It takes dedicated effort to understand a charity's work and social context well enough to assess the true impact of their work—and what corresponding overhead costs are therefore appropriate.

November 18 th 2011

Uncharitable: How Restraints on Nonprofits Undermine Their Potential by Dan Pallotta. Tufts, 2008. 312pp.

The author of Uncharitable, Dan Pallotta, has some interesting ideas as much as he has an axe to grind. Pallotta wrote the book to provide his side of the story in the aftermath of the fall of Pallotta TeamWorks. The story is worth hearing, as are his thoughts concerning an overall restructuring of the way our charitable sector "should" operate. But "worth hearing" and "worth implementing" are quite different in this case. The former I will heartily affirm; the latter, I'm not so sure.

Dan Pallotta founded Pallotta TeamWorks, a for-profit company that invented and organized the AIDS Rides and Breast Cancer 3-Day fundraising events. Between 1994 and 2002, more than half a billion dollars was raised and more than $300 million netted for charity by engaging over 182,000 people in these fundraising events. During its heyday, Pallotta TeamWorks employed 350 full-time employees in sixteen U.S. offices. To say the enterprise was a success would have been an understatement. In August 2002, however, the Pallotta empire fell hard after many of the charities that benefited from the fundraising events decided to cut loose. The largest impact was felt when Avon Products Foundation launched its own version of a three-day breast-cancer walk originally developed by Pallotta. TeamWorks folded and Pallotta's proverbial axe emerged, ready to grind.

The exiting charities had been put in an awkward spotlight after a number of journalists reported that the fees paid to TeamWorks exceeded the 35 cents-per-dollar-raised recommended by various charitable watchdogs. Perhaps more distasteful to the media were the lofty salaries in this overhead—including Pallotta's. To distance themselves from the bad press, charities distanced themselves from TeamWorks.

Six years after the fall of TeamWorks, Pallotta emerged with Uncharitable, in which he asks this question: Why are charities not allowed (morally) to employ business practices such as advertising, marketing, paying premium salaries for top leadership, or paying more for overhead when the ROI is warranted?

In this well-sourced work, Pallotta "examine[s] the arcane structure we inherited for non-profits" by tracing its roots back to the Puritans. Reportedly, John Winthrop's "city on a hill" sermon set the stage for the enduring model of charity that requires the poor to be given handouts rather than helped to escape from their poverty. Pallota goes on to argue that charity is "no longer an exchange between the non-needy and the needy. It is an exchange between the non-needy (donors) and the non-needy (the charity work force) to provide services to the needy. It is an exchange between equals to help the needy." To demonstrate our social inconsistencies, Pallotta effectively exposes that our society is happy when big businesses make exorbitant profits, pay huge bonuses, and advertise their products until we know the jingles verbatim, yet is outraged if charities do the same.

As Pallotta goes to great lengths to explain, dismissing his firm may have reduced the expense ratios of the benefitting charities, but it netted them a worse return in the end. Avon Foundation, for instance, started its own three-day walk and managed to raise $22.7 million after expenses. The last walk organized by TeamWorks, after costs, had provided Avon with $70.9 million to make grants. The other departing charities reportedly suffered similar outcomes.

Since Uncharitable was published, much discussion has taken place both praising Pallotta and taking him to task. Instead of looking at the book overall, though, I'd like to focus on the erroneous posture of the argument itself.

It is not inconsequential that Pallotta's view of the charitable sector, outlined at the very outset of the book, is negative at best:

The system is oppressive. Threatened by any possibility of real change, it suppresses discourse. It intimidates with a moral stick. It discourages thought, inquiry, truth, and possibility. This is doubly dangerous, because nonprofit organizations are supposed to be society's agents of change. Instead, they are coerced into a kind of servitude to the status quo.

If this is indeed reality, it would warrant the harsh treatment that Pallotta dispenses. But the fact is that this is not reality. The (Canadian) charitable sector is replete with large and small organizations that are launching innovative measures to become ever more effective agents of change—even within the constraints so despised by Pallotta. To start his book on such a negative premise is akin to creating a straw man that is easily, although wrongly, knocked down. Further, it establishes the non-partner, us versus them attitude that Pallotta has with the charity beneficiaries and those being served. This posture will lead Pallotta to his fall.

But for all the kerfuffle and discussion that this book generated in 2008 and 2009, it is interesting that there has been little noticeable movement toward the reframed charitable structure that Pallotta proposes. A charitable organization stock exchange has not been formed. Pallotta has not formed another TeamWorks for-profit company. Government legislation has moved more toward restricting not-for-profit salaries than letting them compete with the Bay Street peers. Why, has there been this little observable change?

Quite simply, while Pallotta admittedly identifies a stumbling point in the effort to get more money into the hands of charities, he incorrectly frames the problem. In doing so, the proposed "fix" for the problem requires a solution that is overkill and smothers the essence of good philanthropy altogether.

If we accept Pallotta's critique of the charitable sector, we must also accept the underlying premise that the "fix" of throwing more money at a problem such as AIDS or breast cancer will ultimately solve the problem. This is not the case, as we have observed in both business and charitable enterprises. Pallotta's argument is shockingly naïve to imply that we simply need to reform the charitable sector to be more like business so that more money can be raised. As if business is the model that should be emulated! With the world of capitalist finance in absolute collapse right now, one can only surmise how much charitable work would suffer if it had followed similar practices. Even though Pallotta's new methods would have to be backed up by rigorous accountability, for which he strongly argues, there is no guarantee that charities would not come to similar demise as Lehman Brothers—even if the charity could pay its CEO a similar $120 million.

I say all of this to point out that the business model which Pallotta holds in high esteem is not without its dark side. And if that dark side were to envelop the charitable sector, the consequences would be even greater for society. If it is true that nonprofits haven't solved world hunger because they can't IPO their organizations to raise enough capital, why hasn't an existing for-profit mega-company stepped in to do this? Surely there would be investors willing to get behind such an altruistic, for-profit enterprise.

And here is the real problem with Pallotta's argument: When criticized for the hefty overhead that was charged by TeamWorks, Pallotta should have postured a response that deflected attention to the ultimate impact that is happening as a result of the (net) donations making their way to the charities. Pallotta made the mistake of thinking that it was "all about him" (and his business model). It's not. And this is perhaps the biggest lesson to be taken from Uncharitable. The eyes of scrutinizers—whether they are donors, media, charity workers, or for-profit enterprises such as TeamWorks—need to be focused on and responsible for the impact that is happening as a result of the charities' efforts. As soon as this focus is lost (and it is surprisingly easy for this to happen), subsequent ideas and actions move further from the issues that matter the most. People's ROI of their donated dollars should not be measured in net dollars to the charities, but rather in the impact that those net dollars are having.

It's far too easy to resort to assessing the effectiveness of a donation based on how much of that donation goes toward overhead. Pallotta and others rightly revolt to this simple evaluation. And yet it's easy to default to this position because the work of assessing the real impact of charities' work is significantly harder. It takes dedicated effort to understand a charity's work and social context well enough to assess the true impact of their work—and what corresponding overhead costs are therefore appropriate. This posture is mission critical for any serious donor—including Pallotta in his role as CEO of TeamWorks. If Pallotta understood the work and impact of the charities to the extent that he should, and had he been involved in holding the charities accountable for their work and impact, and had he also been sufficiently knowledgeable so that he could be an informed advocate for the good work being conducted by the charity, the backlash that he faced because of "overhead ratios" may not have amounted to much in the end. When everything fell apart, it was clear that Pallotta was not considered a partner with the charities—which he himself says is the new, post-Puritan reality. He was simply a hired hand.

And it is here that Pallotta has misunderstood the truth of the Puritan heritage as it developed the prevailing understanding of charity: The Puritans knew the importance of working alongside and with those who needed help. They did so not as a penance for creating wealth as Pallotta suggests. Rather, Puritan ethos created opportunities for balance—both earning and giving—so that they could appreciate the full value of God's gifts and provision.

While an interesting read, Uncharitable fails to frame the problem correctly and therefore proposes a solution that is incorrect, self-serving, and unattainable. A more constructive and helpful posture would focus on the impact that the charities are having and taking on the hard work (a.k.a. posture) of partnership with the charities. This posture has a greater potential to change the culture because, in the end, it isn't the overhead ratios or the amount of dollars getting to charities that is most important, but the actual impact of charity's' work.


Brent Fearon serves as the Senior Program Officer at Bridgeway Foundation and Executive Director of Legacy Foundation of Canada, both based in Cambridge, Ontario and providing support for charities working nationally and internationally. In these grant facilitation roles, Brent works to find the best fit between donors and charities—ensuring that limited resources are well-placed within a seemingly unlimited array of worthy charitable work. His work aims to foster an environment of partnership—bringing together the goals of Foundations and charities to create opportunities for mutual growth and learning.