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[Review] 'Charity Case: How the Nonprofit Community Can Stand Up for Itself and Change the World'

September 20, 2012

(Chuck Bartelt is electronic grant information liaison at the Foundation Center. You can read some of her other reviews here, here, here, and here.)

I'm about to shock you. Twice.

First, did you know that telemarketing firms that solicit donations for charitable causes typically keep 90 percent of the money they raise? That's right: for every ten dollars you donate to a cause through one of these firms, only one dollar actually makes it to the charity in question. And did you know that a substantial percentage of the remaining dollar can be eaten up by executive salaries, advertising, and other overhead, leaving only pennies for the cause you thought you were supporting?

These are just a few of the facts revealed in Dan Pallotta's new book, Charity Case: How the Nonprofit Community Can Stand Up for Itself and Change the World. And if you're like me, you're probably feeling a little cheated right now.

But here's the second shock: according to Pallotta, there's nothing wrong with that.

How can that be? Pallotta argues that executive compensation and overhead expenses cannot be considered in isolation when gauging an organization's effectiveness or efficiency. On the contrary, embracing the tools of capitalism (competitive salaries, advertising, lobbying, etc.) may be the best way for charities to maximize their donations and ultimately deliver superior services and programs.

It's an ends-justifies-the-means approach that many will find at odds with the spirit of the social — or, as Pallotta calls it, humanitarian — sector, and it's one Pallotta embraces unapologetically in his book.

Not surprisingly, Pallotta has had personal experience with these issues. As a younger man, he was an admirer of Werner Erhard, whose Hunger Project was criticized for being self-promotion disguised as philanthropy. Then, in 1994, he founded Pallotta TeamWorks, a for-profit organizer of fundraisers for breast cancer and AIDS charities that eventually closed its doors after a dispute with the Avon Products Foundation. He has since founded Advertising for Humanity, which offers business strategy and branding services to nonprofits, and writes a blog for the Harvard Business Review that, like his earlier book, Uncharitable, champions the view that the tactics and methods of capitalism are not incompatible with social sector work; in fact, adopting them is best thing that could happen to it.

But is a mashup of capitalism and do-gooding really possible?

Take the case of executive compensation. Pallotta persuasively argues that cost-benefit analysis must be used when analyzing executive salaries within the nonprofit sector. Regarding the much-criticized salary of Roxanne Spillett, president emeritus of the Boys and Girls Clubs of America, he says, "How can you judge if a $510,744 salary and bonus are worth it if you don't inquire into what the person receiving the salary achieved? A first-year business school student would be kicked out of class for such egregious non-analysis."

Similarly, in the case of overhead, Pallotta argues that there is a tendency to define a charity's "cause" too narrowly. As he puts it: "[I]f hunger, then soup — but not the spoon, the bowl, the stove, the fundraiser that got the money for the stove, or the postage on the thank-you note sent to the donor who donated the money for the stove. Just the soup molecules themselves."

As for the whopping 90 percent of your donated dollar claimed by many fundraising firms, Pallotta argues that for little-known causes with few resources, telemarketing may be the only realistic way of generating any revenue at all. "In many cases," he writes, "the telemarketing firm will essentially advance the upfront costs: it will take the financial risk associated with the possibility of zero donations and accept payment on the basis of only those people who do contribute, eliminating the need for the charity to invest in staff, space, telephony, and technology."

It all makes sense — although it doesn't necessarily make it more palatable to potential donors interested in supporting a cause rather than funding infrastructure.

Which begs the question: Should the general public be informed or shielded from this kind of information? Here Pallotta seems to be of two minds. On the one hand, he embraces the concept of transparency, arguing that if the public were better educated about the economics of charity work, it would be less offended by competitive salaries and high overhead. On the other hand, too much information can create a false image of greed or waste that can drastically stem the flow of donations to a charity or limit them to specific projects or activities.

Indeed, Pallotta argues, unfair media coverage of these kinds of fundraising practices as "extravagant" and "wasteful" has caused charities in general to be held in low esteem by the American public. And one response to this unfavorable coverage — legislation requiring greater transparency on the part of charities through the filing of more detailed financial reports — has had the unfortunate consequence of increasing the very overhead that charities are encouraged (and expected) to minimize.

Pallotta's solution to this conundrum? The establishment of an anti-defamation organization for the nonprofit sector that works to rebut these charges through promotional efforts similar to the "Got Milk?" campaign; the creation of a legal defense fund for the sector; and the creation of an organization that would develop and lobby for a "national civil rights act" for charities. In addition to defending the sector's "rights," the latter would serve as a repository of information for its use, including a "comprehensive national charity database that includes every operating tax-exempt organization in the country and is accessible to everyone and easy to use."

Actually, though, what Pallotta is presenting here is not so much a proposal as a fait accompli. The organization he describes already exists in nascent form, named and incorporated by Pallotta himself. As a result, Charity Case reads more like an advertisement for his own Charity Defense Council than a disinterested defense of the social sector. And that, ultimately, is the book's greatest weakness. By so heavily promoting his new organization (to the point of soliciting donations, recruiting volunteers to perform daily tasks, and hawking merchandise such as t-shirts, flags, and bumper stickers), Pallotta dilutes the persuasiveness of his case.

What's more, that case, when all is said and done, isn't that persuasive. Speaking for myself, I simply don't want to give ten dollars to any charity where almost every dollar goes to fundraising infrastructure or executive salaries, no matter how worthy the cause or how rational the economic justification. We all draw different lines in the sand, and while we may not be able to articulate the difference between acceptable and excessive overhead, most of us, as Supreme Court justice Potter Stewart famously said about pornography, know it when we see it.

Shock me once, shame on you...

-- Chuck Bartelt

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