There are a lot of persistent myths about how charities should be evaluated and what operational standards they should follow. In this video (also shown below), Dan Pallotta argues that these misconceptions are very harmful to the growth of charities and hence to how much of a difference they can make in the world.
First of all, he highlights the following five differences in the rules we apply to the non-profit sector and to the rest of the capitalist economy, and considers the negative consequences of these constraints :
The entrenched idea that making money helping others is immoral (whereas making money selling useless consumerist goods is a respectable career) creates a stark choice between making money and working in the non-profit sector. This leads many talented professionals who could make a valuable contribution away from the non-profit sector.
When donating, we would prefer the money we give to go straight to the needy, but that might be counterproductive: if some of the money donated is invested in reaching out to get more donations by raising awareness of the project, it is possible to raise a lot more funds and therefore have more impact.
There is a negative reaction to trying out new ideas – which may fail – in the non-profit sector, because this means that some of the money donated might not reach the intended target. However, in any enterprise, without innovation – which entails the possibility of failure – you can’t grow; without growth, impact is diminished.
In the non-profit sector, there is much less willingness to wait before a project shows results, but many good ideas – with the potential of having a large impact - may take time to implement.
As charities can’t pay profits to attract capital, they are kept out of the multi-trillion capital funds that would allow much more ambitious projects to be set up.
Overall, Pallotta believes we are prone to ‘confusing morality with frugality’, which leads to the widespread conception that the percentage of overhead costs is a good measure of a charity: one should donate to the charities with least overhead, because those are the ones that put most of their money in direct intervention. But this is self-defeating. Overhead – in the five forms outlined above - can be an important part of the cause by making it grow. For example, by investing more in fundraising, one can multiply the value raised. Even though a smaller percentage of the funds goes directly to the cause, a bigger amount ends up being used for that purpose, and this means that we can make a much bigger difference.
For these reasons overhead is not the best measure of a charity. Obviously, money must go into the cause, so there is some grain of truth to the anti-administration perspective; but the overall impact of a certain intervention is what is most important. This means that we should look at an overall metric, such as QALYs/dollar, which takes into account not just the internal structure of a charity and the relationship with donors but also the impact of the intervention that the charity implements. This measure allows us to focus on helping as many people as we can.