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Jastine Lumbres
by Jastine Lumbres

How Nonprofits Can Invest In Themselves


Revisiting Dan Pallotta.

In March of 2013, Dan Pallotta shook up the nonprofit world with his TED talk entitled, “The way we think about charity is dead wrong.” Founder of the AIDS Ride and author of Uncharitable: How Restraints on Nonprofits Undermine Their Potential and Charity Case: How the Nonprofit Community Can Stand Up For Itself and Really Change the World, Dan Pallotta’s experience in charities brought about this talk, which called for a shift in perceptions in how we view advertising in the nonprofit sector.

Even now, Pallotta’s TED talk still reverberates throughout the nonprofit world, influencing many conversations on how nonprofits should run their organizations, with various articles that have sought to respond to it and pick it apart. Here is our take on things, a refresher for those who have not read the transcript or heard it in a whole and a brief summary for those who are just catching wind of it now.

Pallotta begins by providing us with some contextual terms: social innovation and social entrepreneurship. Using these terms, he sets the stage for his discussion, calling to mind the chasm that separates the for-profit and nonprofit worlds and how it is maintained by the fact that for-profits and nonprofits are governed by two different rule books. This structure hurts nonprofits, specifically in five areas that Pallotta defines and explains.

Ted Talks

1. Compensation.

Those in the nonprofit sector are not permitted to make money helping others, thanks to the stigma associated with those who make a profit helping others. As a result this “gives a really stark, mutually exclusive choice between doing very well for yourself and your family or doing good for the world.” For those who could contribute their passions and talents in their respective fields, it becomes a choice between financial stability and doing some good in the world, chasing them into the arms of the for-profit world.

2. Advertising and Marketing.

Donors would rather see their money go to the needy instead of left in the hands of the nonprofit to invest in advertising. The general public does not understand that such an investment could possibly increase money gained for the cause, two or even three-fold. For-profits are encouraged to throw as much money as they can at advertising, and somehow that is considered “okay.” We believe that nonprofit organizations, institutions created for social good, are not meant to adopt such “dodgy” tactics in order to gain exposure.

3. Risk.

Pallotta means this in the sense of the “pursuit of new ideas for generating revenue.” Nonprofits are too afraid to take on larger-scale events, ideas, or fundraisers for fear that if they fail they will be accused of abusing funds and their “reputations will be dragged through the mud,” if an organization’s fundraiser fails.

4. Time.

Simply put, nonprofits aren’t given enough time to build themselves up to the scale needed to keep itself both operational and able to help the needy. If funds were distributed first to operational costs with another, possibly smaller, portion going to the needy, their moral character would again be questioned.

5. Profit.

Inability to get a foothold in stock against the for-profit world, limited funds, and even more limited revenue stunts nonprofit growth in an economic system that continues to make for-profits more successful. The business of a nonprofit is to make money for the cause, not make money for themselves, no matter the operational needs required.

Why do nonprofits suffer such handicaps? Pallotta has an answer: our fixation on overhead, hit on, well, the head by the common donor question, “What percentage of my donation goes to the cause versus overhead?” Here overhead has always been given a negative connotation; donors do not understand that some funds must be given to overhead in order to achieve growth. In order to maintain a solid reputation of doing social good, nonprofits have to ignore or weaken overhead by keeping it low under the “theory that, well, the less money you spend on fundraising, the more money there is available for the cause.”

If we eliminate the negativity surrounding overhead, Pallotta argues, we would be able to fully empower nonprofits to make more waves of difference in the world. Pallotta ends his talk by charging donors with a specific task the next time they consider donating to a nonprofit: don’t just ask about a nonprofit’s mission or cause. Instead, ask them what they need, operationally, to achieve their goals.

From a legal standpoint.

Dan Pallotta covers a lot of ground, but is only able to cover a few points generally. A large aspect of his discussion is also based in the court of law, an area that sadly many in the nonprofit sector don't know enough about.

Gene Takagi of Nonprofit Law Blog helps us understand the legal parameters of Dan Pallotta’s points in his article, “Is The Way We Think About Charity Dead Wrong? Some Legal Thoughts,” elaborating on the Pallotta’s five elements:

1. Compensation.

Limitations are placed on 501(c)(3) organizations in terms of how much they can pay their staff; this limitation makes it so that nonprofits can keep their tax-exempt status. Laws are in place to prevent private inurement and private benefit from going beyond these limitations. These could be mistaken as excess benefit transactions with tax penalties against the individual person who received the excess and the board members from the organization who approved it. While these parameters have been put in place to ensure that power is not abused and money taken away for board member personal gain, it also limits how much a nonprofit can pay its people.

A. “Private Benefit Rules – Part I: Private Benefit Doctrine” by Emily Chan, Nonprofit Law BlogEmily Chan defines a private benefit as a “transaction, arrangement, practice, or policy that may potentially or actually serve private rather public interests” and is not limited to just monetary benefits. It can seem difficult for nonprofits to pinpoint the difference between private and public interests.

B. “Private Benefit Rules – Part II: Private Inurement Doctrine” by Emily Chan, Nonprofit Law BlogEmily Chan elaborates, “There is no strict definition for “inure” but this is generally understood as providing unjust enrichment from the organization’s gross or net earnings to another party”. These “insiders,” who are usually in a position of power, such as financial officers, CEOs, and fundraising directors are the ones who could gain benefits by setting aside funds for themselves or by using these funds to provide themselves with products and services. When dealing with private inurement, nonprofits should be cautious when pursuing transactions that may be difficult to understand or in a gray area and “poor governance practices” such as not knowing or understanding state laws, restrictions, not having conflict of interest policies in place, etc.

2. Advertising and marketing.

Takagi in this section simply re-emphasizes the stigma that Dan Pallota discussed in his TED talk where nonprofits are frowned upon if they use a large sum of their donations in advertising and marketing. Takagi also takes on the controversial commensurate test, which is “aimed at monitoring an organization’s efficacy and effectiveness by addressing whether a charity is using resources in line with its charitable mission, not through specific formulas or percentages, but on a case-by-case basis,” drawing attention to the difficulties nonprofits face in trying to figure out how to measure their success.

3. Taking a risk on new revenue ideas.

Nonprofits could be in danger of breaching laws or restrictions in investments if they are seen to be making “speculative” or suspicious investments (such as pursuing only one specific company or hedge fund) without truly understanding the legal risks or ruining the reputation of that specific company.

4. Time.

Nonprofits are unable to create enough impact to please the public and their donors within a suitable time frame. This, along with the time it takes to create campaigns and programs that foster trust within the public, nonprofits are faced with a general lack of patience from the public.

5. Profit to attract risk capital.

The emphasis on creating profit so as to gain partnerships with companies makes it hard for nonprofits to fund new tactics. Takagi suggests looking intro program-related investments “from private foundations and up-to-fair market rate loans from individuals and for-profits” and joint ventures “with individuals and for-profits, though the rules are complicated and, generally, the nonprofit must retain the power to appoint at least half the governing body and to control the charitable program of the joint venture.” Nonprofits have to exercise caution when working with for-profits because the business side of things, revenue gained or lost, may complicate the good you are trying to do.

The court of Public Opinion.

All of these things discussed so far all meet in the center at the court of public opinion. So why do we view nonprofits in this way? Why are our attitudes toward nonprofits the way it is?

Pallotta argues that our attitudes toward charity go as far back as the Puritans. Upon landing in America with capitalism in mind, they were compromised by their Calvinist faith, which condemned self-interest. Charity became a scapegoat of sorts, where Puritans were able to ease their guilt by giving away a small amount of their earnings. SO from the get go, charity has already been shackled down by self-interest, keeping the gap between personal and monetary gain and doing good large and in charge.

The Allison Gauss of the Stanford Social Innovation Review expands on these viewpoints in her article, “Why We Love to Hate Nonprofits.” Using psychology, Gauss compiles a list of four major influencers that drive the way we perceive nonprofits:

1. The Norm of self-interest.

This is the widely spread, understood, ingrained attitude in our society that everything we do, the way we live our lives, is done to work towards personal gain, getting ourselves ahead. This even influences the way donors pick and choose what causes and nonprofits to give their money to; studies have shown that donors have to feel some sort of close connection to a mission in order to feel justified in giving to that mission. Volunteers also end up at the receiving end of this kind of thinking, negativity following them if they are seen as not having an experience of suffering that is directly connected to the cause. We are sometimes unable to believe that a person would give their time and money to a nonprofit just for the sake of helping for a good cause. Founders, leaders, and others in high positions in nonprofits specifically get slack for accepting compensation packages, made especially made worse by the entire discussion of overhead that Dan Pallotta had raised.

2. Do-Good derogation.

A “do-gooder” does things and conducts themselves with a set morality, a solid moral compass. This makes others feel guilty, even judged, and that these do-gooders see themselves as morally superior because they are working toward the social good.

3. Assumed incompetence.

Because nonprofits are usually funded by those who had a mission and wanted to create an organization to forward that mission, nonprofits are seen as unable to achieve the same kind of competence as for-profits. They are seen as lacking experience in most areas of management, harming their reputation in the public eye. Furthermore, “under extra pressure to prove their effectiveness,” their job is made harder because it is already difficult to tangibly measure the work they do to begin with.

From another view.

So far we’ve covered Dan Pallotta’s talk at large, the legal point of view, and even the social sphere in our discussion of why nonprofits can’t seem to invest in themselves through advertisement. But like all arguments made, there must also be a different point of view, or another part of the conversation we might have missed.

Let’s start with Brian Mitterndorf of Nonprofit Quarterly. In “Do Nonprofits Really Limit Advertising Because of Pressure to Cut Overhead?,” he challenges Pallotta’s claim that fixation with overhead is what is keeping nonprofits from taking on advertising campaigns. He argues, “Though we may feel that for-profits are much more aggressive advertisers, is that actually the case? After all, since the nonprofit sector is much smaller than the for-profit sector, it may just seem like the advertising footprint of nonprofits is smaller, when in actuality their relative behavior is quite similar,” making the case that the comparison between the two is almost like making a comparison between a golf ball and a basketball. Advertising’s place in overhead, according to Mitterndorf, is so solid that nonprofits are always afraid to take it head on and put funds and donor money specifically towards it. The difference between program expenses and overhead is usually confused, is not always clear to nonprofits, that advertising being considered as over is “no correct.” Besides, “o “if a nonprofit undertakes an activity that includes both an awareness/education and a fundraising component, they are permitted to allocate the associated costs between fundraising and programs (and have substantial leeway in doing so).”

He makes a point, even among all the other articles that are praising Pallotta or heralding him for putting social innovation and social entrepreneurship as terms on the nonprofit meeting table.

Also a part of the conversation is Shannon Ellis, a finance consultant and nonprofit strategist who wrote “Dan Pallotta’s TedTalk is Dead Right AND Leaves Out an Important Part of the Argument” for the CompassPointsofView blog.  She praises Pallotta for bringing to the forefront what nonprofits have been discussing and struggling with all along but lets us know what is missing, Pallotta “ignores the other major sources of revenue for this part of the sector – government revenue and earned income.” The government, Ellis elaborates, has been handing nonprofits some of the responsibilities of health and human services, something that nonprofits have been more than willing to take on. They are at ground level with these issues and it eliminates the complications of working within the government bureaucracy. Government assistance is continuously being cut and while fundraising might be the answer, Ellis argues that it might just be putting a band aid on nonprofits and making up for the funds that they are already losing from the government alone.

She also calls attention to the position of the wealthy in the entire discussion. The gap between the wealthy and those economic classes below it has only grown in the past few decades, with the wealthy continuing to stay wealth. Most donors hail from the middle class, who took a huge hit in the recent years and still suffer in today’s economic structures. They cannot be expected to shoulder the task of giving donations alone, the wealthy have to play a larger part because they have the resources to do so.

Moving forward.

First of all, take a deep breath. You made it to the finish line of this article series. Congratulations are in order; it is definitely a lot to take in. So with of this in mind, where does that leave you and your nonprofit? The answer is easier said than done.

1. Harmonize.

I believe Nonprofit Hub’s Marc Koenig put it in its simplest form in his article, “Should Nonprofits Grow the Pie or Give It Away? Dan Pallotta’s TED Talk.” Koenig says, “It’s important to strike a balance of calculated risks and investments in your organization – so if you fail, you don’t fail utterly.” As they always say, planning is key and the devil is in the details. Invest in yourselves as a nonprofit by being conscientious of how you spend your funds and strike a harmonious relationship between public opinion and operational costs.

2. Accept failure.

Failure is a very hard thing to stomach, but it is a part of every struggle. Failing in one advertising or fundraising campaign is still better than experience failure to such a degree that your nonprofit has to close its doors. Be brave and take a chance on yourself.

3. Be real.

Nonprofits need to have real conversations about how much it costs to run a nonprofit organization and how much revenue is actually needed to achieve your goals. “Nonprofits need to be able to make careful investments in themselves throughout their lifespan,” in order to keep its doors open, its staff well-trained and well-equipped, and donors ready and willing to give.

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Jastine Lumbres

Jastine Lumbres
Jastine is Elevate Click's first content writer. She received her BA in English from UC Riverside and Master's in English degree from Claremont Graduate University. She currently lives in Rosemead, CA with her family.

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