Marcos El Malo

Nice to hear about Gloria Miller's competent non-profit. I hear too many horror stories about self-serving top heavy charities whose prime focus is on the cycle of fundraising and marketing to support fundraising and marketing (and executives' salaries), and the expense of serving their constituencies and clients.

econobiker

Is this also referencing the charitable trust type non-profits?
Because those entities are basically sold as a way to either transfer wealth /assets without paying taxes or to ensure a lifetime income without paying taxes and then transfering the assets to a charity.

At least in the first case, alot of the trusts also are run by the children of the people who set it up. So then those children have a guarrenteed income. And then probably exhibit the negative aspects some have already commented upon.

mamba

Re: high salaries for non-profit workers...

About time someone advocated for it. I spent 3 years and $60k on my graduate education - MBA and MA - which is now bettering the non-profit I work for. My peers in business school earn multiples of my salary, yet nobody blinks at their six and seven figure salaries. Yet mention a six-figure non-profit employee and people raise their eyebrows.

My education and experience are valuable. I love what I do and I am willing to work for less, but that delta isn't infinite - at some dollar amount I will leave non-profit. And that would leave my organization searching for a replacement, who is likely to be less qualified with less experience.

Is that better for the non-profit? Higher pay does mean better workers. Raise the pay of non-profit workers and you'll see better results in their performance.

Aaron

That's all we need... for non-profits to be *more* like for-profit corporations.

I don't want my charities hoarding a lot of capital; I want them spending their money on their charitable operations.

Buy stocks? Where would we be now if a lot of charities were buying up stocks through the 90s to boost their capital? I'll tell you where- they'd still be broke, and in the meantime they'd have wasted a lot of money on Wall Street instead of their stated purpose.

Daniela Papi

For me, the problem with Pallotta's event is not that a small % of each donation actually went to the cause. In my book, that is ok..... IF and only if that is transparent and clear from the beginning. If people know they are signing up for something where X% of money is going to charity (no one complains that Patagonia only gives "1% to the Earth)- then they are getting involved willingly and knowingly. If people are led to believe that every $100 they donate is going to support and the realities of the use of their fundraising dollars are hidden from them before they sign up, then I view that as a form of lying, far worse than an organization just having high overhead.

The articles about Pallotta which I have read seem so biased to me- likely written based off of a press release sent out by Pallotta himself. Of course the Avon ride was going to raise a lot less the next year - the negative press re:this entire thing has caused everyone to question any fundraising rides. To me it doesn't address the key issue, transparency of these details before hand and honest marketing.

Business models is one thing - but i think it misses the point given that the money is then donated to an NGO which likely doesn't function on the same business models. And if, when he talks about adopting business models, he means unethical and untrue marketing, then I would refer to a social sector reflection by Jim Collins' re his book "Good to Great" which basically states that it is an affront to intelligent people to say "NGOs should be more like businesses." In reality, most businesses could serve to be more like GREAT businesses - and that really it is disciplined people/practices which make organizations "great" be they NGOs or for-profits.

So rather than saying we "should be more like businesses" perhaps we need to be more honest, more intelligent with our marketing/promotions, more innovative, and rely more on market demands rather than donor whims. Those things I believe to be true.

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