Striking a balance between compassion and consumption

How is it possible to get to a world where there is a balance of compassion and consumption? So asks Dan Pallotta at the start of UnCharitable, a new documentary about his decade-long campaign to shake up the non-profit sector.

The movie, by director Stephen Gyllenhaal, styles itself as “an inconvenient truth” for philanthropy and is built around Pallotta’s influential TED talk of 2013 where he demanded charities be freed from the sackcloth-and-ashes approach traditionally forced upon them. Donors should stop focusing their giving on charities with the minimum overhead and maximum sum flowing through to the underlying recipients, he says. This starves them of funds they could use to grow, and stymies social entrepreneurs with dreams of solving the world’s most intractable problems. “The next time you’re looking at a charity,” he says, “don’t ask about the rate of their overhead. Ask about the scale of their dreams.”

UnCharitable highlights a string of fast-growing non-profits from the past decade — including the Wounded Warrior Project for US veterans and Invisible Children, which confronted the abuses of the Ugandan warlord Joseph Kony in Central Africa — whose spending on marketing or executive salaries led to critical, and in most cases unfair, headlines, bringing their growth to a screeching halt.

Pallotta is a controversial figure in philanthropy. His crusade comes from his own searing experience as founder of a for-profit company that organised fundraising events for Aids and breast-cancer charities. The events raised tens of millions of dollars, but Pallotta became embroiled in disputes about the amount of money his company took to run them and it closed in 2002. Today he leads Advertising for Humanity, a marketing agency for non-profits.

By no means everyone is persuaded by his pitch to expand charities’ budgets for advertising and executive pay. Arguments against “overhead” are often self-serving, says Laurie Styron, chief executive of CharityWatch, a US-based watchdog that gives ratings to non-profits. Donors should bear in mind that administrative and staff costs do not count towards overhead figures if they are directly related to delivering charitable programmes, so the remaining operational costs do serve as a reasonable metric for assessing a charity’s efficiency.

Donors should be wary, too, she says, when charities encourage them to look at measures of “impact”, which can be “amorphous, incomparable, and almost always self-reported by the charity based on whatever internal measurements it decides to construct”.

In the decade since Pallotta’s TED talk, some big grant-making organisations including the Ford and MacArthur foundations have doubled the amount of money they give to cover a charity’s indirect costs along with the costs of specific programme activities. Heavyweight philanthropists such as Mackenzie Scott have emphasised “unrestricted” giving, which allows charities to spend cash on programmes or other costs as they see fit. Several of the big charity watchdogs have de-emphasised overhead in their ratings systems. And there are no shortage of ambitious social entrepreneurs setting out on new philanthropic missions to solve the big problems of this planet and the people on it.

But UnCharitable is crafted as a call to action, not as a victory lap. A central argument of the documentary is that the continued use of overhead metrics limits not only the financial resources given over to fundraising but also the willingness to do experimental marketing, and that if only these shackles were taken off, not just individual charities but the non-profit sector as a whole might grow. Donations to charity have been stuck, in the US, fluctuating at about 2 per cent of gross domestic product for decades. Imagine the lives saved or lifted out of poverty if that figure could be raised to 3 per cent, a modest rebalancing between consumption and compassion.

An impossible dream? If it is a zero-sum game, then money spent on marketing and other expansion efforts now is money simply taken from other charities and lost forever to charitable works. I would guess the chances of growing the pie are even less in a world where corporations have dressed themselves up in the language of purpose and capitalism has rebranded its output as “impact”. Why give to charity if your coffee purchase “contributes to a thriving future for farmers”, or your investment in an AI start-up will “save the world”?

Donors need not shy away from charities that pay for executive talent

According to the annual Giving USA survey, last year charitable donations amounted to 1.9 per cent of US GDP, the same as in the year of Pallotta’s TED talk. Personal giving as a percentage of disposable income was 1.7 per cent, the worst figure for 17 years.

These will be issues to confront as individuals and families, with an eye on the tax year-end, decide where to make charitable gifts this year. Transparency and dialogue is key. Donors need not shy away from charities that pay for strong executive talent or have a thought-out plan to expand their fundraising network. They may even want to fund overhead specifically, as the non-profit Charity: Water in Gyllenhaal’s movie found. It has a network of wealthy families covering those expenses, separate from the dollars raised to provide drinking water in developing nations.

Ask about the scale of their dreams, for sure. And you can ask about their overhead, too. 

Stephen Foley is the FT’s US accounting editor. Follow Stephen on X @StephenFoley

This article is part of FT Wealth, a section providing in-depth coverage of philanthropy, entrepreneurs, family offices, as well as alternative and impact investment