Why Dan Pallotta wants the nonprofit industry to rewrite the way it does business.
Dan Pallotta has a message for you: You’re too timid.
It’s nothing personal. It’s just that he’s lost patience with a nonprofit culture that, to his mind, has stifled its urge to innovate and is handcuffed by legal restrictions and media misperceptions. He’s come around to this way of thinking out of frustrating personal experience.
In 1994 Pallotta launched Pallotta TeamWorks, which sponsored successful bike rides and walks to raise funds for AIDS and breast cancer research. When that organization collapsed in 2002—in part due to criticism that an overly large proportion of its revenue was dedicated to salaries and other overhead costs—Pallotta launched a second career: professional firebrand and advocate for nonprofit innovation.
His new book, Charity Case, follows up his 2008 book, Uncharitable, and his popular Harvard Business Review blog to challenge nonprofits, including associations, to innovate and make a better case for their value. And he unapologetically frames his argument in terms of some of the fiercest civil rights battles of the past century. He’s launched a Charity Defense Council that’s modeled after the Anti-Defamation League and wants a rewrite of nonprofit regulations in the form of what he calls a National Civil Rights Act for Charity and Social Enterprise.
In my mind, those were sweeping national efforts by communities that were previously disorganized.
An unfair comparison? For Pallotta, the stakes are just as high for nonprofits as for any other wrongfully treated group. “In my mind, those were sweeping national efforts by communities that were previously disorganized,” he says. “And they’re models of what can happen when a community organizes itself on its own behalf and in its own defense and in the name of its own potential.”
So what do nonprofit leaders need to do? Here are four of his challenges to them.
1. Have the nerve to innovate.
Pallotta’s big-picture vision includes revising the IRS regulations to allow outside investment in the activities of charities and association foundations—an almost total rewiring of the system, but one that would improve the flow of funds that he says are essential to effect change.
“I absolutely do see the need for some kind of ability to trade in risk in futures of nonprofit organizations,” he says. “The risk-reward dynamic is what has built American business, and yet it’s prohibited in our sector. We’re starved for that kind of capital. If somebody is willing to put up $10 million and is willing to risk losing it and wants $15 million back, then why on earth would we not want to do that?” Pallotta imagines a “for-profit foundation” that is not tax-exempt but can deduct all its gifts from taxes. Donations would remain tax-deductible.
I’m not down on social media, but I’m down on the way we conceive of it as a free lunch.
Nonprofits could still benefit from an ambition boost, even if such a restructuring doesn’t come to pass. If an association doesn’t aspire to a bare-knuckle corporate culture, in can still aspire to corporate ambition, Pallotta says.
“If we try something big and it fails [in a nonprofit], the price to pay is steep,” he says. “People’s character is called into question, attorneys general start to want to investigate. It’s not a normal business failure. … It’s just common practice in the for-profit sector to dream big and try great things, and we just don’t do it.”
2. Stop cheaping out.
Pallotta’s Charity Defense Council, which was founded in part to respond to what he sees as public anti-nonprofit bias, intends to start test- promoting itself with an eye on the budget: It’s spending $5 million in a midsize city to send its message via TV and print advertising. He says it’s critical to recognize that an organization’s message needs some breadth and serious investment to be heard—which is why he worries that many nonprofits see social media not just as one part of a marketing plan but the whole package. “I’m not down on social media, but I’m down on the way we conceive of it as a free lunch,” he says. “It doesn’t produce tons of results when it’s free. The media is free, but you have to put resources into it to drive people to you.”
3. Build a risk-oriented board.
Board members are attracted to the responsibilities of board work for a variety of reasons—and many of them stifle change, Pallotta argues. Passive goals like enhancing a resume are bad enough, but vague ideals like “I want to do something good for the community” are only marginally better. “In the for-profit sector [the incentive for board members] is to create value for the shareholder,” he says. “There’s not really a lot of incentive for somebody on a nonprofit board to try something new. The risk of failure is way too high. Nobody wants to see it on their watch.”
The irony is that the solution to the problem is largely built into the personalities of the people nonprofits recruit to their boards. So it becomes imperative for executive directors to retain the innovative mindsets that made board members leaders in the first place.
“People do a number of things that make them successful in business, and they come into the nonprofit boardroom and they demand that the nonprofit stop doing all those things while at the same time they’re telling the nonprofit to act more like a business,” he says. “It could not be more dysfunctional.”
4. Build better storytelling into the 990.
The IRS Form 990 gives nonprofits opportunities to spell out their mission and goals but fewer opportunities to describe their progress and show that they’re an organization worth time, attention, and money. In Charity Case, Pallotta mentions an idea from GuideStar president and CEO Bob Ottenhoff that changes the 990: He would require organizations to file a three-year progress report before they are granted nonprofit status. The document would lay out not just the organization’s mission but how it has measured its progress toward fulfilling that mission.
“I think there needs to be much more opportunity to talk in a narrative sense about goals and progress,” Pallotta says. “We react in a defensive way to legislation that comes up that can hurt us. I want to excite people’s imaginations and show them what a new conversation might look like.”