The Attack on Philanthropy
American philanthropy and the nonprofit sector it supports are under attack. The attack comes both from outside the boundaries of the sector and from within it.
Hyperbole? I don’t think so.
With recent books from Philanthrocapitalism to Uncharitable receiving prominent play—and their authors being feted by those within and outside the sector—there is real danger that an appreciation of the nonprofit sector’s distinctive identity and purpose will be lost.
Both of these books, though very different, contain some good ideas about how the sector can improve—and some completely wacky ones too. But the real problem lies in the fact that both caricature the sector unfairly and look simplistically and misguidedly to the markets and “business practice” as the answers. Both lack sufficient appreciation for the fact that if free markets or the government could solve all our problems or fulfill our needs for expression, we wouldn’t have any use for a nonprofit sector at all. But, alas, we do.
The authors seem not to appreciate the irony of looking to investment banks as a model of how to foster transparency—as Philanthrocapitalism does. Or to CEO compensation practices in the corporate world—as Uncharitable does. (That book even includes a table that, with seeming approval or at least no critique, lists the $119 million 2006 total pay of the former CEO of Lehman Brothers as evidence for how the nonprofit sector needs to reform its approach to compensation!)
Meanwhile, faculty at business schools such as my alma mater, Harvard Business School (whose publishing arm has given the author of Uncharitable a blog), speak breathlessly about the “blurring of the boundaries” between the sectors, as if this is only a good thing. There is much to be lauded about the newfound interest in “social innovation” and “social entrepreneurship” at leading business schools. And there is certainly much to be learned across sectors. But that learning should flow in both directions, as Peter Drucker famously pointed out in his terrific 1989 Harvard Business Review article “What Business Can Learn from Nonprofits.” And it needs to be accompanied by an appreciation of the nonprofit sector’s distinct purpose, role, and value.
Claire Gaudiani, in her provocative book The Greater Good: How Philanthropy Drives the American Economy and Can Save Capitalism (which, sadly, received much less attention even in the sector than the two books noted above), documents how the nonprofit sector and American philanthropy have invested in ideas that didn’t get support from business or government, but transformed our lives for the better.
“Rocketry, commercial aviation, stock market portfolio analysis, and radar are just a few of the important ideas that have flourished because innovative donors supported innovative thinkers and built prosperity in America through gifts to grow intellectual capital,” she writes.
She also points out that the role of nonprofits is often to reign in business, citing the environmental movement and giving specific examples such as the ban on DDT and the successful effort to convince McDonald’s to discontinue using foam containers in 1990. A more recent example that was at the heart of a presentation I heard just last month at the Philanthropic Foundations Canada conference—and that was achieved with support from a number of foundations—is the increase in use of recycled paper in the Canadian book publishing industry. (See http://www.ivey.org/.)
Gaudiani goes so far as to argue that “philanthropy saves . . . capitalism. . . . Generosity has saved capitalism over many, many decades, like a smart, kind friend watches out for a somewhat gifted but intemperate colleague, advising him throughout his life on the need for self-restraint and better judgment.”
I find her case for the value of the sector much more compelling, much more rooted in historical fact, than those who suggest that the way to improve the sector is for it to adopt, wholesale, the practices of business.
The sector can and must improve, just as business and government can and must improve, but to suggest, as so many do, that the “Birkenstock world of charity”—as the authors of Philanthrocapitalism derisively label it—needs to be saved by “business approaches” (whatever that even means) is both dangerous and destructive.
Tomorrow: The Attack from Within
- Phil Buchanan's blog
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Comments
Ironic, indeed.
Excellent post. I would just echo the point that it's particularly strange that these two books have gained so much attention in the face of disastrous results of unrestrained self-interest in the business sector. It's complicated, of course. There are aspects of business practice that ought to be emulated by nonprofits. But the wholesale adoption of "business approaches" is misguided.
The Attack on Philanthropy
Thank you for your comments. I agree with your conclusions. It never ceases to amaze me that people with no interest whatsoever in charitable works insist that charitable enterprises should adopt market based solutions. And yet, they generally refuse the very idea that most charitable enterprises serve valuable economic purposes.
Legal aid, for instance - how many revolutions have been caused by large groups of people who no longer believed that their existing government was interested in their welfare. How easy it would be for the tens of millions of people living at below median income levels to decide that because they cannot afford lawyers to guide them through the legal system, that legal system serves no useful purpose. The trip from disgust at the existing system to active revolution is a very short step indeed.
Meanwhile, legal aid groups all over the country attempt to maintain the illusion that the legal system is, in fact, open for the poor as it struggles to help 1 out of 5 or 6 legitimate clients because no one wants to fund it sufficiently.
There is no market based solution to funding legal aid. Eiher you do or you don't. Those at the very top of society stand the most to lose if the masses decide there is no justice. The same could be said of healthcare. So, their very existance lies in presenting realistic solutions to access to both healthcare and justice. Meanwhile, charitably inclined individuals struggle to maintain charitable institutions that present some slim hope for the millions without hope.
Interestingly enough, at least in my case, those to the right of the political spectrum donate more time and money to support legal aid than those to the left of the political spectrum.
I agree!
I completely agree; I formerly worked at an organization where the founder left and a big business honcho was brought in as CEO and hired techy analysts to corporatize the whole thing. There is absolutely no heart left in the organization - the employees and the donors feel it, and as a result the good employees leave to find places that still have a charity feel to them, and donors give to leaders and organizations that touch them emotionally. This organization seems to think that if you just have enough good data, that should sustain you as a charity - but it doesn't. The founder has privately referred to it as "a sinking ship" and I agree. I think the move to corporatize this charity was well-intentioned, but it has just been a sad decline; I predict it will be gone within 10 years.
"Why business thinking is not the answer"
Phil Buchanan has written a very thoughtful piece about these two books, and provides a succinct op-ed critique about their thesis that the nonprofit sector needs to be saved by “business approaches”. Whenever I train volunteers and staff, or coach board chairs and executive directors, one of the first misconceptions I need to address is their desire “to function like a business." I have found a good response in Jim Collins’ monograph “Why business thinking is not the answer.” It accompanies his seminal book “Good to Great."
I think readers of this blog would be interested in what Collins wrote: “We must reject the idea --- well intentioned, but dead wrong --- that the primary path to greatness in the social sectors is to become “more like a business.” Most businesses --- like most of anything in life --- fall somewhere between mediocre and good. Few are great. When you compare great companies with good ones, many widely practiced business norms turn out to correlate with mediocrity, not greatness. So, then, why would we want to import practices of mediocrity into the social sectors?”
He then sets the thesis of his approach to effectiveness, with, “…it dawned on me: we need a new language. The critical distinction is not between business and social, but between great and good. We need to reject the naïve imposition of the “language of business” on the social sectors, and instead jointly embrace a language of greatness.”
I hope the above reference encourages nonprofit practitioners to respond professionally to the babble that books like “Philanthrocapitalism” and “Uncharitable” are attempting to spew.
Yes
I quote the very same passage from Collins (the first one) every chance I get, including in my blog of today (which I had emailed off to Barry at Duke a few days back). So thanks for the comment: I very much agree that his monograph is worth reading.
-- Phil
Wow, You've Really Misrepresented or Misunderstood My Book
Phil,
I find your blog here really misrepresents my argument and is more than a little caustic.
You write that, "The authors seem not to appreciate the irony of looking to investment banks as a model of how to foster transparency." I would appreciate the irony had I made any such argument, or anything close to it. Tell me where in my book I look to investment banks as a model of transparency. I don't.
More important, my book is a total defense of the nonprofit sector and the people who work inside of it, often under the most oppressive restraints. You make it sound like the opposite. Note this passage, in italics, on page 6:
"The canon to which these mistaken ideas belong is what I refer to as nonprofit ideology. It is a dysfunctional mentality based on deprivation. Our loyalty to it keeps us from getting what we are really after.
Let me be clear that by “nonprofit ideology” I do not mean the nonprofit sector. I do not mean nonprofit organizations or the people who work for them. Nor do I mean the wonderful ideals of a better world that the people who work in the sector strive after every day. By “nonprofit ideology” I mean the oppres- sive set of rules that the whole of society has forced on these good people and or- ganizations—the severe restraints we impose on them that keep them separ- ated from the dreams that brought them into the sector in the first place."
Moreover, I am NOT one of those people saying that charities should act more like business, as you so simply imply here. See page 9:
"One of the cruelest and most dangerously disingenuous messages being preached to the nonprofit sector today is that it should act more like business—cruel because we don’t allow it to, and dangerous because it creates the illusion that we do, preempting any initiatives for change under the guise of its already being under way.
When charities are told to act more like businesses they are, by and large, being told nothing more than to be more efficient, as if efficiency were a substitute for vision. The term is used in the narrowest sense— read: less money spent on overhead, with no understanding of what “overhead” really is and what it really isn’t. Whoever believes that this and this alone is what it means to act like a business never ran a success- ful one. Great businesses grow on great vision. Efficiency is a secondary matter. How the business people who sit on the boards of our charities have allowed an obsession with efficiency to become conflated with what it means to act like business is one of the great mysteries of mod- ern economic history."
I wonder if you actually read the book.
I have to tell you that I have spoken to thousands of nonprofit professionals about these ideas and, rather than being offended by what I really have to say - as are the commenters here who have been provoked by an inaccurate summary of what I have to say - those people are, in large majorities, relieved and uplifted by it.
Last, before you defend the ideology and the 400 year-old form that so suppresses the sector, consider that the word "profit" comes from the Latin for "progress," and thus the name we have unintentionally slapped on the sector that houses all of these amazing people means, literally, nonprogress.
- Dan Pallotta
Don't think so
Dan: I did read your book -- cover to cover -- and stand by my blog. My comment about investment banks referred to Philanthrocapitalism, not your book. That is quite clear. I wrote, "The authors seem not to appreciate the irony of looking to investment banks as a model of how to foster transparency — as Philanthrocapitalism does. Or to CEO compensation practices in the corporate world — as Uncharitable does."
Your book in fact repeatedly looks to business and market approaches as the analog nonprofits should emulate. Page 43: "Capitalism works. It demonstrates a superior ability to meet human needs. ... There is no need for a separate nonprofit construction." You then go on to quote a report that says nonprofits, "exist in a culture of dysfunction." Or, on page 57, you juxtapose compensation approaches in the for-profit and non-profit world and ask, “can any of us imagine the for-profit sector allowing the IRS to weigh in on its compensation levels? This is an assault on individual liberty that towers over anything we might have feared in the Patriot Act.” On page 178 you discuss your notion of “marrying charity and capitalism.”
As I said in my blog, I think your book contains some good ideas. I agree with your worry about an over-emphasis on administrative costs, for example. At the Center for Effective Philanthropy, we focus on developing performance indicators that help funders gauge progress against their impact goals, because that, of course, is what really matters.
But I think it’s important to recognize the limitations of the free markets: indeed, many of the challenges nonprofits confront are the result of market failures. Having carefully read your book, I believe you place far too much faith in the markets – and fail to give the nonprofit sector the credit it deserves. Finally, I have trouble imagining how anyone who read your book could see it as "a total defense of the nonprofit sector and the people who work inside of it" as you say above.
Phil, I don't know what you
Phil,
I don't know what you mean by me or anyone placing too much faith in markets. What are the 1.1 million nonprofits in the U.S. if not a marketplace for the purchase of public goods, i.e. cancer research, reduction of homelessness, etc. ?
Right now that marketplace is largely dysfunctional because donors buy on the basis of price, without every inquiring about the product, and competition is fierce among nonprofits for the donor's dollar, and they compete, sadly, on the basis of price.
Anyone who thinks markets aren't at work right now is living in some kind of distortion field.
Would be nice to meet some day :)
Yes, we should meet
I'd welcome that.
This Week's HBR Blog
http://blogs.harvardbusiness.org/pallotta/2009/11/a-thanksgiving-questio...
Phil, sorry to say, but...
I am reading Pallotta's book right now, since I am new to the field of non-profits, and I have a different interpretation of Pallotta's point-of-view. What I could absorb from the book is the idea that non-profits should be allowed, by law and by the society, to explore business-like initiatives IF they will to do so.
Pallotta is a cry out that we should look to non-profits willing to do so differently, that we should change our mindset about how they should work, freeing our reasoning from "moral" judgments that, not rarely, classify nonprofits involved in business endeavors as "evil" or "not worthy of my donation and trust". My nonprofit is oftenly hostilized by the other local nonprofits for acting like a company, but we are proud to say that we are the most prominent in our field and we have strong support of our donors.
I use Balanced Scorecard. I set KPIs. I evaluate risk and performance regularly.
For the second part, I work for almost two years for this nonprofit. I am Brazilian, but I moved all the way to a muslin country because of this job position and I tell you, it was not just for the cause. I am very sorry, but as Palotta said, some of the people that point fingers at you because of your salary (e.g Members of the Executive Board, that are at the same time, CEOs of big companies) are the same that ask their employees to give them more profit for less pay.
I think that, what Pallotta is trying to say is that,nonprofit are not only short on financial resources: we are short on support when it comes to innovation and change.
In this sense Phil, I have to say, your article is the one that is harmful to the future of Philanthropy.
Yes to free markets, but...
I too work at a non-profit that has adopted a more business-like approach to management - i.e. a competitive environment, operational analytics, etc. And, while some people have said that this is "not the non-profit way" our major outcomes have increased significantly over the last 4 years that we've adopted this mindset.
In response to the markets question. Donors/investors are definitely attempting to create markets, our donors are asking for a cost/outcomes, SROI projections, etc. to analyze the impact of their investments. But, because there isn't regulation on what these outcomes are, how to calculate them, or legal repercussions about publishing potentially-inflated outcomes, they can look larger than what would generally be agreed upon if analyzed. Because of this, comparing investments between different non-profits is not always fair comparison.
Before a market truly exists, a legally-backed framework for reporting outcomes/impacts needs to be created, or else we're right back where we started. I'm all for a market-based approach but a regulatory structure needs to be designed first; I think IRIS is a good start (http://iris-standards.org/).
I personally think that this is one of the many reasons that there has been such a growth in companies that "blur the boundaries" because it's much easier to measure how many people you've helped based on the number of products/services you've sold than the current way that non-profits report outcomes.