September 30, 2012

Nonprofits Need a Stronger Voice, but Not From the Wrong Messenger

Dan Pallotta’s Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World argues forcefully that nonprofits need a stronger and more unified voice to speak up for their values.

In particular, Mr. Pallotta wants to fight the American obsession with using administrative spending rates as a way to gauge nonprofits and to combat the media’s tendency to raise questions about nonprofit CEO salaries that they deem excessive. (See “Charities Must Battle Misconceptions About Overhead Costs,” Opinion, September 20.)

These are important, if not new, arguments. Using administrative spending as the default measure of performance is, in my view, among the biggest impediments to getting nonprofits to focus on results. Some nonprofits shun crucial investments in performance assessment and professional development, for example, because they worry donors will see that spending as just more bloated overhead.

Shifting the emphasis away from this arbitrary and often ill-defined measure could lead to more resources flowing to the most effective nonprofits—and to more learning and improvement, with profoundly positive effects on the people and communities nonprofits seek to serve.

But in Charity Case, the arguments are made by the wrong person in the wrong way. Mr. Pallotta, in fact, stands to do more harm than good because, as it turns out, he isn’t interested in fighting for nonprofits. Instead, he wants to replace them with something that looks much more like the business world. (More on that later.)

The first problem in this problematic book is that Mr. Pallotta starts from a false premise. He roots his entire argument in the erroneous claim, laid out in the book’s opening chapter, that public perception of charities is low—lower, he asserts, than it is for Congress. But, in fact, any honest review of polling data clearly indicates that public trust is higher in charities than it is in government or business.

As The Economist noted in 2010, citing separate surveys conducted by American Express and Merrill Lynch, “Few institutions in the modern world enjoy more trust than charities—a trust given both by rich people who give them money and by the wider public that may benefit from their work.”

That doesn’t mean nonprofits are doing an adequate job of standing up for themselves. But it does suggest that we start with a crucial asset—the fact that the public believes nonprofits have value. It’s a sentiment I happen to share from my direct interactions with hundreds of foundations over the past decade.

The thing is, I am not sure Mr. Pallotta agrees. He is not a credible defender of nonprofits because he doesn’t seem to really care for them. He appears not to grasp the notion that markets fail—and that one of nonprofits’ primary roles is to address those failures, not mimic corporations. He has consistently disparaged nonprofits. In a Harvard Business Review blog, he wrote that he’d be hard pressed to think of any business that wasn’t making more of a positive difference in society than nonprofits.

And in his previous book, Uncharitable: How Restraints on Nonprofits Undermine Their Potential, Mr. Pallotta argued that “the free market is a self-correcting system” that supports our “natural desire to help each other” and “only stops working when it is interfered with.”

Perhaps that is why, in Charity Case, he proposes new classes of entities such as the “for-profit foundation” and “for-profit charity.” His view seems to be that it is financial incentives that drive individuals, despite an increasingly rich body of scholarship that suggests otherwise. 

Worse, in both of Mr. Pallotta’s recent books, he evinces what is either ignorance or disinterest in the historical achievements of nonprofit organizations. He makes more references to Steve Jobs, Apple, and its products—the index lists seven, though I counted more—in Charity Case than to any nonprofit organization. Yet he says he is rising to the defense of nonprofits: comparing the “movement” he seeks to lead to the civil-rights movement.

He writes of his experience founding the fundraising company Pallotta TeamWorks: “We challenged convention on many levels—not for the sake of being unconventional but because convention, to us, clearly didn’t work. We did what we believed would work: We advertised our events the way Apple advertises iPads.”

Mr. Pallotta describes his own work as so cutting-edge that it produced an “unjust” backlash that led to his company’s collapse. In recounting this history, he doesn’t seek to understand the perspectives of the nonprofits and donors who reportedly became concerned about how much of the money raised went to Mr. Pallotta’s bottom line rather than the charities the company was serving.

He seems not to believe that it is legitimate for donors to want to understand what proportion of their contribution is going to a for-profit company that helps a nonprofit raise funds—and what is going to the nonprofit itself.

To Mr. Pallotta, it’s the total amount of funds raised that is the ultimate measure. His defense of CEO pay justifies compensation in the context of revenue, apparently assuming that a charity that has more money will inevitably get better results.

That’s neither true nor a winning message for nonprofits. It’s not just about the dollars raised, it’s about what is achieved with those dollars. We need to be focusing the attention of the media, lawmakers, and the public on that question.

The best case nonprofits have to make is that they are effective in dealing with the challenges that the markets that Mr. Pallotta so reveres cannot, or will not.

I share Mr. Pallotta’s concern that nonprofits aren’t always good advocates for their own agenda. Among his key proposals in the book is to mount a massive advertising campaign to educate the public about overhead.

While I’d like to see nonprofits be more forceful in articulating their value, and I think paid advertising has a place, I am skeptical that his approach is the right one. Isn’t it possible that the reason nonprofits today enjoy higher levels of trust than businesses is that they do not constantly bombard the public with slick marketing? And isn’t any advertising campaign about nonprofits likely to be more successful if it focuses on the results nonprofits achieve rather than their need for overhead spending to fuel fundraising?

These are not questions Mr. Pallotta considers. That’s because, ultimately, what Mr. Pallotta is selling is himself—as both the nonprofit world’s messiah and its advertising agency.

Mr. Pallotta also argues for the creation of a Legal Defense Fund for charities to combat efforts to legislate restrictions on overhead and CEO pay. I share Mr. Pallotta’s concern for the proliferation of ill-conceived legislative proposals. But our voice needs to be a reasonable one, and Mr. Pallotta’s is not. In both Uncharitable and Charity Case, he looks uncritically to CEO pay in the corporate world as an analog for nonprofits and, in the former book, goes so far as to describe the IRS’s monitoring of “excessive compensation” at nonprofits as “an assault on individual liberty that towers over anything we might have feared in the Patriot Act.”

Other groups with real roots in the nonprofit world are already at work seeking to give charities and foundations a more powerful voice. Independent Sector’s newly released two-year study on advocacy makes the case for why nonprofits should push a more forceful and integrated nonprofit agenda and offers a blueprint for how to do it. CForward has started a political action committee to help elect politicians who understand and value the role of nonprofits.

Those are the kinds of efforts that will make a difference, in part because they are led by people with the knowledge and credibility to be effective. I suggest redirecting what you would have spent on this book and making a contribution to one of these organizations instead.

Phil Buchanan is president of the Center for Effective Philanthropy.