Nonprofit Chronicles

Dan Pallotta’s powerful TED talk, called The way we think about charity is dead wrong, has been viewed nearly four million times since 2013. More important, his argument — that charities should be rewarded for their big goals and big accomplishments, and not punished for spending on overhead, marketing and salaries — has helped change the conversation about nonprofits in the US.

A few months after the TED talk’s, the three major groups that report on charities (Charity Navigator, Guidestar USA and the BBB Wise Giving Alliance) published a letter to all nonprofits  calling for an end to what they termed The Overhead Myth. Last November, Darren Walker, the president of the Ford Foundation, announced that Ford would double its overhead rate on project grants from 10 to 20 percent, and he assailed the “well-intended metrics developed by nonprofit watchdog groups that have equated lower overhead with organizational effectiveness when, in fact, the opposite may be true.”

And yet. As Pallotta acknowledged yesterday [Oct 4], until charities do a better job of measuring their impact, and reporting on it in ways that are meaningful and widely accessible, donors will continue to focus on the wrong metrics: overhead, marketing, fundraising costs and salaries.

“We have this belief system that, despite the best of intentions, keeps nonprofits tiny,” Pallotta said during a conversation with Arthur Brooks, the president of the American Enterprise Institute, at AEI’s new offices in Washington. 

“You can’t pay talent. You can’t advertise to increase donations. You can’t take risks,” Pallotta went on. “You’ve just put the whole nonprofit sector at a huge disadvantage to the rest of America.”

He’s right, of course, as should be obvious. When I buy a new iPhone, I don’t care about Apple’s overhead or marketing budget or what Tim Cook is paid. I want to know whether the phone will perform well, and what it costs. Likewise, nonprofits should be judged on their impact per dollar spent.

To his credit, Pallotta has worked tirelessly to spread this message. He has written two books about nonprofits. He’s given 275 speeches in the last five years, his website says. There’s his TED talk, and the work of the Charity Defense Council, a nonprofit that he founded in 2012 as a kind of anti-defamation league for nonprofits.

But a big question remains: If not overhead, then what? Thousands of nonprofits seek our support. Some are high-performing. Others are mediocre. Wouldn’t it be useful to know which was which?

I put that question to Pallotta at AEI. He replied that all nonprofits should be able to answer three simple questions: “What are your goals? What progress are you making towards your goals? And how do you know?”

Then, he said, their answers should be made available in a user-friendly, iTunes-like way to every American who wants to donate to charity. After all, AirBnB and TripAdvisor make good use of user feedback to inform their customers; someone could and should do the same for nonprofits.

The BBB Wise Giving Alliance, Charity Navigator and Guidestar USA are trying. They have come up with a five simple questions, similar to Pallotta’s, called Charting Impact.that nonprofits can use to talk about their effectiveness to donors.

But, as Pallotta noted, these meta-charities (i.e., charities about charities) are not well resourced. “These are all well-intentioned organizations,” he said.” Unfortunately, they’re tiny.”

“We need something robust,” he said. “It’s going to cost on the order of half a billion dollars to gather that data on an annual basis and distribute it to Americans and to keep it updated.” That’s a fraction of the estimated $358 billion that Americans gave to charity in 2015, he noted.

Once again, Pallotta’s message is spot-on. But, as best as I can tell–Pallotta brushed off questions after the q-and-a with Brooks–the important task of coming up with a user-friendly way to track nonprofit impact isn’t on his to-do list. Instead, he said, he’s developing “a series of events that focus on kindness and being present,” called Epoch B, an idea he touches on in his latest TED talk.

On the one hand, that’s unfortunate because Pallotta is such a good marketer. He invented the multi-day charitable event industry, creating three-day walks for breast cancer and long-distance AIDS rides, which raised in excess of half a billion dollars in nine years, his website says. For Pallotta, this work was deeply personal; he talked fondly at AEI about doing an AIDS ride across Montana with his father, and a breast cancer walk with his mother, a cancer survivor. Brooks, who wrote his own book about charitable giving, compared these long journeys for charity to Catholic pilgrimages. “There’s obviously a deep spiritual component to this: giving of oneself for the good of others,” he said. Both men are able to talk about charity in ways that meld the head and the heart.

Then again, Pallotta is probably not the best person to persuade donors and nonprofits to focus on impact instead of overhead. He’s controversial — his company, Pallotta Teamworks, went out of business after being dropped by its biggest client, the Avon foundation, in the aftermath of press complaints that his fundraising events were too costly and his salary too high. (Which is, in part, why he came to see the attention paid to overhead and executive pay is misplaced.) More recently, his Charity Defense Council rose to the defense of the embattled Wounded Warrior nonprofit, which had given Pallotta’s group a $150,000 donation in 2013. That didn’t look right. Some nonprofit executives worry that Pallotta’s fierce defense of charity overhead and executive salaries are doing more harm than good, the Chronicle of Philanthropy reported [paywall] in May.

I’m not sure. I tend to think the world of foundations and nonprofits could use a few more people like Dan Pallotta, who are willing to challenge conventional thinking. I know his message deserves to be taken seriously.