Why Charities Should Operate More Like For-Profit Businesses

Dan Pallotta is the founder of the Charity Defense Council and the author of Charity Case: How the Nonprofit Community Can Stand Up for Itself and Really Change the World. He would like charities to compete for top executives, advertise and employ other business strategies so they can build a strong financial base and afford to make a significant impact for their causes. We recently spoke with him about how the non-profit sector and the public view of it should change. Here is an edited transcript of our conversation:

Is Your Charitable Giving Getting Results?

KIPLINGER: You say charities need to be more like profit-making businesses. Why?

PALLOTTA: The nonprofit sector is at an extreme disadvantage compared with the rest of the economy. In business, we can lure top talent with a competitive wage based on the value that someone produces. But we have a visceral reaction to the notion that anyone would make much money helping other people. We don’t like to see charities spend donations on advertising, so they can’t build demand for philanthropy the way Apple can for the iPad mini. We’ll allow Disney to make a $200 million movie that flops and nobody makes moral judgments. But if a charity produces a $3 million fundraiser and doesn’t get an 80% return immediately, the charity’s character is called into question. That really stifles innovation.

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How else are charities at a disadvantage?

We have enormous patience with the for-profit sector. Amazon went for years without returning a profit to investors while it focused on long-term objectives. If a charity gave no money to the needy for years because it was trying to build something enormous, nobody would understand. Finally, there’s nothing like a capital market to attract investment in the nonprofit sector.

Why don’t charities change?

There are legal issues and IRS regulations. But by far the biggest obstacles are philosophical restraints. Our culture is not for a moment ready to give charities the bigwig freedoms we give to business.

How can the changes you suggest be put into practice?

The nonprofit sector needs a national leadership organization that can organize the sector and change the way the public thinks about these things. We’ve launched the Charity Defense Council to act as the mechanism for this.

Can Americans accept a new model for charities?

If we want to plod along without making significant progress against homelessness, breast cancer, AIDS or other big issues, then leave the system alone. But if you believe we could solve some of these problems in our lifetime, then you’ve got to change things.

This article first appeared in Kiplinger's Personal Finance magazine. For more help with your personal finances and investments, please subscribe to the magazine. It might be the best investment you ever make.

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Tan joined Kiplinger in June 2012 from Bloomberg News, where she was a reporting intern covering mergers and acquisitions and IPOs in New York. Prior to that, she worked as a production intern at CNN in Washington, D.C., where she assisted with political research and live broadcasts. She also covered financial regulation, including the Dodd-Frank Act, as a reporter for the Medill News Service. Before that, she wrote about economics and commodities in Chicago. She has written for the New York Times, MarketWatch, Businessweek.com, United Press International and the San Francisco Chronicle. She holds a BBA in finance from the University of Michigan and an MS in journalism from Northwestern University.