truly giving charities the freedom to act like businesses
I was at time inspired and discouraged by reading Dan Pallotta’s two books on what’s wrong with the humanitarian (nonprofit if you prefer) sector. I sat down to write a book review although found that Steve MacLaughlin had done a great job already. So check that out. Or watch Pallotta’s TED Talk below.
To summarize, the 5 key things we get wrong in thinking about the nonprofit sector are:
1. Compensation: We let the for-profit sector pay people a competitive wage based on the value of what they produce. But we don’t want people making money in charity.
2. Advertising and Marketing: We let business advertise until the last dollar no longer produces any value. But we don’t like to see charitable donations spent on advertising.
3. Risk Taking in Pursuit of New Donors: It’s OK for a big budget movie or new product to flop. But if a $5 million charity walk doesn’t show a 75% profit in the first year, then it’s considered suspect.
4. Time Horizon: Companies can go years without returning any money to investors in the interest of a long-term goal. But if a charity has a long-term goal that doesn’t show short-term results, then it’s scandalous.
5. Profit: Business can offer profits to attract investment capital and there’s an entire ecosystem around funding new ventures. But there’s no such vehicle for a charity and they are left starved for growth capital.
I was particularly struck by #5. How can we create an equity-like market for humanitarian causes? How can someone put up risk capital and earn some economic reward for taking risk to fund new projects, startup, transistion or capital needs for for a non-stock corporation especially one considered a 501c3. Every idea I kept coming up with lead back to dubious legal grounds. Under current law, in order to maintain the tax exempt status (and realistically to be able to raise donations as for-profits that ask for donations may be accused of fraud), “no part of the net income may inure to the benefit of any private …individual”.
The closest I’ve found to working around this is Pay for Success or Performance Bonds championed by the like of Third Sector Capital. Do you know of any other models like this? Would love to hear about them.
Pallota does suggest in Charity Case that by law we create a new category called a for profit foundation. It would be allowed to solicit donations and funnel them only to 501c3s. It would be able to make a profit (pay taxes on it) and distribute to shareholders. I think it is a great idea and would love to help make it happen. Any pointers to resources on this or people working on this topic, please let me know.
If you’re interested in learning more about Pallota’s plan to change the country’s view on charities, check out the Charity Defense Council.