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Use capitalism to do good works
Dan Pallotta, founder and CEO of Pallotta Teamworks
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TEXT OF COMMENTARY
Kai Ryssdal:
The bottom line's a dangerous place this year. Lots of scary numbers down there.
But nonprofits that depend on charity are hoping that despite the tight times people and companies are still going to share a little with the most needy. Because as good as it feels to get, it can feel even better to give.
As we wrap up our look at philanthropy this week, a moment now for the groups on the receiving end of your donations. People have been saying for years that nonprofits ought to act more like regular businesses. The ones that do make a profit.
Commentator Dan Pallotta couldn't agree more.
Dan Pallotta:
We let business pay people based on value. But we don't want people making money in charity. Want to make a million as a CEO selling violent video games to kids? Go for it. Want to make a million curing kids of cancer? You're a parasite. So our top business school grads gravitate to the for-profit sector.
We let business advertise until the last dollar no longer produces a penny of value, but we don't want charitable donations spent on advertising. So charities can't build demand for causes. Budweiser's all over the Super Bowl. AIDS and Darfur? Absent.
We let business make mistakes, but expect charity to spend contributions cautiously. It's OK if a $100 million Disney movie flops, but if a $5 million charity walk doesn't show a 75 percent profit year one? Call the attorney general. So charities can't develop learning curves for revenue generation.
Amazon could forego investor returns for six years to build market dominance. But if a charity embarks on a long-term plan with no return for the needy for six years -- we expect a crucifixion. Business can offer profits to attract investment capital. But there's no stock market for charity. So the for-profit sector monopolizes the multi-trillion-dollar capital markets.
No competitive compensation, no advertising, no risk-taking, no long-term vision and no capital markets. A perfect storm of prohibition that puts the nonprofit sector at extreme disadvantage to the for-profit sector. We blame capitalism for the inequities in society, and then refuse to let charity use the tools of capitalism to rectify them.
Maybe capitalism isn't the problem. Maybe the lack of it is. It's been banished from charity by a Puritan ethic of deprivation that considers it contaminating. Maybe an ethic that stands in the way of progress is an ethic whose time is done.
Ryssdal: Dan Pallotta is the author of "Uncharitable: How Restraints on Nonprofits Undermine Their Potential."
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Dear Hal, Thanks for continuing the discussion. The issues I raise in my book go far beyond special event fundraising. I can't re-write the whole book here :) - if you have an interest I'd love to get your thoughts after you read the book. The commentary on the show summarized some key tools of capitalism that we prohibit the nonprofit sector from using; competitive compensation, paid advertising, risk-taking, long-term investment, and profit itself. On the first, it cannot be denied that arbitrarily limiting salaries keeps highly productive people out of the market; it is less expensive for them to simply donate to charity, e.g. if you limit someone with a $5 million annual earning potential to a $200,000 salary, it is less expensive for them to go into the for-profit sector and simply donate $1 million a year to charity. Their talents, which may be worth tens of millions of dollars a year, are then lost to charity.When you put a philosophical prohibition on paid advertising, the nonprofit sector cannot compete with the for-profit sector in the critical area of building consumer demand (this is why giving remains static at about 2% of GDP - charity is not gaining market share). Galbraith wrote extensively about the foolishness of a society that values private goods over public goods, and he laid a big part of the blame for the inequity at the door od the marketing engines of the gigantic private consumer brands. If you don't allow the nonprofit sector to compete, i.e., have that tool of capitalism, you condemn it to stasis. Further, if you don't allow charity to risk donor dollars on new revenue-generating mechanisms, they can never generate any new mechanisms. If you always measure charity in 12-month windows, while Boeing gets 12-year windows, charity can never invest in the long-term. And, if you prohibit profit in charity, it cannot use profit to attract capital, so all the capital goes to gold balls and Budweiser. Can't see how this is a good thing. It seems to me a weak argument to deny charity the tools of capitalism simply because there are people in business who violate the law. There are people in charity who violate the law as well - hundreds of cases each year. To deny the needy the tools of capitalism because some have abused it is akin to denying people the tools of medicine because we have found a few doctors to be quacks. You have to argue the case based on the merits, or lack of merits, of the tools - and you would be hard-pressed to show how more freedom to pay competitive leadership wages, to advertise, to take risk, to invest in the long-term, and pay a profit to attract capital will not significantly accelerate our advance on the great social problems that confront us. To take a short-cut around the merits of the tools because a few people are of bad character still leaves my whole argument standing.
http://www.huffingtonpost.com/2008/12/16/madoff-bragged-about-prof_n_151...
The money manager accused of duping investors in one of Wall Street's biggest Ponzi schemes once boasted to the Securities and Exchange Commission about how much money he earned and formally advised the U.S. government on ways to protect investors from scam artists.
Now Bernard Madoff stands accused of being one.
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Alleged victims include ... a charity of movie director Steven Spielberg.
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Commissioners laughed openly as Madoff agreed "to take off our selfish hats here and speak for the public good."
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Financial analysts raised concerns about Madoff's practices repeatedly over the past decade, including one letter to the SEC as early as 1999 that accused Madoff of running a Ponzi scheme, but the agency did not conduct even a routine examination of the investment business until last week....
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Good timing on your Marketplace commentary, Dan.
To Bill Stevenson:
Bill, I think maybe we should draw a line between what you did and what Dan used to do. There certainly are similarities, but there are also notable differences.
Because, I assume, you did not have Dan's professional experience in the field of Charity Events, your expenses were a greater % of revenue, so you were unable to donate as much (%-wise) as Dan. But, also because you did not run your event as an ongoing business, you (although you did not have to do so) donated your time (a significant donation, I suspect). It sounds like Dan had a pre-existing contract with a specific charity for services rendered; it sounds like you did not. As long as you don't claim to represent a specific charity, you can pretty much write the rules yourself as long as they are not fraudulent. And who would know if they were?
Let me be clear on this: I do NOT believe Charity Events like yours or Dan's are necessarily a bad thing. In fact, I think they are often a GOOD thing. As was pointed out by you and Dan, Charity Events often result in money going to a charity that would not OTHERWISE have gone to the charity ("otherwise" being the operative word). That can't be a bad thing. Up to a point.
Here's the concern: As you agreed, your concert-goers were there primarily to see a concert. That's like me buying a kayak knowing that a percentage of the profits from the sale will be donated to charity. I didn't buy the kayak because of the charitable donation; that was merely incidental. I didn't really make any effort to examine the fine print, and it probably wouldn't have made any difference to me if only $1 of the $800 purchase was actually donated. Can you see that that opens the door to charlatans?
I organize a Charitable Event Concert. Like you and Dan, I'm allowed to deduct both my real and my organizational expenses. How much is my time worth (which is what you donated, but which Dan and I want to be paid for)? Well, there is no hard-and-fast legal answer to that. My time is worth pretty much what I say it's worth. Dan, being an honorable businessman, and you being an honorable person, do not take advantage of the situation. But there is not much to stop me (or anyone else) from doing so. "Charitable" Events can easily become (and maybe often are) just a business for the benefit of the businessman, with the charity getting a pittance, almost as an afterthought.
Dan raises some valid and interesting points: his events brought awareness of the charity (advertising), it provided comfort and community to those intimately involved with the cause, and, I ASSUME (I may be wrong) the RISK was HIS. If the risk is his (as it was yours), the expense is not on the CHARITY'S bottom line. Their bottom line stays clean. And Dan, because he was a professional and honorable fund raiser, was able to provide a substantial donation to the charity.
But my previous concerns remain: the advertising "bounce" is transitory. The comfort and community may last a bit longer, perhaps considerably longer, but for how many (what percentage) of the participants? I used to attend many charitable 10K runs. But the only community I was interested in was the extremely transitory comradery of the actual run. When the event was over, so was I. And you can only have so many events (for a host of different charities) before Charitable Events in general become a stale, sparsely-attended undertaking. I think they call that the law of diminishing returns.
Here in San Diego we recently had a breast cancer walk. A long one. Two or three days, I think. They were all over the radio and TV for MONTHS before the actual day of the walk. How much must that have cost? And what about the possibility of DISCOURAGING donations? If a charity seems too flush (too big, too much advertising) might they run the risk of seeming LESS needy? Might people take their donations elsewhere?
All of that expense comes straight out of the contributions before the charity sees a single dime. How much was donated to the charity? I have no idea. Who was the major beneficiary, the promoter or the charity or local businesses (media, security, etc)? Is the promotions business even required to make such information public? Dan? Were you required to make your numbers public, or was that a private matter between you and the charity?
THIS is my primary objection to Dan's thesis that capitalism can be the savior of charity. Capitalism relies too much on self-interest and greed and manipulation to be a good bedfellow for agencies of good works. There are too many Ken Lay crews too willing to bend or suspend the rules for their OWN benefit to entrust them with the hard-won assets of charities. I don't even have to spend more than five minutes to come up with a host of capitalism's RECENT charlatans and incompetents: Bernie Madoff, Worldcom's Bernie Ebbers, Enron's Lay, Fastow, and Skilling, Bear Stearns Tannin and Cioffi, the really smart guys at Lehman Brothers like Investment Management Director George Herbert Walker IV, the geniuses at AIG, the skilled (and public-relations savvy) executive teams at Ford, General Motors, and Chrysler (especially Nardelli who had previously helped Home Depot wither), Killinger at WaMu, Mozilo at Countrywide Bank. Need I go on?
Capitalism is NOT the solution for Charity.
Dear Dan,
I was glad to see that you took the time to reply to some of the comments. It's clear to me that a couple of people didn't get it and but some others do.
Dear Erich,Ken and Hal,
These are participatory events, purposely attracting and empowering Aids and Cancer patients who need support as well as walkers, runners and riders who want to get out and do something. That is a different scenario from those organizations that seek funds to generate direct actions. My company and I support the International Rescue Committee, which has a low expense to relief ratio when we wanted to do something after the South Asian Tsunami. We give to the Central Asia Institute which builds schools that educate girls as well as boys in the "Tribal Areas" of Pakistan and more recently Afghanistan, providing an alternative to the boys only madrases. We found them after the Pakistani earthquake. We give to Doctors Without Borders because of their ability to go and provide medical care where famine, genocide and pandemics have ravaged whole populations. I mention this not to toot my horn or create a hierarchy of values but because there are many good ways to do things.
These are not $5 donations either but the local "Hockey Fights Cancer" that my son skates in is a small donation participatory event operation. I don't know its ratio and don't much care. Not the point. Reality is what I said in my first comment, not knowing the ballpark numbers. Over $300,000 got to support the quest for cures for AIDS and Breast Cancer thanks to Dan Pallotta's work that wouldn't be there otherwise.
I do agree with Hal that the money that is filtered through these events doesn't have the dollar for dollar impact that a direct donation to a research project or a clinic may have, but not everyone can do that. And there is nothing wrong with the "Feelgood" approach. it's the most successful form of charitable giving. This brings me to...
Dear Bill,
Concert promotion and production is hard and expensive. I know because many years ago I tried to produce small scale shows in Baltimore that would raise funds for a local environmental action group. The first 2 were just ahead of expenses and the 3rd didn't draw well so I paid out of pocket and ended that phase of my career.
My company did gigs for a local entrepreneur who produced great Blues Festivals alongside the Chesapeake. His true intention was to donate anything above and beyond expenses to a selection of charities. That worked but at a lesser scale than the goal.
You should be proud of the $50,000 you raised and if it felt good to do it that's excellent. I don't know Callie but the Indigo Girls are friends of a friend and I'm sure they were proud of that accomplishment. Working with artists who care is a fine form of consciousness raising as well as fund raising.
Thank you all for reading this. I've found this entire thread to be well worth our time. And oh by the way, although I agree that charities of all kinds should be given better economic tools to use, there must be a higher degree of transparency and program accountability that matches the higher purpose. If there isn't the scam and skim artists will rise. I don't believe that the masters of the universe who lead us down the road to our current economic crisis are the best choices for charity CEOs. I do think that an upfront entrepreneurial approach like Dan's is a fine method of accomplishing those goals.
Greg Dunn
Thanks Hal,
I didn't argue with your Wall Street concerns because I largely share them. We all have a bit of a bad taste in our mouths right now about these so-called wizards.
But I don't want to confuse them with social entrepreneurs who genuinely want to do some good. We ought to congratulate, and yes, reward those who use their business skills to create social benefit and enable them to do more. You and I will agree that we have rewarded Wall Street too much, so let's encourage society to value social entrepreneurs instead, by allowing them to make good livings.
I don't think I said or implied that our concert goers were philanthropists or should be congratulated. I'd say 90% simply paid to see Indigo Girls and Colbie Caillat, not to help with AIDS in Africa. But don't miss the point: whatever their intentions they helped desperate people, wittingly or unwittingly.
If you require that a charity meet a strict percentage threshold, you would judge our work to be better if we had held a car wash and raised $500, giving 100% of that to the cause. Instead we took a lot of risk and put a lot of work into a "less efficient" event that raised $50,000 for the cause. In what way is it conceivably better to do the car wash?
Hal, I'm not sure where you get the idea that I want to let Wall Street money managers loose in charity. I don't mean wheeling and dealing money managers when I'm talking about MBAs. What I mean is that the nonprofit sector needs and deserves the same kind of talent that the for-profit sector has access to, and that will never go into the nonprofit sector because of the salary cuts they have to take. 95% of the MBAs coming out of the nation’s top business schools are honest, decent people, with exceptional talent.
With respect to the percentage question, you're missing three critical points. First, beware the admin: program ratio and donate at your own peril on its basis because a) it tells you nothing about a charity's programs, so a soup kitchen can hide behind a stated 90% return to the cause and you will never know that they serve rancid soup, and b) because many charities account for a variety of expenses that you might NOT consider part of the cause AS part of the cause. An Indiana University study of 126,000 charities found that 25% of those with revenues between $1 million and $5 million reported a highly improbable zero percent spending on fundraising. The likelihood is that, fearing for their lives, they’re labeling fundraising spending as spending on the cause, to tell the public what it wants to hear. When we ask about percentage costs we are rewarding the charities that do aggressive accounting and penalizing the ones that don’t.
Second, and most important, you are absolutely right that it is more efficient for a person to give directly to a charity without some device in the middle. However, they don't. You have to use various devices, like fundraising events, dinners, advertising, etc. to increase the scale of the giving. Therefore, your solution would consign the great causes that you and I care about to essential stasis, and we will never reach the scale that we must to solve those problems; we will forever be keeping our heads just above water. I always found it ironic when some critic would hear about the AIDS Ride and say, "I'd rather just give directly to the cause." My response? “Yes, well, you should, but you didn't, did you? And the only reason you're thinking of doing it now is because we're here soliciting you, so the expense that you so do not want incurred has already been incurred to get us to your doorstep to ask. When you give, don't for a moment think that it wasn't because we spent all of this money on this revenue generating engine."
The point here is, if we say to charity, you can never spend more than 30% of revenues on “overhead” and fundraising is one of the things we call “overhead” then they cannot grow at the huge rate they would need to to confront our problems. Would we really say to kids with cancer, I’m sorry, we had a chance to raise an extra $500 million for reasearch, but it was going to come at a 50% cost, so we decided to pass on it?
Dear Dan,
Thanks for the update. While I appreciate that your charitable events may have ancillary benefits to a charity that are not measured in actual dollars, I suspect they have a limited shelf life:
(1) eventually the publicity fades (quite quickly, if the attention span of the average, attention-deficit, over-stimulated American consumer is any part of the equation), and
(2) they have a built in fatigue factor: you can only have so many walkathons and triathlons and bike-athons and dance-athons before saturation is reached and the cost of business to produce one of these events is much more than your 49% (45% + 4%) because expenses stay approximately the same to promote and produce the event, but fewer and fewer warm bodies show up to participate (and, more importantly, to donate).
But, for those intimately involved in a specific cause or charity (breast cancer survivors, for example), yes, I imagine the life-affirming effects can be substantial. If THAT is what a person is donating FOR ... great. But if they are donating to find a CURE, then their donation is better made elsewhere, some avenue that does not have such high overhead: skip the feelgood event, make out a check directly to the charity.
But that is a sideshow. You have responded only to my imputation of your prior corporate services to charitable clients and I stand (somewhat ... not much) corrected.
However, on the more important issue, your radio commentary proposed bringing to bear the "brilliance" of Wall Street money management (my words) in "service" to charity. For the reasons stated previously, that is a gamble I am not willing to make with my charitable contributions. Any charity that slips below that magic cost-benefit ratio will never see my money, nor, I suspect, the money of many others. If the charities don't need our money, that's okay. But once lost, in dollars and in reputation, it will not soon be restored. Let charities embrace Wall Street at their own peril.
Note to Mr. Stevenson and Mr. Ryan: as I said above, if a person is paying for feelgood (or for a concert, which is just another form of feelgood) then they are NOT paying for a cure. If they were paying for a cure they would skip the concert and make out a check directly to the charity. I have no objection to the service Mr. Stevenson has provided to a charity, that was a good thing, but let's not canonize your concert-goers and mischaracterize them as philanthropists.
Of course I understand that media companies and medical researchers and all the rest (the secretaries and the janitors) are drinking from the pool of charitable contributions. But, when you add up ALL of those expenses, many (most?) well-managed charities still report a cost-benefit ratio in the neighborhood of 70% benefit. By their own admission, Mr. Pallotta and Mr. Stevenson cannot come close to that. If I want to find a CURE, why would I want to give my money to them?
What I find really interesting, what I really wonder about is why Mr. Pallotta and Mr. Stevenson and Mr. Ryan have a fixation with that portion of my comment and totally ignore the much larger issue raised by letting Wall Street money managers loose in the untapped Elysian Fields of charitable bankrolls. That, after all, is what the radio commentary was all about. Methinks they doth protest too much.
Thanks Jack, thanks Bill. I honestly don't believe there's now any cause more vital than getting people to change these old ways of thinking, because, without knowing it, they're killing our hope of serious progress on every other issue we care about.
I just wanted to point out companies like Kintera and Convio (the webportals that handle a lot of charities like the Komen 3Day) take as much as 4% off your donations made through their portal. Credit Card companies take another 2-4%.
When you see ads in the newspapers, tv, promoting the charities, those media companies are profiting off your donation dollars too. And those medical researchers working on those cures with their fancy education degrees...aren't they making a buck off it too?
I was surprised there's no outrage there. Cough::sarcasm
It's pretty sanctimonious anger I see from arm chair quarterbacks like Hal.
This is what I hate about the Internet. Marketplace can air a reasonable, thoughtful, and provocative point of view from an experienced and articulate professional on it's program, but then their web site has to be opened up to unhelpful and uninformed nonsense from people who obviously have missed the point... and these get equal space on the web!
Dan, keep spreading the word and raising real money. Hal, Erich, Ken I encourage you to continue to give as you see fit, as I am certain that you give to good organizations and worthwhile causes. But please don't disparage those of us who are looking for better ways.
A few years ago I created a benefit concert to raise money for AIDS relief in Africa. I did this because I was unable to give a significant amount to the cause from my personal resources. Over a couple of years we raised and donated $50,000 (I'll point out that I didn't make any money on the event, though I would not apologize if I had). Our expense ratio was incredibly high, well over Dan's 40%. But we raised $50,000 for a great cause, when otherwise I would have been able to donate nearly nothing. Which do you prefer?
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