Downsides to Philanthropy: The Way We Think About Charity Is Dead Wrong

Institutional philanthropy
Institutional philanthropy - Jekyll and Hyde?

There are downsides to philanthropy as well as its well-publicized upsides.  Philanthropy has a Jekyll and Hyde approach to benefiting communities and society: talking big but releasing only a trickle of cash on terrible terms to do the important work.

In his TED talk, “The way we think about charity is dead wrong,” Dan Pallotta, activist and fundraiser, makes many interesting and provocative points about the dysfunctional nature of our society’s “philanthropic market.”  I cheer him on.

He points to five downsides to philanthropy.  These are ways that the non-profit world is explicitly kept on the sideline and rendered ineffectual by the attitudes and practices of the for-profit world.  Non-profits are forced to endure…:

  • dysfunctional compensation practices that don’t reward genuine productivity that makes a difference;
  • virtual prohibitions against advertising and marketing, throttling resource development;
  • non-rewards and even punishment for taking risk, especially to develop new revenue streams;
  • prohibitions against taking time to build the infrastructure and momentum before rewards are demanded,
  • denial of profit even when plowed back into the organization, starving the sector of growth and idea capital.

These restrictions on nonprofits, imposed by traditional donors who ask innocent-seeming questions that have the effect of stifling deserving nonprofits in their pursuit of solutions to big social problems.   The nonprofit world wants these points made loudly.  If the general public understood these realities about nonprofits and the handicaps they labor with, there could well be a surge of support for the work nonprofits do, and a restructuring of the non-profit/for-profit misalignment for the better.

Pallotta creatively traces this dysfunction to the operating assumptions brought to this country by its first immigrant populations, Puritans and Calvinists, who lived and left a legacy that combined piety, ambition and shame, a combination giving rise to American philanthropy, a form of penance, he says.  If we want to remove these downsides to philanthropy and make headway with the causes we fight for, we have to go beyond those inherited cultural strains and re-imagine the possibilities.

Pallotta suggests that if we could get philanthropic contributions “up to scale,” which he defines as contributions at 3% of GDP rather than 2%, the level it’s been stuck at the last several decades, 50% more resources would be available to tackle society’s problems.  And we could get there, he says, if society knew more about and fixed the dysfunctions of the non-profit/for-profit schism.

Perhaps so, but I worry that he carries forward the same mistake as our Pilgrim ancestors, assuming that money is the root of all solutions.  Is it really the case that all that’s needed is more money?  I’m not so sure.

Look at all the money held by private foundations and community foundations, all raised in the last few decades on the promise of solving these problems.  Billions.  Throw in public money and we have major mass. Yet the same huge social problems persist, and are perhaps even worse.  Why would making charitable organizations more massive be better, I wonder?  Please let’s not think that just by throwing more money in their direction we can say “problem solved” or “mission accomplished.”  Possibly, shockingly, perhaps heretically, social problems are worse because of the way we throw money at them. 

A key, I think, to fanning the flames of change Pallotta wishes to fan, is to shed light on yet another dysfunctional schism, one that operates within the world of institutional philanthropy, between grant-making foundations and grant-receiving nonprofits.

Grant-making foundations create terrible choke points in the supply of charitable dollars. Individuals give money in the hope of solving important social problems, but institutions (philanthropy) hold the money, investing it in questionable commercial operations that work against their very own missions, creating beautiful offices for themselves with wonderful salaries and perks, acting more like banks than like partners in problem-solving, and releasing only a trickle of cash on terrible terms to do the important work.

The donating public (most Americans), even the well-to-do donating public, doesn’t differentiate foundations from nonprofits – both are philanthropic charities in their eyes, which is largely true in the eyes of the IRS, institutional charity’s governing authority.   Yet those two sides of the philanthropic world operate at odds with each other every bit as much as the for-profit and non-profit worlds do.

Many of the inequities Pallotta points to actually stem from the practices of institutional philanthropy.  It’s the private foundations, corporate foundations, and even community foundations that ask those inappropriate questions about overhead that keep nonprofit salaries low, that put nonprofits on short time lines that inhibit risk-taking and innovation, that prohibit taking in enough money to plow back into R&D.  It’s at these choke points where change must happen.

I’m not saying that nonprofits know exactly what to do to fix the problems of breast cancer, homelessness, and hunger (to draw on the same issues Pallotta cites), because they don’t yet – largely because, I believe, they’ve been denied the real opportunity to push out on these fronts.

Most people are terribly misinformed about the realities of the nonprofit and philanthropy marketplace, as Pallotta suggests.  If the public knew more about how the right hand (foundations) squelches the left hand (nonprofits) they would demand change.

I credit Pallotta for raising these issues, especially in articulating the historical forces that perpetuate how the profit-making side of our society’s consciousness (and marketplaces) continues to marginalize, demean, and dismiss its benevolent side.  But the goal has to go beyond that of raising more money, it has to go to investing in and testing workable solutions, just as the for-profit world is permitted to do.

Otherwise all we’ll have is a bigger nonprofit economy and the same high problem rates.

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Steven E. Mayer, Ph.D. / Effective Communities Project / March 26, 2013 / gently revised November 5, 2020

Originally appeared:

Original date: March 26, 2013

Author: Steven E. Mayer