How do you evaluate a charity?

According to Dan Pallotta, we're doing it all wrong.  He says, “Business will move the great masses of humanity forward with advancements in pharmaceuticals, materials, process, and technology — but it will almost always leave 10% behind. It will almost always leave unaddressed humanity's most disadvantaged and unlucky.”  I talked before about the role of luck in achievement, so I’m happy to hear Pallotta acknowledge this too.  Yes, the market works well for the lucky. However, “Philanthropy is the market for love,” he says. 

Pallotta is frustrated because society forces charities to operate using different and less effective rules than capitalism.  I’ve done it myself, looked at the evaluations for charities, looked to see which charities use the largest percentage of their money for “good work,” and the smallest amount for overhead.  However, here is Pallotta’s take on the subject: 

This nonprofit rulebook discriminates against charities in at least five different areas: compensation, marketing, risk taking, time horizons, and capital itself. We allow people to make a fortune doing any number of things that will harm the poor but crucify anyone who wants to make money helping them. This sends the top talent coming out of the nation's best business schools directly into the for-profit sector and gives our youth the mutually exclusive choice between making a difference and making money. This we call ethics. We let Apple and Coca-Cola plaster our billboards and television sets with advertising, but we are appalled at the notion of important causes "wasting" money on paid advertising. So the voices of our great causes are all but silenced, and consumer products get lopsided access to our attention, 24/7. This we do in the name of frugality. Amazon was permitted to forgo investor returns for six years to build market dominance.

But if a charity embarks on a long-term plan with no return for the needy for six years, we are outraged. This we call caring. We aren't upset when Disney makes a $200 million movie that flops, but if a $1 million charity walk doesn't make a 75% profit to the cause in year one, we want the attorney general to investigate. So charities are petrified of exploring new revenue-generating methods and can't develop the powerful learning curves that the for-profit sector can. This we call prudence. We let for-profit companies raise massive capital in the stock market by offering investment returns, but we forbid the payment of a financial return ("profit") in charity. The result? The for-profit sector monopolizes the capital markets, while charities are left to beg for donations. This we call philanthropy. 

Combine those five things and you have just put the humanitarian sector at an extreme disadvantage to the for-profit sector. Yet we still expect it to solve the world's problems. 

Pallotta gives us a lot to think about.  His ideas are a reversal of my previous beliefs.  I can see I have work to do; I need to get clearer about what I expect from the charities I donate to; .  I was first introduced to his ideas from a Ted Talk.  I’m going to send this link to the charities I support and let them contemplate his ideas as well.