Invest in the Best to Make an Impact

By Sean Stannard-Stockton
Published: June 28, 2008 (link to original column)

Giving money to charity does not necessarily make the world a better place. Nevertheless, most donors believe that donating qualifies as “doing good”. In fact, the gift of money is only the first step in a chain of events that might achieve the elusive goal of creating social impact.

For-profit investors understand this issue. Making an investment does not guarantee a profit; this comes from what a business does with its capital. A result of the belief that the donation itself produces an impact is the idea that non-profit organizations should spend as little as possible on their infrastructure. We see this belief manifest itself when we hear people complain about charities “wasting money”, when press reports grumble about the high salary of an executive director, or when donors are encouraged to focus on a charity’s overhead expenses as a deciding factor on where to give.

Of course, we have a radically different way of thinking about for-profit entrepreneurs. We celebrate the idea of a few people in a garage, with limited resources, inventing the next big thing. We are enamored of the concept that in dorm rooms at Stanford and Harvard, the next Ebay or Facebook is being developed. Implicit in this ideal is the idea that business profits are a product of brilliant people with creative ideas, figuring out how to be successful.

In both business and non-profit work, the critical factors of success are people, ideas and passion. Everything else is secondary. As a nation of stock market investors, we understand this. We are attracted to investment opportunities because of the people leading the company, the ideas for new products or services, and the way the company seems to throw itself at opportunities and relish the chance to compete.

Google lets its engineers spend a day each week working on whatever project catches their interest, and feeds its employees gourmet food in free cafeterias. Google’s stock is up more than 500 per cent since going public less than four years ago. But can you imagine the outcry if a large non-profit let its employees spend 20 per cent of their time on interesting “side projects” or gave them fancy free meals? Never mind that non-profit employees are shamefully underpaid compared with their for-profit counterparts (certainly no stock options for these “do-gooders”). If a non-profit followed Google’s business practices, donors would flee, the media would write exposés and Congress might even investigate.

What a disgrace.

Americans give more than $300bn a year to charity. It is time we reframe what we expect from the non-profits we fund. Let us ask for more innovation, more creativity, more impact. But as a nation of philanthropists, we can not make this demand without holding up our end of the bargain. We need to expect non-profits to hire the best people, and support our donations being spent on competitive salaries. We need to encourage non-profits to take risks, and understand that risk-takers fail sometimes (even frequently). We need to believe that non-profit leaders know best how to achieve their mission, and just as investors do not tell companies how to spend their investment dollars, make the majority of our donations for general operating support.

Imagine the way we could remake our world if non-profit organizations were backed by investors who encouraged them to hire the best people, to poach employees from Silicon Valley and Wall Street, and to bump shoulders with Fortune 500 recruiters at Ivy League career fairs in the fight for the best talent. Imagine the good we could achieve if landing a job at the United Way or the celebrated Teach for America inspired the same joy that getting a high-tech or investment banking job provokes today.

But that will cost too much! We cannot afford it! How can we possibly pay non-profit employees the same rate as for-profit employees?

Here are the facts. According to the Urban Institute, public charities collected $1,600bn in revenue in 2005 and held $3,400bn in assets. These numbers do not include the more than 800,000 small non-profits that are exempt from reporting.

In reframing our understanding of the non-profit sector, we must recognize that we cannot afford not to hire the best people. Fortunately for us, the non-profit sector is teaming with passionate individuals who are innovative enough to figure out how to do their job in such a backward system. Imagine what could be achieved if we transformed our dysfunctional understanding of charity.

As we face the myriad challenges of the 21st century, we must focus our examination of the social sector on identifying the very best people and organizations. We must champion these leaders and invest heavily in their ability to achieve an impact. Just as businesses turn investment dollars into profit, non-profits turn philanthropic dollars into social impact. It is not enough to simply do good, it is time to start funding the best.

The writer is a principal and director of tactical philanthropy at Ensemble Capital Management and author of the blog