Dan Pallotta: The way we think about charity is dead wrong

Speaker

Daniel Pallotta is an American entrepreneur, author, and humanitarian activist

Summary

People question the role of charities compared to business. Business will definitely lift the standards in the developing world, but will always leave gaps – people that it can’t support. Some mentally disabled people just want compassion or love, and that can’t be monetised by a business. However, there are perceptions working against the non-profit sector that make it hard to ‘compete’ against businesses

  • Compensation: People react viscerally against charity workers being well paid. However some are extremely well qualified: a CEO of a hunger charity is paid ~$86k/yr and has similar qualifications to a Stanford MBA graduate with an average $400k/yr. Someone on $400k /yr can donate $100k/yr, reduce his tax bill by $50k, be seen as a philanthropist and still be $260k better off than the high-paid ‘parasite’ running the charity.
  • Advertising: Similarly, people do not like the idea of their money being spent on advertising. However, the percentage of people’s wage being given to charity has stayed at 2% for 40 yrs – the only way to gain ‘market share’ in the charity sector is to actually do marketing against the ‘for profit’ sector.
  • Risk: If a charity invests in a fundraising drive and it flops, it ruins their reputation. But if people cannot accept failure, there will be no innovation or improvement.
  • Time: Companies can take years to develop market share before they gain revenue. However donators will not accept a 6yr wait before any funds reached the needy.
  • Profit: For-profit companies can use the promise of future profits to attract capital investment. Charities are locked out of this capital stream.

These disadvantages add up – since 1970 only 144 charities have passed $50million revenue, compared to 46,136 for-profits.

People hold the above perceptions, and it is typified in asking “How much of a donation goes to overheads compared to ‘the cause’?” This question has some problems in it:

  • It implies ‘the cause’ is not helped by overheads. This is not the case, especially if the overheads are spent on ‘growth’.
  • It prevents charities from growing or investing in fundraising. However if fundraising actually raises funds, then it should be encouraged, giving them more money to push towards the cause.

As examples of successful fundraising, Dan describes how $50,000 investment in an AIDs Ride resulted in $108,000,000 extra revenue for research, or $350k investment in breast cancer fundraising multiplied to $194,000,000. However, one year he netted $71 million for breast cancer research and was put immediately out of business. The media and his sponsors turned on him because 40% of his revenue was spent on overheads – in growth, customer service and recruitment.

The focus should not be on overheads, but on the scale of the operation. A company with 40% overheads netting $71,000,000 should be seen as superior to one with 5% overheads netting $71. We need to rethink how charities should work, and focus on whether they are achieving their goals rather than their investment to get there.

My Thoughts

Dan speaks very passionately and puts forward a new perspective, however I can’t help but disagree with him. His focus is entirely from an individual charity’s point of view – where of course it is a no-brainer to invest more in recruitment and marketing. However some of these efforts will not be ‘poaching’ resources from the for-profit sector, but from other charities. This gets worse as charities get bigger, and will generate an arms race between them. The money is coming from outside the charity: donators do not expect that their money is taken and 40% of it used to beg someone else to donate, or convince others to pick this charity over another. This is not an efficient use of money – pure growth implies an ego that ignores what the donators expected.

When someone buys a can of coke, they accept that (made up numbers) 20% goes to the cost of ingredients, 10% to the employees, 10% in packaging / transport, 30% to retailers, 20% in advertising and 10% profits. Dan’s argument is that the same sorts of ratios should be accepted in charities: that if a fraction of the money we give him goes to what he said it would, we should accept it because the rest was used to generate money at similarly poor efficiency from someone else.

I’m also slightly disturbed by the focus of the speech: which was from the point of view of the charity while ignoring results of the fundraising or opinions of the people donating. It is nice that he raised $71million, but what did that money achieve?

I appreciate what he is saying about scale of an organisation, and compensation or risk. But like it or not, people do want a sense of frugality rather than massive structures designed to just support the business.

Anyway, it was a good talk to make you think about your own viewpoints. My reaction above is not because I disagreed with every point in his speech, and not because I didn’t appreciate it.

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Joy Sun: Should you donate differently?

Speaker

Joy Sun is a veteran aid worker and COO at http://www.givedirectly.org

Summary

As an experienced aid worked, Joy often felt the urge to give money directly to the poor (rather than through programs). However, she believed that her programs would benefit them more: by spending money for the poor rather than letting the poor spend money. Recent research shows that this is not true – when people are allowed to spend money themselves, pregnant women will buy food for stronger babies, businessmen will invest directly in their business and increase their income. Studies showed people didn’t spend more on alcohol, or slack off and work less. People prioritised their own needs well, and usually got a direct benefit.

It begs the question: are aid workers worth the extra cost? Are the poor better at spending their money than we are at choosing what they want? As an example, in India a program gave livestock to the ‘ultra-poor’, and 30% then sold their livestock for cash. To add to the inefficiency, for every $100 spent on livestock, another $99 was spent in administration of the program.

New technology allows us to send money directly to the poor. This payment amount could allow people to send money directly to the poor. Joy’s latest program will firstly verify how poor a person is, then sell them a cheap cellphone and donate $1000 per family directly to them. It avoids issues of corruption, and allows people to invest in themselves.

Aid efficiency tends to have a very low threshold of success- we tell ourselves that it is successful if we do some good. Or that we are better off giving than not giving. This increases the amount lost to plane tickets, reports, studies. The new bar should be “can we choose how to spend this money better than the recipients?”.

Direct money cannot eradicate disease or build up institutions, but could be a more efficient way to improve the lives of individuals. Joy believes in aid, but isn’t convinced that most of it is more efficient than directly giving to the poor. She hopes some day it will be.

My Thoughts

Very thought-provoking. As someone who could donate more, but is cynical of the agencies delivering programs, the idea of direct payments is intriguing. I am also curious how this aid impacts those who do not receive it: are whole villages targeted, and if so does it simply cause inflation? Or does involvement in this aid pick winners? I admit my ignorance of economics in this area. I would also be concerned about the verification process – giving money is a concept that is open to fraud, and donators should feel confident that it is being given to those who need it.

Nonetheless, I agree with her that it is a very good way to bypass inefficient organisations and government corruption.

Michael Norton: How to buy happiness

Speaker

Michael Norton is an Associate Professor of Business Administration at Harbard business school.

Summary

If you believe “Money Can’t buy happiness”, then you’re not spending it correctly. When people think about winning the lottery – they think it will make them happy. However they spend it all, go into debt, and all their friends ask for money – their instinct is to get more antisocial and closed off. Winning the lottery ruins people’s lives – but is this because they only spend it on themselves?

Michael ran a test at university of British Columbia – giving students either $5 or $20 and asking them to spend it on either themselves or someone else by the end of the day. The ones who gave their money away were happier, but those who spent on themselves felt the same. Also, the amount of money spent or given away didn’t make a difference. A similar experiment showed the same result in Uganda – a completely different culture to Canada. The magnitude of the gift wasn’t too significant – a girl who bought a gift for her mother felt as happy as a Ugandan who bought life-saving malaria treatment for a stranger.

Michael extended this to the workplace – giving a team $15 each to spend on themselves or an experience for the team. The team ‘pro-social’ events were sometimes silly bonding exercises – like buying a pinata and smashing it together. However, the company got a 72c return in productivity on every 15c spent on team bonding. The productivity return for people spending on themselves is far less – only 4.2c per 15c spent.

The same experiment was carried out with dodgeball teams – and the ones who spent on each other became much better teams. They dominated the league. The teams that spent on themselves stayed the same.

To make yourself happier, don’t think about which product to buy. Find a way to spend it on someone else, or to charity.