social philosophy

Charity

I have a resolution to each year donate $250 to charity.

As a single, government employee, with no kids, this is perfectly affordable and I could easily give more.

This year, I donated my money to The New Zealand Red Cross in the wake of the Nepal earthquake.

About two weeks after I gave the donation, I recieved a letter from the New Zealand Red Cross, acknowledging my donation, and asking for me to donate another $250.

I felt a little dirty receiving this message, I posted about this on Facebook and my friends quite rightly pointed out that the purpose of a charity is to raise money for its cause, and the research shows that people who have donated before are more likely to donate again. Sending a letter to ask me to donate is simply effective usage of their resources.

Today’s post addresses this issue.

A good starting point for this conversation is with this Ted Talk.

Video summary:

Dan Pallotta highlights that as a society, we assign different rules to non-profit charities, than we do to for-profit organisations, and that this kind of thinking is counter productive.

Compensation

Charities aren’t allowed to use money to incentivise its employees. It’s seen as wasteful or unethical to pay a non-profit executive a large salary.  While a for-profit organisation can pay a lot of money to attract the best talent – employees of charities are expected to be working out of the kindness of their hearts.  In Dan’s words:

You want to earn fifty million dollars selling violent video games to kids, go ahead we’ll put you on the cover of Wired magazine, but if you want to earn half a million dollars curing kids of malaria and you’re considered a parasite.

Dan points out even if a smart business exec wants to help a charity, it makes more economic sense for the him to go into the for profit sector, donate a significant amount of his income to the charity, and then get recognition as a philanthropist and a tax refund for his donation, than it would be for him to take a huge paycut and work as the CEO of the charity. (This was a particularly good part of his speech, and you can see it here.)

Dan points out that this makes working for charity a distinct mutually exclusive choice between doing well for yourself and your family, OR helping the world. The suggestion is that one should be able to to both.

Marketing 

Again, it’s seen as wasteful or unethical to spend charity funds on advertising, even though that advertising money may help the charity bring in more money.

Growing without producing a dividend. 

Dan points out that Amazon operated for six years without producing a single dividend, instead putting all its revenue into scaling the company up to size. Dan points out that it would be considered unacceptable for a charity to focus on growing its brand and size, without donating a single cent to the cause it’s committed to, even if growing big is what will help the charity in the long run.

Overhead vs The size of the pie. 

It’s often seen as a good thing if the charity has low operating costs, so that the charity can spend money on helping its cause. However, this neglects considering the scale of a charity. For example a bake sale that has only 5% overhead, isn’t as good as a large charity that has 40% overhead, if the bake sale is only producing $100 of revenue, and the large charity is producing $100m revenue.

Essentially Dan argues that as a society, we should treat charities the same way that we treat for-profits, and allow them to compensate their workers and spend money on advertising in the same way.

A charity focusing on growing in scale is good thing, because it’s essentially growing the pie which will ultimately be served to the cause.

I agree with all Dan’s points, people’s ethical assessments of charities a lot more stringent than we our assessments of non-profits, ourselves, or others.

However, there are a couple of limits to his his pie growing philosophy.

Is the over charity pie growing, or is taking market share from another charity? 

Say you have a charity with annual revenue of $10m. It’s going to adopt this pie growing philosophy to try increase its revenues to $50m. If this additional $40m has simply come from donations that people would have otherwise donated to other charities, then I’m not sure our charity has improved the world by increasing its own pie.

The overall charity pie can only grow so big. 

Let’s say that advertising is effective in convincing people to donate more to charity overall.

People can only donate so much, before they start running out of disposable income. Granted society overall can donate a lot more than it currently does, the caveat here is at some point the charity does need to monetise and start giving its money to the cause.

Simply increasing revenues can be unethical. 

Charities, like all organisations, should have some degree of social responsibility. Just like a business shouldn’t have the single bottom line of making as much money for its shareholders as possible, without consideration to its social and environmental impact, charities should adopt the same triple bottom line thinking.

This is where ‘it’s effective targeted marketing, the charity is just doing its job’ falls down. It’s also well known that the poor give more money to charity than the rich.  I would argue that it would be unethical for charities to target poorer areas for cold calling, simply because they more likely to donate money.

Instead an innovative charity (perhaps led by a highly paid CEO) could come up with ways to convince the rich to donate more to their charity.

Bottom line. 

Yes, charities seeking to increase their revenue is a good thing. However, they should be doing this in an ethical and innovative manner, rather than, what I see was quite a cynical manner in this case.

Things like the Ice Bucket challenge, were good examples of innovative charitable thinking.

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