Dan Pallotta: The way we think about charity is dead wrong (1)
I want to talk about social innovation and social entrepreneurship. I happen to have triplets. They're little. They're five years old. Sometimes I tell people I have triplets. They say, "Really? How many?" (Laughter)
Here's a picture of the kids -- that's Sage, and Annalisa and Rider. Now, I also happen to be gay. Being gay and fathering triplets is by far the most socially innovative, socially entrepreneurial thing I have ever done.
The real social innovation I want to talk about involves charity. I want to talk about how the things we've been taught to think about giving and about charity and about the nonprofit sector, are actually undermining the causes we love, and our profound yearning to change the world.
But before I do that, I want to ask if we even believe that the nonprofit sector has any serious role to play in changing the world. A lot of people say now that business will lift up the developing economies, and social business will take care of the rest. And I do believe that business will move the great mass of humanity forward. But it always leaves behind that 10 percent or more that is most disadvantaged or unlucky. And social business needs markets, and there are some issues for which you just can't develop the kind of money measures that you need for a market.
I sit on the board of a center for the developmentally disabled, and these people want laughter and compassion and they want love. How do you monetize that? And that's where the nonprofit sector and philanthropy come in. Philanthropy is the market for love. It is the market for all those people for whom there is no other market coming. And so if we really want, like Buckminster Fuller said, a world that works for everyone, with no one and nothing left out, then the nonprofit sector has to be a serious part of the conversation.
But it doesn't seem to be working. Why have our breast cancer charities not come close to finding a cure for breast cancer, or our homeless charities not come close to ending homelessness in any major city? Why has poverty remained stuck at 12 percent of the U.S. population for 40 years?
And the answer is, these social problems are massive in scale, our organizations are tiny up against them, and we have a belief system that keeps them tiny. We have two rulebooks. We have one for the nonprofit sector, and one for the rest of the economic world. It's an apartheid, and it discriminates against the nonprofit sector in five different areas, the first being compensation.
So in the for-profit sector, the more value you produce, the more money you can make. But we don't like nonprofits to use money to incentivize people to produce more in social service. We have a visceral reaction to the idea that anyone would make very much money helping other people. Interestingly, we don't have a visceral reaction to the notion that people would make a lot of money not helping other people. You know, you want to make 50 million dollars selling violent video games to kids, go for it. We'll put you on the cover of Wired magazine. But you want to make half a million dollars trying to cure kids of malaria, and you're considered a parasite yourself.
And we think of this as our system of ethics, but what we don't realize is that this system has a powerful side effect, which is: It gives a really stark, mutually exclusive choice between doing very well for yourself and your family or doing good for the world, to the brightest minds coming out of our best universities, and sends tens of thousands of people who could make a huge difference in the nonprofit sector, marching every year directly into the for-profit sector because they're not willing to make that kind of lifelong economic sacrifice. Businessweek did a survey, looked at the compensation packages for MBAs 10 years out of business school. And the median compensation for a Stanford MBA, with bonus, at the age of 38, was 400,000 dollars. Meanwhile, for the same year, the average salary for the CEO of a $5 million-plus medical charity in the U.S. was 232,000 dollars, and for a hunger charity, 84,000 dollars. Now, there's no way you're going to get a lot of people with $400,000 talent to make a $316,000 sacrifice every year to become the CEO of a hunger charity.
Some people say, "Well, that's just because those MBA types are greedy." Not necessarily. They might be smart. It's cheaper for that person to donate 100,000 dollars every year to the hunger charity; save 50,000 dollars on their taxes -- so still be roughly 270,000 dollars a year ahead of the game -- now be called a philanthropist because they donated 100,000 dollars to charity; probably sit on the board of the hunger charity; indeed, probably supervise the poor SOB who decided to become the CEO of the hunger charity;
and have a lifetime of this kind of power and influence and popular praise still ahead of them.
The second area of discrimination is advertising and marketing. So we tell the for-profit sector, "Spend, spend, spend on advertising, until the last dollar no longer produces a penny of value." But we don't like to see our donations spent on advertising in charity. Our attitude is, "Well, look, if you can get the advertising donated, you know, to air at four o'clock in the morning, I'm okay with that. But I don't want my donation spent on advertising, I want it go to the needy." As if the money invested in advertising could not bring in dramatically greater sums of money to serve the needy.
In the 1990s, my company created the long-distance AIDSRide bicycle journeys, and the 60 mile-long breast cancer three-day walks, and over the course of nine years, we had 182,000 ordinary heroes participate, and they raised a total of 581 million dollars.
They raised more money more quickly for these causes than any events in history, all based on the idea that people are weary of being asked to do the least they can possibly do. People are yearning to measure the full distance of their potential on behalf of the causes that they care about deeply. But they have to be asked. We got that many people to participate by buying full-page ads in The New York Times, in The Boston Globe, in prime time radio and TV advertising. Do you know how many people we would've gotten if we put up fliers in the laundromat?
Charitable giving has remained stuck in the U.S., at two percent of GDP, ever since we started measuring it in the 1970s. That's an important fact, because it tells us that in 40 years, the nonprofit sector has not been able to wrestle any market share away from the for-profit sector. And if you think about it, how could one sector possibly take market share away from another sector if it isn't really allowed to market? And if we tell the consumer brands, "You may advertise all the benefits of your product," but we tell charities, "You cannot advertise all the good that you do," where do we think the consumer dollars are going to flow? The third area of discrimination is the taking of risk in pursuit of new ideas for generating revenue. So Disney can make a new $200 million movie that flops, and nobody calls the attorney general. But you do a little $1 million community fundraiser for the poor, and it doesn't produce a 75 percent profit to the cause in the first 12 months, and your character is called into question. So nonprofits are really reluctant to attempt any brave, daring, giant-scale new fundraising endeavors, for fear that if the thing fails, their reputations will be dragged through the mud. Well, you and I know when you prohibit failure, you kill innovation. If you kill innovation in fundraising, you can't raise more revenue; if you can't raise more revenue, you can't grow; and if you can't grow, you can't possibly solve large social problems.
The fourth area is time. So Amazon went for six years without returning any profit to investors, and people had patience. They knew that there was a long-term objective down the line, of building market dominance. But if a nonprofit organization ever had a dream of building magnificent scale that required that for six years, no money was going to go to the needy, it was all going to be invested in building this scale, we would expect a crucifixion.
The last area is profit itself. So the for-profit sector can pay people profits in order to attract their capital for their new ideas, but you can't pay profits in a nonprofit sector, so the for-profit sector has a lock on the multi-trillion-dollar capital markets, and the nonprofit sector is starved for growth and risk and idea capital.