Getting the Facts Straight About the Nonprofit Sector

Click here to read an original op-ed from the TED speaker who inspired this post and watch the TEDTalk below.

Dan Pallotta's TEDTalk has received a lot of attention. Too bad, then, that it is built on so much ignorance about both the history and present-day realities of the nonprofit sector.

There are at least four crucial fallacies in Pallotta's argument.

First, Pallotta says the sector has failed because we haven't "ended" homelessness or poverty. But if the nonprofit sector is to be blamed for this, should it also be credited with the dramatic improvements in worldwide infant mortality? Or how about the progress in gay rights in the U.S. in recent decades?

Fact is, ending homelessness or poverty will require governments to play a role. But that's the last thing Pallotta wants. In his writing, Pallotta makes clear his views: "Big government is the enemy of the full potential of the humanitarian sector," he writes. "The more the state insists on providing services, the less inclined private individuals are to fund similar services with charitable contributions."

It's absurd to cite the fact that social problems persist as evidence of the nonprofit sector's failings; indeed, it's fair to ask, how much worse might they be without the work of nonprofits?

Second, Pallotta argues that nonprofit performance suffers because the sector doesn't pay adequately (a disparity he, unbelievably and grotesquely, equates to apartheid) -- and that it should take a page from the corporate world. In his talk and in his books Uncharitable and Charity Case, he looks uncritically to corporate CEO pay as a model. He has gone 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."


Look, I agree that nonprofit CEO pay is frequently lower than it should be (and occasionally higher than it should be). But not let's look to corporate pay as a model when the gap between the highest and lowest paid in corporations has widened so dramatically - and when corporate CEO pay is so often utterly disconnected from actual performance. Moreover, Pallotta either ignores or is oblivious to the increasingly rich body of research that suggests that pay is in fact not a key driver of motivation and performance. (See, for example, Daniel Pink's Drive.)

Third, Pallotta argues that nonprofits are ineffective in marketing themselves, suggesting that this explains why giving has been basically flat as a percentage of GDP. Leaving aside the question of whether holding giving steady with GDP is a failure (as Pallotta argues) or, in fact, an achievement -- and I think you could credibly argue either -- the notion that nonprofits haven't been effective marketers is simply false.

In his history of American philanthropy, Olivier Zunz describes how nonprofits have mobilized mass participation and action for positive effect in the fights against disease. He also describes the successful campaigns to encourage giving that accompanied the birth of the "community chest" and the community foundation, and the "democratization" of philanthropy. Indeed, the country's high level of charitable giving relative to other countries is the result of savvy marketing by nonprofits.

Fourth, Pallotta argues -- rightly -- that percentage of budget spent on overhead is not generally a good measure of nonprofit effectiveness. But he takes his argument to an extreme that ignores the fact that it is isn't always irrelevant either. By lumping together fundraising costs that too often are, in fact, questionable, with investments in professional development or performance measurement, as Pallotta does, we do the cause of reducing the emphasis on overhead a disservice.

Those of us who think overhead is an overused and flawed measure will be much more powerful and credible advocates for our case if we condemn -- loudly -- the kind of practices exposed by these investigative reports. -- Phil Buchanan

Fact is, donors have a legitimate interest in understanding what proportion of their dollars ends up in the hands of for-profit fundraising professionals. A recent, widely discussed investigative report by The Tampa Bay Times and the Center for Investigative Reporting (CIR) identifies "America's Worst Charities" on the basis of the proportion of funds raised that were paid to for-profit solicitors. (Topping the list is the "Kid's Wish Network" which raised nearly $128 million over the past 10 years -- $110 million of which went straight to the solicitors they hired to raise money!)

Some of these organizations seem to exist as little more than shells for for-profit fundraisers. Those of us who think overhead is an overused and flawed measure will be much more powerful and credible advocates for our case if we condemn -- loudly -- the kind of practices exposed by these investigative reports. Yet some, like Pallotta, whose for-profit fundraising business went under when its client organizations and their donors became concerned about the high proportion of funds raised going to Pallotta's company (and to the promotion of his image rather than theirs), seem intent on defending them.

Pallotta's talk, then, is rooted in fallacy and distortion.

Am I saying that all is well with nonprofits? Of course not. I'd be the first to say that nonprofits and foundations can and should be much more effective (and I would say the same, for what it's worth, of businesses and government). The organization I lead works to help foundations improve their effectiveness.

But we don't have a chance of making real progress unless we root our discussions in the reality -- in the facts -- no matter how slick and superficially persuasive a presentation or argument such as Pallotta's may appear.

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