Mark's Blog

Dan Palotta, delivered this Ted Talk in March 2013.  The video, already seen by over 1.7 million viewers, has stirred up a lot of passionate conversation.  Although he is talking from the perspective of humanitarian non-profit charities, I find that the environment he describes is also present for churches and religious non-profits as well. I wonder what you think?

I have taken the liberty to abridge and edit his talk to a blog-sized version, mostly by removing examples, but if you would like to hear the whole talk, go to www.Ted.com and search for “Dan Palotta: The way we think about charity is dead wrong!”

. . . The real social innovation I want to talk about involves charity. I want to talk about how the things we’ve been taught to think about giving and about charity and about the nonprofit sector are actually undermining the causes we love and our profound yearning to change the world.

  . . . We have two rulebooks. We have one for the nonprofit sector and one for the rest of the economic world. It’s an apartheid, and it discriminates against the [nonprofit] sector in five different areas, the first being compensation.

So in the for-profit sector, the more value you produce, the more money you can make. But we don’t like nonprofits to use money to incentivize people to produce more in social service. We have a visceral reaction to the idea that anyone would make very much money helping other people.(Interesting that we don’t have a visceral reaction to the notion that people would make a lot of money not helping other people.) You know, you want to make 50 million dollars selling violent video games to kids, go for it. We’ll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you’re considered a parasite yourself.

And we think of this as our system of ethics, but what we don’t realize is that this system has a powerful side effect, which is, it gives a really stark, mutually exclusive choice between doing very well for yourself and your family or doing good for the world to the brightest minds coming out of our best universities, and sends tens of thousands of people who could make a huge difference in the nonprofit sector marching every year directly into the for-profit sector because they’re not willing to make that kind of lifelong economic sacrifice.

Businessweek did a survey, looked at the compensation packages for MBAs 10 years of business school, and the median compensation for a Stanford MBA, with bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was 232,000 dollars, and for a hunger charity, 84,000 dollars. Now, there’s no way you’re going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.

Some people say, “Well, that’s just because those MBA types are greedy.” Not necessarily. They might be smart. It’s cheaper for that person to donate 100,000 dollars every year to the hunger charity, save 50,000 dollars on their taxes, so still be roughly 270,000 dollars a year ahead of the game, now be called a philanthropist because they donated 100,000 dollars to charity, probably sit on the board of the hunger charity, indeed, probably supervise the poor [person] who decided to become the CEO of the hunger charity, and have a lifetime of this kind of power and influence and popular praise still ahead of them.

The second area of discrimination is advertising and marketing. So we tell the for-profit sector, “Spend, spend, spend on advertising until the last dollar no longer produces a penny of value.” But we don’t like to see our donations spent on advertising in charity. Our attitude is, “Well, look, if you can get the advertising donated, you know, at four o’clock in the morning, I’m okay with that. But I don’t want my donations spent on advertising. I want it go to the needy.” As if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy.

In the 1990s, my company created the long distance AIDSRide bicycle journeys and the 60-mile-long breast cancer three-day walks, and over the course of nine years, we had 182,000 ordinary heroes participate, and they raised a total of 581 million dollars. They raised more money more quickly for these causes than any events in history, all based on the idea that people are weary of being asked to do the least they can possibly do. People are yearning to measure the full distance of their potential on behalf of the causes that they care about deeply. But they have to be asked. We got that many people to participate by buying full-page ads in The New York Times, in The Boston Globe, in primetime radio and TV advertising. Do you know how many people we would have gotten if we put up flyers in the laundromat?

. . . The third area of discrimination is the taking of risk in pursuit of new ideas for generating revenue. So Disney can make a new $200 million movie that flops, and nobody calls the attorney general. But you do a little $1 million community fundraiser for the poor, and it doesn’t produce a 75 percent profit to the cause in the first 12 months, and your character is called into question. So nonprofits are really reluctant to attempt any brave, daring, giant-scale new fundraising endeavors for fear that if the thing fails, their reputations will be dragged through the mud. Well, you and I know when you prohibit failure, you kill innovation. If you kill innovation in fundraising, you can’t raise more revenue. If you can’t raise more revenue, you can’t grow. And if you can’t grow, you can’t possibly solve large social problems.

The fourth area is time. So Amazon went for six years without returning any profit to investors, and people had patience. They knew that there was a long-term objective down the line of building market dominance. But if a nonprofit organization ever had a dream of building magnificent scale that required that for six years, no money was going to go to the needy, it was all going to be invested in building this scale, we would expect a crucifixion.

And the last area is profit itself. 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.

Well, you put those five things together — you can’t use money to lure talent away from the for-profit sector, you can’t advertise on anywhere near the scale the for-profit sector does for new customers, you can’t take the kinds of risks in pursuit of those customers that the for-profit sector takes, you don’t have the same amount of time to find them as the for-profit sector, and you don’t have a stock market with which to fund any of this, even if you could do it in the first place, and you’ve just put the nonprofit sector at an extreme disadvantage to the for-profit sector on every level. If we have any doubts about the effects of this separate rule book, this statistic is sobering: From 1970 to 2009, the number of nonprofits that really grew, that crossed the $50 million annual revenue barrier, is 144. In the same time, the number of for-profits that crossed it is 46,136. So we’re dealing with social problems that are massive in scale, and our organizations can’t generate any scale. All of the scale goes to Coca-Cola and Burger King.

. . . Now this ideology gets policed by this one very dangerous question, which is, “What percentage of my donation goes to the cause versus overhead?” There are a lot of problems with this question. I’m going to just focus on two.

First, it makes us think that overhead is a negative, that it is somehow not part of the cause. But it absolutely is, especially if it’s being used for growth. Now, this idea that overhead is somehow an enemy of the cause creates this second, much larger problem, which is, it forces organizations to go without the overhead things they really need to grow in the interest of keeping overhead low.

So we’ve all been taught that charities should spend as little as possible on overhead things like fundraising under the theory that, well, the less money you spend on fundraising, the more money there is available for the cause. . . .  We should be investing more money, not less, in fundraising, because fundraising is the one thing that has the potential to multiply the amount of money available for the cause that we care about so deeply.

 . . . This is what happens when we confuse morality with frugality. We’ve all been taught that the bake sale with five percent overhead is morally superior to the professional fundraising enterprise with 40 percent overhead, but we’re missing the most important piece of information, which is, what is the actual size of these pies? Who cares if the bake sale only has five percent overhead if it’s tiny? What if the bake sale only netted 71 dollars for charity because it made no investment in its scale and the professional fundraising enterprise netted 71 million dollars because it did? Now which pie would we prefer, and which pie do we think people who are hungry would prefer?

Here’s how all of this impacts the big picture. I said that charitable giving is two percent of GDP in the United States. That’s about 300 billion dollars a year. . . .  But if we could move charitable giving from two percent of GDP up just one step to three percent of GDP, by investing in that growth, . . . . Now we’re talking scale. Now we’re talking the potential for real change. But it’s never going to happen by forcing these organizations to lower their horizons to the demoralizing objective of keeping their overhead low.

Our generation does not want its epitaph to read, “We kept charity overhead low.” We want it to read that we changed the world, and that part of the way we did that was by changing the way we think about these things. So the next time you’re looking at a charity, don’t ask about the rate of their overhead. Ask about the scale of their dreams, their Apple-, Google-, Amazon-scale dreams, how they measure their progress toward those dreams, and what resources they need to make them come true regardless of what the overhead is. Who cares what the overhead is if these problems are actually getting solved? If we can have that kind of generosity, a generosity of thought, then the non-profit sector can play a massive role in changing the world for all those citizens most desperately in need of it to change. . . .