Reevaluating The Nonprofit Sector

The nonprofit sector comprises roughly 9% of the United States workforce and is the fastest growing sector in the U.S. economy with over 1.4 million non-profit organizations to date. The National Philanthropic Trust states that the amount of money given to charities in the U.S. in 2012 totaled $316 billion; over 300% more than a decade ago. With exponential growth in revenue, we expect to see a proportional growth in performance. A cure for breast cancer has not been found, food insecurity dominance remains in Sierra Leone, and we have not skimmed the surface of finding a vaccine or prevention measures for tuberculosis. The failure of congruence between financial growth and performance comes from poor infrastructure within the sector and attempting to combine pathos, capitalism, and taxes.

The 300% increase in charity-giving over a decade cannot be explained by an evolution of society’s gradual feeling of remorse for others. Rather, a combination of greater awareness and the implementation of financial incentive. While we all like to believe that our favorite celebrities and CEOs donate because they feel a social obligation, many contributors donate money to entitle themselves to a charitable contribution deduction against income tax.

Generally, we associate charity with giving to others out of altruism and ethical obligation. Whether an individual decides to donate to charity out of benevolence or tax spurs, individuals always give with the intention of their financial contribution apportioned directly to the cause. When individuals of the general population give $100 to Feeding America, each person invariably requires that their payment be used to purchase $100 worth of food for children. It is easy for one to monetize feeding a single child, but difficult to quantify the benefit of giving money to an organization that spends it on overhead costs. The viewpoint from the donor is basic: when money is given to a charity, it is expected to serve the cause, entirely – any other allocation must be superfluous, after all it is non-profit.

With this in mind, here is an illustration of the operations of a charitable organization. We have Brad Pitt, Lebron James, and Kanye West who contributed a total of $80 million to their favorite charity, Habitat for Humanity [hypothetical situation]. The three celebrities sit alongside the board of directors and the well-learned, well-experienced CEO of Habitat for Humanity at the next board meeting. The CEO claims that they should spend the $80 million on fundraising, research, and hiring – potentially further increasing the revenue and efficacy of the charity. Pitt, James, and West cannot rationalize the idea of spending money on the unessential and intangible. Moreover, donating money to charity that does not use the money on its cause does not make them feel as good about themselves. Following the celebrities’ request, the CEO decides to spend the money on building a number of houses. However, the $80 million could have been expended in other areas that could have raised more capital and increased the effectiveness of the organization.

Conversely, imagine that the three celebrities start brainstorming at the board meeting and decide that it may be a good idea to invest the $80 million on events or research to generate more income. At this point, the CEO has a decision to make – if they decide to invest the $80 million in overhead then there is the chance that the organization does not see a return on investment. If so, then the CEO’s character would be in question – people will begin to wonder how charitable money was spent within the organization, and why the money was not going to the cause. Therefore, the CEO decides to remain prudent and insists that they use the $80 million to construct more homes.

Finally, when the $80 million is resorted to the cause, we see no change in the aggregate amount of homeless or financially insecure because $80 million in homes is not enough to make a substantial impact. The illustration exemplifies the reason why we have not made extensive progress in finding a cure for breast cancer or ending child poverty in Sierra Leone. In the end, the CEOs of charities are always reluctant to inherit any risks, if even granted the opportunity to do so by non-experts such as Kanye West or Brad Pitt. CEO’s of charitable organizations are even discouraged from acting independently by distributing capital to areas outside of the cause because they fear losing the allegiance of sponsors or top contributors.

If Lebron James held a considerable portion of stock in a company such as Walmart, he would not only have minute influence over the company’s operations, but he would not have any input to begin with because he made an investment, not a donation. When somebody invests in a company, they are investing in the management as well, not just the usual implied value; furthermore, an investor’s input to a company would be negligible because it is simply outside their area of expertise. It seems absurd that Lebron James would have some domain over financial activities when carrying his contribution from private to nonprofit sector just because he believes that he and the CEO are on the same obligatory plane. Executives of nonprofit organizations should be regarded no differently than the executives in private sector companies

We believe that charities are basically an agent between the fortunate and unfortunate – the wealthy shares with the underprivileged and charities are just the channel to do so. It’s a difficult mentality to adjust; it seems as though good deeds should be simple and executed as such. In reality, charities are complex, transparent organizations that operate similarly to those in private sector. Social entrepreneurship cannot thrive as long as its incentives and disincentives remain. Executives in the nonprofit sector need to be granted further autonomy and incentivized by reasonable risks. The infrastructure of the nonprofit sector and the configurations of organizations, respectively, need to be altered to allow innovation. Potentially adopting more principles associated with private sector could allow nonprofit organizations to reach the parallel between proceeds and performance that we expect from them.

Author Simon Sinek is best known for popularizing his concept of the “golden circle”. The golden circle is a basic but powerful paradigm of leadership. The significance of the golden circle lies in that successful leaders are driven by a profound purpose to succeed – successful leaders’ cognitive process are inverse from most people. Effective leaders think and act in the order of why they do what they do, how they do it, and what they do, while most of us transpose the sequence of thought. Interestingly, executives of charities are the first people that come to mind when I think of people who do what they do because of a deep sense of motivation to fulfill their cause – they have no regard of money or fame, charities function in congruence with the golden circle. However, charitable organizations have not been [relatively] groundbreaking and have not fulfilled their cause at a global level. Personally, I believe in the golden circle, and I do not believe that it is habitually inapplicable to charities. With this in mind, I am convinced that financial, structural, and social adjustments to the nonprofit sector could revolutionize charities’ performances.