I’m finishing out my second week working with Charities Review Council, and I’m very excited to propel our mission of building up the nonprofit sector. Being relatively new to the nonprofit world, I've been spending a lot of time reading various thought leaders' takes on where the sector is going, what needs to be changed, and what practices are downright broken. One big hot-button issue right now is “the overhead ratio,” or the ratio of money a nonprofit spends on its mission versus employee salaries and other operating fees.
My colleagues here at Charities Review Council have written a great deal in our blog about the overhead ratio, pointing out that the overhead ratio is generally just a data point; it is a poor measure of a charity’s overall performance or effectiveness when taken alone.
One of the loudest champions of overhead ratio reform right now is Dan Pallotta, whose recent TED Talk illustrates how investing in leadership the way for-profit companies do can create unparalleled results in nonprofits. He goes beyond the argument that overhead isn’t an effective measure for nonprofit performance, suggesting that donors should accept charities taking on large risks in fundraising projects the way for-profit companies do. Recently, Pallotta has seen a barrage of backlash from respected leaders in the field.
One of Pallotta's biggest critics is Phil Buchanan, president of the Center for Effective Philanthropy, who recently sounded off in opposition at Huffington Post. “Fact is, donors have a legitimate interest in understanding what proportion of their dollars ends up in the hands of for-profit fundraising professionals,” Buchanan says He worries that charities under Pallotta’s model can become “little more than shells for for-profit fundraisers.”
Pallotta argues that fundraising professionals should have every opportunity to make a fortune as their peers in the for-profit world. He promotes a meritocracy of fundraisers, where the most effective fundraisers get paid a competitive market wage. It’s easy to see how donors are wary of this mentality, especially with some of the more extreme cases of recent charity fraud—CNN reported this year that Florida-based Kids Wish Network spends less than three cents per dollar raised helping dying children and their families.
Ken Berger and Robert Penna of Charity Navigator said in Huffington Post “We believe his message has gained tremendous popularity for one simple reason — he ultimately is arguing that charities should be held to virtually no accountability standards.” They don’t believe he has explained in enough detail how to measure the success of a charity, and whether the gains were worth the amount of donations expended.
@danpallotta Wow. Really? Most Americans think corporate CEO pay is out of control and too often disconnected from performance.
— Phil Buchanan (@philCEP) September 26, 2013
It’s also arguable that Pallotta’s ideas on charity have become popular because of the current reality of the nonprofit landscape. Organizations have been faced with increased need and decreased funding, so it’s easy to see the appeal of a charitable model that promotes capital growth on par with for-profit companies.
As this conversation continues, debate will likely center around something along the lines of “can a charity be effective and responsible while taking greater risks and providing increased personal gains for individuals?” The answer isn’t necessarily cut and dry. The increased capacity of a charity run like a business comes with unprecedented barriers of donor trust. If Pallotta’s vision, or something like it, is ever to become a reality, it will require innovative standards of nonprofit performance that foster relationships between donors and charities. If Pallotta truly wants to change the way we think about charity, his first concern should be donor trust.
Matt Beachey joined the council in September 2013, working on marketing and engagement. He graduated from Gustavus Adolphus College in 2010, and has since been living in the Twin cities. Matt served in AmeriCorps with the nonprofit Hunger Solutions and interned with Twin Cities Habitat for Humanity in their Marketing and Communications department. He also volunteers as the managing editor of Pollen, and as a blogger for FINNEGANS.