A Maverick’s Defense

To Dan Pallotta, there’s something very wrong with the nonprofit world.

It suffers, says the former fund raiser, from a self-defeating mind-set that demands charity workers sacrifice personal benefit to help their social causes.

Mr. Pallotta argues that such thinking leads to unfair scrutiny of nonprofit salaries, discourages innovative fund-raising ideas, and causes donors to frown on overhead costs.

Those problems — and the ways to overcome them — form the basis of Mr. Pallotta’s book Uncharitable: How Restraints on Nonprofits Undermine Their Potential, which was released this month by Tufts University Press. In it, he writes that the “nonprofit sector is being suffocated by a morality imposed from the outside and reinforced from within,” and that he intends to lead an “uprising” to free it.

While many nonprofit officials may applaud Mr. Pallotta’s strongly worded, if verbose, book, especially regarding the issue of compensation of charity employees, some say his controversial background makes him a dubious reformer.

As the founder of the now-defunct Pallotta TeamWorks, a California company that planned three-day charity bike rides and other big events, Mr. Pallotta says he brought in $305-million for AIDS and breast-cancer research during an eight-year period.

But his six-figure salary — $394,500 in 2001 — along with other issues, caused controversy. The company ultimately closed after a contract dispute with Avon led to cancellation of plans for a three-day breast-cancer event with another charity.

“He strip-mined the cause,” says Robert Egger, founder and president of the D.C. Central Kitchen, a Washington antihunger group. “He did a tremendous disservice.”

Mr. Pallotta defends his tactics and says the criticism he received is a reflection of the “dysfunctional ideas” that underlie the nonprofit world — ideas, he argues, that prevent the elimination of hunger or cures for deadly diseases.

“We would do things that would work very well that would raise huge amounts of money and we would get criticized for them because they violated some ethic,” he tells The Chronicle in an interview. “At some point, you have to question whether the ethic is getting in the way of real progress.”

‘Nonprofit Idealogy’

Mr. Pallotta, who lives in Los Angeles and works as a marketing consultant, is quick to say that nonprofit workers and donors are not the problem.

Instead it is a “nonprofit ideology,” which he says originated with the Puritans of New England in the 1700s, that exults the idea that one must be selfless to do good works.

The best example of this — and the primary target of Mr. Pallotta’s book — is the expectation that nonprofit executives should forgo being well paid.

Why can’t self-interest motivate humanitarian work as it does business? he asks.

“We allow people to make huge amounts of money doing any number of things that will hurt the poor, but want to crucify anyone who tries to make money doing something that will help them,” he says.

As a sign of this, he points to a recent proposal by San Francisco’s Board of Supervisers that would have limited the pay of charity directors whose groups receive city grants.

While that measure was rejected, the thinking behind it and similar efforts stifle nonprofit pay, which hurts charities’ ability to attract the brightest employees, he says.

“That has the effect of sending all of the top talent from the nation’s best business schools directly into the for-profit sector, because there’s no way they can make the economic sacrifice that that ethic requires of them,” he says.

The ideology also preaches other “commandments” that hamstring charities:

• Don’t take risks with fund raising. If a new way to raise money fails, the charity will be accused of being wasteful or mismanaged. But he says failures can point the way to potentially profitable new practices.
• Don’t spend money on marketing. Buying an expensive commercial during the Super Bowl would be criticized because it has no direct link to assisting needy people, he says, but it would greatly increase the public’s knowledge of a cause.
• Don’t save money. He writes that donors unwisely expect their contributions to be spent immediately, which leads to short-term planning by charities.

“I have observed a lot of irrationality that’s imposed upon the sector by society’s ethics about charity,” he says. “I’ve seen how debilitating they are and how they suck the enthusiasm and life and energy out of people who come into the sector full of dreams and passion.”

Fund-Raising Company

In a sense, Mr. Pallotta is talking about himself.

He started Pallotta TeamWorks in 1994 full of ambition. The company pioneered large-scale rides or walks to benefit AIDS and breast-cancer groups. It challenged participants physically and financially, asking them to raise between $1,200 and $10,000.

But the overhead costs triggered concerns. As riders enjoyed hot showers and cooked meals, the news media and others asked questions about how much was actually going to charity; Bill O’Reilly began ranting about the company on Fox News.

Mr. Pallotta writes that administrative costs averaged 45 percent for his events. While the figure exceeds watchdog standards, he says it was justified because of the logistical complexity of the rides, the large amount of money he was bringing in overall, and the fact that a portion of the expenses included advertising, which made people aware of the charitable causes that benefited from the events.

Despite his defense, in 2002 charities started pulling out of his events, forcing Pallotta TeamWorks to lay off its 350 employees and shut its doors.

Pallotta TeamWorks sued one client, the Avon Foundation, for $21-million for breach of contract. In 2005, the company settled the case for $7.5-million, Mr. Pallotta says.

Carol Kurzig, Avon Foundation’s president, declined to discuss the legal battle.

But in an e-mail message to The Chronicle, she writes, “With the self-described goal to ‘get rich doing good,’ PTW had priorities other than fund raising for the breast-cancer cause, which was (and remains) the mission of the Avon Foundation.”

The lawsuit and other aspects of Mr. Pallotta’s history lead some nonprofit experts to be skeptical of the ideas he proposes in his new book.

The D.C. Central Kitchen’s Mr. Egger says he agrees that nonprofit salaries should be higher, but that Mr. Pallotta overstates the problem.

“I don’t think a lot of people would defer working in a nonprofit if they don’t receive a scale equivalent” to corporate pay, he says. In addition, the current economic recession and anger about Wall Street executives’ “golden parachutes” makes Mr. Pallotta’s argument moot, he says.

Art Taylor, president of the Better Business Bureau’s Wise Giving Alliance, a charity watchdog in Arlington, Va., takes umbrage at Mr. Pallotta’s broadside against his group’s standards.

In the book, Mr. Pallotta rails against the alliance’s suggestion that charities should spend at least 65 percent of their revenue on programs, saying it’s unreasonable and easily gamed by hiding administrative costs as program expenses.

Mr. Taylor agrees that the standard should not be the only characteristic a donor considers, but says charities themselves support it and that Independent Sector, a Washington coalition of nonprofit groups, calls it “reasonable.”

“I would say the vast majority of charities do not have a problem with it,” he says.

A ‘Powerful Argument’

Despite the criticisms, Mr. Pallotta’s new book has fans.

Bill Shore, founder and executive director of Share Our Strength, an antihunger group in Washington, says the book will make nonprofit leaders speak up about the need for better compensation, the need to save money, and other issues.

“Dan’s experience and career make this such a powerful argument,” Mr. Shore says.

For his part, Mr. Pallotta says he hopes people will focus more on his message than on his past.

With the financial meltdown roiling markets and a new president coming into the White House, the nonprofit world has an opportunity to improve itself — and maybe the book will be a guide, he says.

“I hope that it liberates something in the soul of people who work in the sector, especially young people,” he says. “That it causes them to rise up and say, I will not dedicate my life to working inside a set of rules that work against me.”