Charities should be poor.
I sit on the board of a local non-profit and I happen to have a Masters in Business Administration. Yet only until very recently have I realized that how wrong this idea is. Up until this point, the mention of charitable or nonprofit work would conjure up in my mind humble mendicants in tattered frocks scrounging up donations to serve some underserved segment of society. It seemed natural to me that those do-gooders in the non-profit world would forego the material trappings of the world-at-large. After all, the term “non-profit” almost expressly says as much. However, I recently saw a video clip which completely changed my thinking on this issue, and I wanted to share it with you.
If you have clicked on the link above, you can stop reading as the remainder of this article will basically be a summary of its contents. However, I wanted to pass this idea along as I think it is an important one.
The way that we think about charity in America is influenced in large degree by Puritanical beliefs. The Puritans came to America in search of religious freedom, but also in search of economic profits. In comparison to other colonists, the Puritans were extremely capitalistic. The Puritans were also Calvinists, and one of their core beliefs was that acting in self-interest was a one-way ticket to eternal damnation. One way the Puritans strove to reconcile these conflicting beliefs was through charitable work. They used charity as a method of doing penance for all of their profit-making. Necessarily, the charity could not make money as it was done specifically to counteract the spiritual effects of other profitable activities. Over time, the idea took root that charitable work should not or cannot result in financial gain. This idea has not changed in four centuries.
One significant offshoot to this idea is that it is improper for charities to utilize their operating budget for overhead. The funds donated should be used to buy soup for the kitchen, shelter for the homeless, mosquito nets for the sick, not advertising time for the cancer center or computers for the head start program. It’s natural to feel this way, as many people who give their hard-earned money to causes want to ensure that the money is used to further the mission, as opposed to lining the pocket of a greedy CEO. While this thinking is understandable, it is somewhat misguided. We should look at overhead as a necessary part of the investment required to further the cause. The cancer center can use the advertising time to grow their donor list and the head start program can operate more efficiently with the proper infrastructure, which means more money for the cause. Investing in overhead boosts the charities’ capabilities and allows them to increase the amount of good they can do. Which charity does more societal good? The bake sale that raises $100 and donates 90% to its mission or the fundraising organization that raises $1,000,000 and donates 50%?
This thinking is also applied to the hiring of employees and executives. Executives of charitable organizations often make a pittance compared with their counterparts in the for-profit world. Much of this is a function of the idea that charitable endeavors should not result in personal profit, as such profit would besmirch the purity of any altruistic motives. In reality, allowing charities to spend more on hiring quality people will result in more smart, motivated and innovative people to enter the non-profit realm. Many of today’s best and brightest students disproportionately end up graduating to jobs in places like Wall Street, where the money is great but the work may not necessarily be socially fulfilling. Allowing charities to attract top talent will give many of these people the opportunity to utilize their talents in the furtherance of social good without foregoing the promise of a stable financial future.
In closing, I wanted to leave you with one thought. Non-profits are businesses. The main difference between a non-profit company and a for-profit company is that a non-profit must reinvest its profits in furtherance of its mission, where a for-profit company uses its profit for the benefit of its owners and shareholders. By freeing non-profits from the restraint of keeping overhead low, we allow them to operate like true businesses and maximize the amount of money they can apply to their cause, resulting in a profit to society.
Brian Y. Chou is an estate planning attorney based in Southern California at the Law Firm of Barth Calderon, LLP.