The Way We Think about Charity is Wrong
(Most relevant is 2:32-10:28)
From the local mom-and-pop shop to trillion-dollar companies like Apple, the goal of for-profit businesses is typically to make as much money as possible for their stakeholders. For charities, the goal is to help as many people as possible, be it people with cancer, the homeless, people with disabilities, etc. Despite their differences, businesses and charities are, fundamentally, the same in that they seek to improve the lives of their stakeholders. However, in trying to achieve their goals, society expects businesses and charities to operate very differently. The following expectations create a contradiction where we expect charities to tackle massive issues, but we require the charities to be small by restricting their possibility to grow.
- People react negatively when charity workers are compensated at their full market rate, yet we expect charities to attract the best and brightest. For well-qualified individuals, the loss in annual income may be too much to ignore. For example, a Stanford MBA graduate may make $400,000/year working in the for-profit sector, while a similarly qualified individual may make only $85,000/year – 21% of the for-profit worker’s income. As such, a person wanting to make a difference could reasonable choose to work in the private sector and donate $100k per year, still make $300k per year, and been seen as a philanthropist, while the CEO of the receiving charity still makes $86k and struggles to obtain a $10k raise out of the belief that money could better be used toward the cause.
- We do not like the idea that people make lots of money helping other people, yet do not mind when people make a lot of money not helping other people. For example, most people would object to the CEO of a charity making $1 million per year, but do not have a problem with a star athlete making $50 million per year.
- Advertising and Marketing
- As consumers, we accept that companies must market to grow their market share. Big Pharma spends nearly twice as much on advertisements as it does research and development. However, as donors, we do not like to see our donations used on advertising for charity—we want out as much of our money as possible to go directly to the the cause. Charitable giving has remained at 2% of annual GDP for the last 40 years.
- Risk taking
- “When you prohibit failure, you prohibit innovation.”
- As investors, we accept that businesses must take risks, and accept that risks sometimes do not pay off. A failure does not necessarily ruin a company’s reputation. However, as donors, we expect charities to play it safe and only work with tried-and-true methods of fundraising. If a charity invests in a fundraising drive that flops, it ruins their reputation.
- A private company can fail for years to return a profit to shareholders who wait patiently because they believe in the overall plan. However, charities are not allowed to build for the future; they cannot invest in an organizational infrastructure that will, with patience, better address the cause.
- In the last 40 years, poverty has dropped from 20% of the population to 12%, and breast cancer mortality rates have dropped from nearly 100% to 23%.
- Does this not suggest that the traditional model of charity is working?
- Should we be expecting more over the course of 40 years?
- Pallota’s organization had 40% overhead. (The average overhead for a charity is 37%, although the public believes it “should” be 23%). After it became publicly known how much went to overhead, affiliates stopped hiring Pallota’s organization to run their charitable events. Subsequently, his sponsors lost 84% of their incoming donations in one year.
- Does overhead really matter when the total amount going toward the cause increases? (i.e. is it not better to have 60% of $100 million (60 million) go towards ending breast cancer than 95% of $10 million ($9.5 million)?)
- How can we expect the charity “market share” to grow without marketing?
- While marketing may increase the total donations an individual charity receives, is it not likely that some of those donations are coming at the cost of donations to other, lower-overhead charities? Does this not decrease the overall amount going to causes?