Thursday, October 8, 2009

Profit versus Nonprofit

My good friends Randy Mayeux and Larry James have both addressed the question of the effectiveness of nonprofit compared to for-profit companies recently (see Randy Mayeux’s entry here:, and Larry James’ entry for October 1 here: It’s a topic I’ve discussed recently (see my entry “Eat This Building” from October 2, 2009, so I can’t resist joining the discussion. Here’s the chart, which Randy reproduced, from Dan Pallotta’s book Uncharitable: How Restraints on Nonprofits Undermine their Potential.

I’m still deciding whether I want to invest the time to read the book (so take all this with a couple of grains of salt), but looking at the chart makes me tend to think the book isn’t worth my time.

First, I don’t believe that financial incentives are the way to attract the top talent. Lehman Brothers, Merrill Lynch, and AIG all paid enormous salaries, attracted the purported top talent and went spectacularly broke. On the other hand, even top universities may relatively low salaries and starving novelists and artists have become a cliché. Albert Einstein did some of his most brilliant work while he made his living as a low level government employee. In short, I don’t think you need high salaries to attract top talent. If I had even a moderate salary to offer people, then I could hire an amazing amount of talent. Unless to define the top talent as the people who get paid the most, I think this idea is nonsense.

Second, any respectable nonprofit doesn’t need to advertise its product. If you’re meeting the needs of the community, then you’ll have more business than you can ever handle. Advertising, IMHO, is for pushing products that people don’t really need or want.

Third, I agree—surprise—that nonprofits are too reluctant to take risks. Nothing significant is achieved without taking risks. Fear of failure leads inevitably, if not to failure, to mediocrity at best.

Fourth, the idea that for-profit businesses invest in the long term is just wrong factually—or else drawn from some other country or century than the United States in the 21st century. It’s a good idea, but first you always have to survive the present.

Fifth, it’s wrong that nonprofits can’t pay return on investment to attract capital. Nonprofits just do it in the form of loans, rather than investments. Right now, Central Dallas CDC has about $25 million in loans, and since we have the ability to repay them all, it isn’t a problem. We also have the ability to create nonprofit subsidiaries (we have three or four currently). If you allow direct investments in nonprofits (and still allow them to remain tax exempt), then they would have an enormous competitive advantage over nonprofits—such a large advantage that for-profit corporations would cease to exist.

In short, I’m not impressed, and I know that’s not fair because I haven’t read the book. But it’s like seeing the trailer for a movie that’s supposed to be a comedy and finding the trailer isn’t funny. Chances are that you’re not going to shell out the money or spend the time to go see the movie, fair or not.

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