Day 82: The way we think about charity is dead wrong.

If, like many of us, you’ve ever wanted to give to a charity and thought, ‘But what percentage of my money goes to the people in need?’, Dan Pallotta has a few confronting ideas which may change your thought processes.
Dan Pallotta is the founder of AIDSride, an organisation which used good marketing and advertising techniques to organise events which challenged people to push themselves outside their comfort zones while fundraising for charity at the same time. He used the same model to fundraise for breast cancer research. Using an initial investment of $350000, the company raised a net profit of 194 million dollars over 5 years. In 2002, they raised 71 million USD after profit, before being promptly dumped by their sponsor. The organisation was being demonised in the media for spending more than 40% of their growth on ‘overheads’; items such as recruitment and advertising. The sponsor tried to organise the events themselves; overheads increased and the net income for breast cancer research decreased by 84%. This, according to Pallotta, is what happens when we confuse morality and frugality.
Between 1970 and 2009 in America, the number of non-profit organisations which crossed the $50 million annual revenue barrier was 144. 43,136 for-profit companies crossed it. There are several reasons for this difference, all related to the manner in which we expect non-profits to act in relation to for-profits. Pallotta outlines his top 5 in this talk.
Firstly, the not-for profit sector aren’t allowed to use money to incentivise improved production. While we don’t have a visceral reaction to the notion that people would make a lot of money from computer games or restaurant chains, in the eyes of many the CEO of a charitable organisation shouldn’t be profiting greatly from curing malaria. This often deters non-profit organisations from obtaining the best staff. In a Businessweek survey, the compensation packages for MBA students ten years out of business school averaged in the region of $400,000 USD per annum in for-profit organisations. By comparison, the average salary for a $5 million medical charity in the U.S. was $232,000 and that for a hunger charity was 84,000 USD. It would be cheaper for a corporate CEO to donate $100000 to a hunger charity, save $50000 dollars in tax and be viewed as a philanthropist, possibly serving on the board of that charity.
The second issue is advertising. The general public are happy for the charity to advertise on donated time at 4am, but not so keen to see their donations spent on prime time slots, despite the fact that this could bring in dramatically greater sums of money to serve the needy. Charitable giving in the U.S. has remained stuck at 2% of GDP since measuring started; it’s hardly surprising that charities can’t wrestle away a market share if they’re not allowed to market.
Thirdly, heads of non-profit organisations are dissuaded from taking risks with donators’ money. Yet we know that prohibiting failure kills innovation. Similarly, we are unwilling to grant non-profit organisations time to succeed. By contrast, Amazon ran for 6 years without returning a profit while its investors patiently waited for it to gain a share in the market.
The final area of difference is in profit itself. In the non-profit sector, companies don’t pay profits to attract capital for new ideas so they are starved for growth and risk and idea capital.
So where do we get these double standards from? Pallotta thinks that in America at least, they stem from old Puritan beliefs. While the first Puritan settlers may have been pious, they were also money hungry capitalists who recognised the ability to make a profit in the States. In addition, they were Calvinists with deep seated feelings of self hatred. Making lots of money would see them sent directly to hell, so, to counteract this, they established charity. As they were trying to avoid going to hell, they couldn’t possibly make any money from their charitable activities…
We have been conditioned to think of overheads as separate from the main cause, yet without them a company cannot grow. Pallotta asks, do we want to be the generation who kept overheads low? Or the one which brought about real change and social innovation.

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