Sunday, March 24, 2013

THE NON-PROFIT DISADVANTAGE


Now if you’re someone who doesn’t want to donate money to a water-based non-profit because you think they are wasteful, have too much overhead, pay their employees too much, or are not really innovative, let’s start talking.

I’ve talked a lot about social enterprises that have revenue-generating models. But even the social enterprises with revenue-generating models still fundraise. And fundraising is what non-profits do. So today, I want to talk about the disadvantage that non-profits face because of the different standards applied to for-profits and non-profits.

I’ve been bothered a lot lately by the fact that there is no multi-national, global, big-money social enterprise. When you think of big companies you think of Apple, Samsung, Coca-Cola, GM, GE, Shell, Chevron, Wal-Mart, BP, etc. But I can’t think of one non-profit company or one social enterprise that size. Some say, it’s fundamentally and inherently an impossibility. Why it bothers me is that I think of all the amazingly impacting change a multi-billion dollar social enterprise could do—one that was still amazingly innovative in selling its products but just as innovative in using its profits for seeable change and whose products themselves were changing the world for those without access to basic needs. I’m still pondering this and what it would mean if it existed and if it’s possible to exist.

I do know that non-profits, today, are often hindered in their growth due to concerns of giving to non-profits, efficacy, efficiency, and waste. So I want to list the disadvantages they face in their work compared to for-profits and for-profit work. These disadvantages are highlighted by fundraiser and activist Dan Pallotta in his recent TED talk, The Way We Think About Charity Is Dead Wrong.


      1) COMPENSATION: It’s ok for for-profit leaders to make tons of money, but we do not like it when non-profit leaders make a lot of money. People don’t care so much if someone makes a lot of money selling violent video games, but they get very angry when a non-profit leader makes a lot of money. The problem is that for-profit sector then has an advantage because they can use compensation and salary to attract talent whereas the non-profit sector cannot. Dan gives a beautiful example where he takes the median compensation (with bonus) of a Stanford MBA holder at age 38 ($400,000) compared to the average salary of the CEO of a hunger non-profit ($84,000). It may not be greed that entices a person to take the $400,000 job., according to Dan. It can be much smarter to (1) take the $400,000 job, (2) donate $100,000 every year to the hunger charity, (3) save $50,000 on taxes (still $270,000 ahead of the hunger charity CEO), (4) be called a philanthropist for the $100,000 donation, (5) sit on the board of the hunger charity, (6) supervise the poor person who decided to become the CEO of the hunger charity, (7) and have a lifetime of this type of power and impact.

(Now, I have a slight problem with this thinking since I find it counter-productive, on one hand, to be part of a system that creates hunger and, on the other hand, sit on a board to fight it. However, the point that we need to be willing to compensate non-profit workers in general is an important one. At the very least, the extra attraction of higher salaries, allows people to live consistent lives “on both hands.”)


2) ADVERTISING: We’re ok with for-profits spending as much as possible on advertising, but we don’t like our donations to non-profits to go to their advertising needs. This reminds me of criticism heaped upon Invisible Children. What’s interesting here is that for-profits use advertising to increase revenues.  In the same way, a non-profit can actually increase the amount of money they bring in and fundraise, and therefore increase the good they do and the amount of money directly impacting beneficiaries through advertising.
  
      3) RISK TAKING: We’re ok with for-profits taking risks to generate potential new revenues such as new products (Apple) or new, daring movies (Disney). But when a non-profit takes a risk with a fund-raiser that doesn’t produce huge profits, they get in trouble and their reputation is hurt. Non-profits then become scared to take risks. The problem is that prohibiting failure kills innovation, which prevents the possible growth of revenue and stifles an organization or industry.

      4) TIME: We’re ok with for-profits taking time to get a return on investment (Amazon took 6 years before it generated profits). But if a non-profit needed 6 years of work before generating any return that benefited the hungry, people would critique the non-profit out of business.

      5) PROFIT: For-profit companies can pay out profits that can attract capital for investment into new risks and new ideas, but non-profits can’t pay profits, which reduces their risk capital, idea capital, and potentially their growth potential.

I’m not sure if these things will change, but I am happy that through social sector enterprises combining the social aims of non-profits with the for-profit revenue-generating models, that at least 5 is being addressed. However, it’s still a problem with non-profits. I know people criticise Jeffrey Sachs a lot, but often, I do understand what he means, that we honestly have not given much money (percentage-wise) to the problems we want to resolve. So I often wonder what would a world look like where a multibillion-dollar-profit-making company was a social enterprise and was so innovative in its products that it always remained on top. How would their profits go to social use and would it make a difference? My guess is that its products would become socially good if it was the ethos of the company. But is it possible?

I’ll leave the topic alone and invite you to comment and respond to it. Do you agree with the list? Do you see any possible solutions? Any new ideas bubbling beneath your hoods?

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