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The charity business: drawing the line in spending for philanthropy

Good governance and transparency is essential to the sustainability and growth of the charity sector, says leaders of local nonprofit organisations.

When American entrepreneur-turned-activist Dan Pallotta started Pallotta TeamWorks (PTW), a producer of hugely successful fundraising events that went on to raise more than US$300 million for Aids and breast cancer charities, he never imagined that it would one day go bust. But it did.

In 2002, the event promoter went out of business amid public outrage that it had spent 40 per cent of its gross income on “overheads”, things like staffing, marketing and creating a great experience for participants. It also emerged that Mr Pallotta’s salary was close to US$400,000.

Sponsors pulled out, clients filed lawsuits, and 350 employees lost their jobs because they were labelled as overheads that needed to be cut. And this backlash came as a result of a fundamental assumption many have about charities: that they are supposed to keep expenses low, Mr Pallotta says. While leaving PTW brought costs down for some charities, this proved to be a bad move. After non-profit Avon Products Foundation fired PTW to start its own three-day walks to create breast cancer awareness, the highest amount it managed to raise was US$22.7 million after expenses – three times less than the US$70.9 million collected from a walk organised by PTW.

Mr Pallotta, whose controversial “go big” approach to fundraising has both won fans and lost supporters, advocates that charities should be run like businesses. Philanthropy should set robust goals for raising money and find innovative – even risky – ways to do so, even if these come with high costs.

The argument is spelt out in a March 2013 TED talk The Way We Think About Charity Is Dead Wrong. In the talk, he points out that people hold charities to vastly different standards from corporations, and seem to have two different rulebooks – one for the non-profit sector, and another for the rest of the business world.

WHAT’S THE DIFFERENCE?

Chief among the discrepancies is how people view compensation for those involved in philanthropy.

With corporations, the more value one produces, the more one earns. However, people tend to dislike it when non-profits use money to incentivise people. This way of thinking suggests that doing well for oneself and doing good for the world are mutually exclusive, which isn’t the case, because frugality should not be confused with morality, says Mr Pallotta.

What many also forget is that people working for non-profits are employees who are entitled to a wage, and not volunteers. In fact, one Singaporean who works in the social service sector says people are actually surprised to hear that she gets paid!

There is a need for patrons – and the public – to understand that part of their donations will go towards other functions. Functions that also include advertising and marketing.

(RELATED: Should charities be run as businesses? Food from the Heart chairman Ronald Stride says yes)

“So we tell the for-profit sector, ‘Spend, spend, spend on advertising’,” says Mr Pallotta, “but we don’t like to see our donations spent on advertising in charity”.

He notes that charitable giving in the US has remained stagnant at 2 per cent of gross domestic product (GDP) ever since it was measured in the 1970s. (In Singapore, donations stand at about 0.7 per cent of GDP.)

“That’s an important fact, because it tells us that in 40 years, the non-profit sector has not been able to wrestle any market share away from the for-profit sector. And if you think about it, how could one sector possibly take market share away from another sector if it isn’t really allowed to market?”

Nor do most non-profits allow themselves to take risks and attempt bold new ways to raise funds, says Mr Pallotta. They are afraid that their reputations will be tarnished if they fail. Because they are afraid to fail, innovation is stifled.

And they feel that they cannot afford the luxury of time. A tech company such as Amazon can go on for several years without returning profit to investors and people will understand, because they know of a long-term objective, one that will see it build market dominance over time, Mr Pallotta says. Yet if a charity wanted to scale over a few years without having money being given directly to its beneficiaries at the outset, the public would not be so patient, or forgiving.

EFFICIENT VS EFFECTIVE

When a charity goes down, the public shaming usually converges on cost. Fingers are pointed at extravagant parties and exorbitant salaries. The question that comes to the fore is: “What percentage of my donation goes to the cause versus overheads?”, a line of enquiry Mr Pallotta asserts is a dangerous guideline by which charities are policed. That measure, known as fundraising efficiency, is nevertheless still widely accepted as a valid way to evaluate charities.

In Singapore, the fundraising efficiency ratio is measured as the total fundraising expenses to the total gross receipts from fundraising and sponsorships of the charity for that financial year. Singapore organisations are “expected to keep their fundraising efficiency ratio below 30 per cent”, says the government.

The problem with the question of efficiency, says Mr Pallotta, is that it makes people view expenses as a negative, that is not part of the cause, when they should be viewed as resources being channelled for growth. This forces charities to keep overheads low, forgoing the very things they might need to expand.

Mr Pallotta also debunks the notion that the less money is spent on fundraising, the more money is available for the cause. If spending more dollars on fundraising can make the donation pie bigger, then charities should be investing more money in fundraising – because it is the one thing that has the potential to multiply funds that will be directed to a cause.

“So the next time you’re looking at a charity, don’t ask about the rate of their overheads. Ask about the scale of their dreams, how they measure their progress towards those dreams, and what resources they need to make them come true, regardless of what the overheads are,” Mr Pallotta says.

“If we can have that kind of generosity – a generosity of thought – then the non-profit sector can play a massive role in changing the world.”

DOING GOOD WELL

How then, should we draw the line between spending in a way that encourages donors to fork out more for good, and overspending that makes philanthropic efforts appear wasteful?

Since Mr Pallotta broached the subject of the “overheads myth”, organisations in the US have started paving the way for the public to look at other gauges of non-profit performance beyond what’s on their balance sheet. In an open letter to donors, three leading resources for non-profit data GuideStar, Charity Navigator and Better Business Bureau Wise Giving Alliance, have said that they would reject the “overheads ratio” as a valid indicator of charity performance, and instead call for the public to pay attention to other factors that truly matter – transparency, governance, leadership and results.

With an increased focus on corporate governance and greater interest in augmenting the competencies of non-profits, the charity sector in Singapore too is headed in the right direction.

Carrie Tan, executive director of local charity Daughters of Tomorrow (DOT), explains that her non-profit has seen that more funders are now willing to invest in the “capability-building of charities”.

“There is an increased awareness that professionalising the services of charities can go a long way in increasing reach, impact, and efficiency of funds-to-outcome,” Ms Tan says.

DOT helps women from low-income families find jobs, and offers various programmes to prepare them for gainful and sustainable employment. While DOT keeps its overheads ratio well below Singapore’s 30 per cent limit, Ms Tan highlights that about 80 per cent of the IPC’s expenditure last year was used for programmes such as confidence-building, IT literacy, financial literacy, befriending support and employment bridging for their beneficiaries.

She adds: “Some donors who have just begun their giving journeys may think that the money should be given directly to beneficiaries, whereas sometimes greater impact can be achieved if the funds are used in creating enabling programmes for beneficiaries instead of being given out as handouts, depending on the cause and mission of the charities.”

Keeping a lid on costs can also be tough on smaller charities that are working to build capacity. “So if there can be flexibility that provides better allowance for smaller charities with under S$1 million a year to invest in fundraising for capacity-building and professionalisation of their services, it will be helpful,” says Ms Tan.

Utilising funds to scale a charity or develop their capabilities may be the best way to advance a cause, but conveying this nuance might be difficult if the public remains sceptical. “It is not just doing good work but rather, doing good well,” says Andrew Khoo, founder and CEO of New Hope Community Services, which garnered top honours at last year’s Charity Governance Awards. Among other policies, New Hope has a whistle-blowing policy, a conflict of interest policy to ensure that conflicting transactions are not entered into, and undertakes board evaluation and renewal at least once a year.

Good governance and transparency, say fundraisers, are crucial to the sustainability and growth of the charity sector – and the well-being of its beneficiaries. Nowhere was this more clearly seen than at the National Kidney Foundation. One of Singapore’s largest charities, it promotes kidney transplant and provides highly subsidised dialysis treatment and care for kidney patients. The NKF fell hard from grace in 2005 when it emerged that ex-CEO TT Durai was paid an annual salary of about S$600,000, flew first class and misused NKF funds to maintain his Mercedes. A very public loss of confidence ensued, the entire board stepped down, and donations plunged. Durai was later charged and jailed for intending to deceive the NKF over payments.

For years after the news broke, the NKF had to halt its fundraising activities and eventually ran into the red in 2009. Having put in place strict policies and controls, the foundation has since rebuilt its reputation. Donations and grants, which dived from S$62.3 million in fiscal 2005 to S$26.6 million in 2006, are back up at about S$64 million for 2017.

WHERE SINGAPORE STANDS

In this year’s Budget speech, finance minister Heng Swee Keat said he was heartened to see that Singapore’s volunteerism rate had doubled in the last decade, while total donations rose from S$2 billion in 2011, to S$2.7 billion in 2015.

To encourage individuals to continue giving back to the community, the government has extended the 250 per cent tax deduction for donations made to Institutions of a Public Character (IPCs) till Dec 31, 2021.

The Business and IPC Partnership Scheme (BIPS) was also extended for another three years, allowing businesses that support their staff to volunteer and provide services to IPCs, to enjoy a 250 per cent tax deduction on the associated costs incurred. All IPCs are externally audited.

Undeniably, government policies can directly affect the amount of donations in a given year.

In 2015, tax-deductible donations (TDD) received by IPCs jumped 25 per cent to S$1.36 billion in the year, when donors got a deduction of 300 per cent of the amount they donated during the Golden Jubilee year, or SG50.

When the tax deduction rate reverted to 250 per cent in 2016, donations to IPCs fell 36 per cent to S$866 million, marking the lowest amount of TDD in the last five years.

Thus, the extension of the 250 per cent tax deduction for donations in Budget 2018 is a move welcomed by both academics and charities alike.

Lam Swee Sum, director of the Asia Centre for Social Entrepreneurship and Philanthropy (ACSEP) and associate professor of finance at NUS Business School, says: “This policy effectively reduces the cost of giving for someone in the top tax brackets from about 80 cents, to about 50 cents of a donated dollar”.

Similarly, DOT’s Ms Tan agrees that the extension “really helps”, as the charity has seen an increased willingness among donors to contribute money since it attained its IPC status in October last year.

Globally, Singapore ranks 30th in the World Giving Index 2017 out of 139 countries, which together represent around 95 per cent of the world’s population. This is according to data where 1,000 individuals in each representative country were polled on whether they had helped a stranger who needed help; donated money to a charity; and volunteered their time to an organisation in the month preceding the survey. While this ranking is decent, Singapore still trails behind other Asian countries such as Hong Kong which is ranked 25th, and Myanmar which clinched the top spot, indicating that there is more to be done in our charity sector.

WE ARE THE FUTURE OF PHILANTHROPY

The future of charity lies in crowd-driven philanthropy, where innovation takes place amid a new generation of citizen leaders, proposes Katherine Fulton, president of social impact consultancy Monitor Institute.

She cites the “democratisation of philanthropy”, saying that “this is a moment in history when the average person has more power than at any time”.

Technology has made mass collaboration and online marketplaces readily available, with digital giving fast gaining traction.

Singapore’s national charity portal Giving.sg, for instance, saw donations surpassing the S$100 million mark last year, while crowdfunding site Give.asia, set up by NUS students, saw collections hit an impressive S$10.8 million in 2017, double the amount from the previous year.

Ultimately, charity is more than just cheque-book philanthropy – it’s also about the giving of time and talent. And social media has provided a perfect platform for creating valuable connections that have the potential to garner a huge audience and in turn help amass donations.

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Remember the ALS Ice Bucket challenge? What started out as a fun challenge in honour of a friend with ALS (amyotrophic lateral sclerosis or motor neurone disease) culminated in a viral campaign that not only raised awareness of the disease, but along with it, US$115 million. As Ms Fulton explains, online philanthropy marketplaces challenge the assumption that organised philanthropy is only meant for the very wealthy.

Looking ahead, Ms Fulton feels sanguine about prospects for the charity sector, which she says is reorganising itself.

“And I’m hopeful because it’s not only philanthropy that’s reorganising itself, it’s also whole other portions of the social sector, and of business, that are challenging ‘business as usual’. Words such as “philanthro-capitalism”, “philanthro-entrepreneur”, and “venture philanthropy”, we don’t have a language for these yet. Whatever we call it, it’s new, it’s beginning, and I think it’s going to be quite significant.”

Indeed, interesting new ways of providing aid have emerged over the years.

A social impact bond for example, is a public-private partnership that drives resources towards effective social services. These bonds, which are also known as “pay for success bonds”, can be bought by private investors, with the money used to finance projects run by charities or businesses. This means that repayment to investors is contingent upon specific social outcomes being achieved, which could include reducing recidivism rates.

Yet another model could include corporations setting up their own charitable arm. In January this year, Amazon, Berkshire Hathaway and JP Morgan announced that they would form an independent company “free from profit-making incentives” to address healthcare issues for their workers in the US. These corporate behemoths, which together employ more than 1.1 million workers will seek to cut medical costs, and showcase how companies can leverage their corporate reach to solve seemingly intractable social problems.

As CEO of the National Volunteer & Philanthropy Centre Melissa Kwee notes: “The next decades will belong to those willing to step into the vulnerable, uncertain, complex and ambiguous world, disrupt old models of giving and embrace the discomfort that births innovation.”

“If the future is bright, it is because we have co-created it to be so.”

Philanthropy today takes place in a context vastly different from the environment in which many current practices were developed, and no private funder alone can solve all the problems in the world, just as how non-profits cannot operate in silos.

But if we can collectively challenge the assumptions we have of charities, ensure good governance, and embrace new ways of giving, then we can begin to move the needle for the charity sector, on a scale that matters.

This story originally appeared inĀ The Business Times.