Dan Pallotta is one leader spreading his advocacy through numerous speaking engagements, TED Talks, and as chairman of the Charity Defense Council. He believes that nonprofits should be driven by the entrepreneurial spirit to achieve impacts on the scale of SpaceX. Currently society gives organizations that pursue profit margins more operating freedoms than nonprofits pursuing societal improvement. This structure offers perverse incentives and precludes charities from resources needed to tackle significant systemic problems. Instead, Pallotta argues that nonprofits should have the same freedoms as businesses. More specifically, nonprofits should be able to pursue more risk in the form of higher reinvestment of donor dollars. This freedom, in turn, results in the ability for charities to hire the best talent, invest in necessary infrastructure, and launch effective advertising campaigns. Armed with these freedoms, the social sector can dream and execute on the scale of Elon Musk. Although the dream sounds simple enough, acquiring those freedoms is much more difficult.
Pallotta notes that in the status quo the modern philanthropy philosophy equates “frugality with morality.” Although this notion that a charity that spends less on itself is morally intuitive, it constrains and harms an already struggling social sector. This paradigm arose from the advent of the internet and the rise of watchdog organization Charity Navigator.
The advent of the internet allowed unprecedented access to nonprofit tax returns. Although tax returns provide a financial reflection for nonprofits, they fail to contextualize the information. This access soon gave rise to websites like Charity Navigator which collect and analyze financial public records and assign charities a one to four-star rating. Through smart strategy, Charity Navigator became the leading authority on nonprofit accountability, setting the numbers approach as the industry norm for measuring charity impact and efficiency.
Former chair of Fundraising at Columbia University and early stage Charity
Navigator founder Doug White pushes back on Charity Navigator by proposing his own accountability platform. He finds that a decentralized system focusing on multiple user-submitted standards rather than one universal law would be successful. White contends that the nonprofit sector is so diverse that it is impossible to use the same metric to compare a university like Dartmouth against a homeless shelter. There should not be a top down power dynamic. Instead, the standards should be a conversation between donor’s expectations and the charity’s mission statements. The platform would serve as a Google for nonprofits. It would allow charities, foundations, and organizations to state their mission, objectives, and plans while giving donors the ability to see the nonprofit’s progress and success in meeting them. Just as charities can set their importance on mission and values, donors would be able to set their priorities and see organizations that reflect their beliefs and are ranked accordingly. More specifically, he hopes to show a three-dimensional bell curve that would compare aspects of the charity against others in the field to place their mission in perspective.
White’s platform will empower nonprofits to set lofty goals and reverse the prevalent numbers paradigm. Allowing individuals to influence standards and nonprofits to set expectations decentralizes power by shifting authority from the watchdog to the nonprofits and donors. But there are some pitfalls to this system. In an open system, it may give rise to nonprofits essentially grading themselves, as they set their own mission and progress. White, in turn, responds that no system will be perfect, but those problems are insignificant against the damage of maintaining the status quo.
Philanthropy is the “market of love” as Pallotta notes. It is the sector whose mission is to help those who have been left behind by traditional market forces. Nonprofits ought to be able to not only relieve but solve these pressing issues that are outside the scope of profit and shareholder value. Although it may seem that the CEO’s are the only casualties of this debate, it is groups like the 700 million in poverty worldwide that are the true victims of an inefficient social sector. Most frustratingly, these constraints are self-imposed. White agrees that there is no legal but rather a public norm that justifies the current stance on charities. Despite the problems there has been progress. In 2013 three of the leading charity evaluators issued a joint statement downplaying the importance of a numeric approach. Such action, however, is insignificant to arm charities as they face even larger problems. Only through a combination of accountability overhaul and new measures of nonprofit impact will the social sector begin to improve the lives of those in need.