Invited response to “Rethinking Charity,” by Dan Pallotta, from Association Now, September 2009

Wm. Patrick Nichols, Assocation Now, December 2009 (© 2009)

The ever-provocative Dan Pallotta argues, in the September edition of this publication, that nonprofits are constrained by rules, formal and informal, from behaving more like businesses.  These rules, he believes, serve to the great detriment of the nonprofit sector’s performance. 
It seems to me Pallotta makes a number of compelling points on the way to being seduced by a misplaced thesis.  He seems right in arguing that:

      • Obsessing over lowering overhead is destructive of long-term success.
      • Access to capital is a mammoth challenge for the sector and our access to that capital is impeded in ways that are unwise.
      • Money in the nonprofit sector is too impatient, expecting results on a 12-month cycle and precluding needed investment.
      • A huge aversion to risk is also a huge impediment to rewards.
      • Dwelling on what portion of a contribution goes directly to constituent service distracts us from more important considerations and further cripples long-term performance.
      • These expectations cause nonprofits to game the system, redefining what it means to go directly to constituents.

Unfortunately, Pallotta seems to accept uncritically the notion that nonprofits and for-profits are, or should be, fundamentally alike and then argues that unfair rules keep nonprofits from participating effectively in for-profit markets. 

Surely, though, nonprofits play an importantly different role than for-profits.  We serve fundamental societal needs and pursue values to which markets, while important, are secondary.  We appeal, on the whole, to different motives for “spending” and “investing.”  We attract different employees motivated by different values. 

My own experience, serving as interim CEO for associations and charities in times of crisis, persuades me that the people who make decisions on supporting associations and charities use their business experience and insights to inform those decisions but their key motivations, even in association membership and corporate giving, are centered in different parts of their hearts and minds.  And, when I compare my friends and colleagues in the corporate sector with those in the nonprofit sector I conclude that we are hiring different talents, but not lesser talent.

Interestingly, several of the points on which Pallotta seems very right—related to the impatience of nonprofit money, the compulsion to get every dollar to constituents, and the arguments that nonprofits aren’t allowed to take risks or to “waste” money on advertising—reflect “market” constraints”.   It is the donor “market” that precludes these far more than the formal rules of the game. 

Even our access to capital is largely a market phenomenon.  Lenders fail to understand nonprofit business models and so discriminate against nonprofit borrowers.  And, equity investors can’t, by the nature of who we are, find the kinds of economic returns or the forms of participation they require. 

The good news is that with regard to donors and lenders we can adopt market tools (actually, marketing tools) to educate these decision-makers as to how they can serve their interests by working with us. 

Pallotta’s provocations remind us that markets represent a powerful and much needed discipline that is harder to come by in our sector than in the business sector.  The way we pursue our missions can be greatly informed by market approaches.  And where those don’t offer themselves naturally, we need to work hard to find market surrogates that impose discipline on us. However, we needn’t, and shouldn’t, imagine that being business-like is an end in itself.  Our role, first and foremost, is to serve those social missions for which markets are ill adapted.