The view from the boardroom: distant, elevated, homogeneous. Part 2: Who gets to decide which solutions receive funding?

Part 2 of the Revolution Will Not Be Funded

Welcome back. We ended last week with a quote from Lumbee Tribal member Edgar Villanueva: "All of us who have been forced to the margins are the very ones who harbor the best solutions." But those solutions remain unfunded because funders with the least connection to problems control resources meant to solve them.

This week, we're digging deeper into the inequality—and inequity—in the vast majority of nonprofit boards

A 2021 analysis of major nonprofit boards—Feeding America, Habitat for Humanity, the Gates Foundation, and the Red Cross—found that finding a board member without a prestigious university degree is "an anomaly." Many board members also serve as executives for other companies/nonprofits, creating a class barrier between aid givers and recipients that "reduces the autonomy of the working class and fosters a lack of understanding between providers and beneficiaries."

Nonprofit Quarterly reported in 2022 that 9.5 out of 10 philanthropic organizations are led by white people. Only 7% of nonprofit chief executives and 18% of nonprofit employees are people of color. Among the largest nonprofits, almost 90% of the leadership roles are occupied by white people.

The financial disparities are stark. Black-led organizations are 24% smaller in revenue than their white-led counterparts and have unrestricted net assets that are 76% smaller. This reflects systematic underfunding of organizations led by people closest to the problems and reveals deeply embedded values about who is trustworthy and competent.

The barrier is access and opportunity, not interest or ambition.

Myrl Beam, author of "Gay, Inc.," observed that as the gay rights movement became reliant on wealthy donors and philanthropy, "the goals of the movement began to shift to be more in line with what those funders would prioritize. So, why [gay] marriage? Because rich people wanted it."

The movement's priorities aligned with the interests of wealthy funders rather than the most vulnerable LGBTQ+ community members who might have prioritized housing, employment discrimination, or healthcare access. Marriage equality is important. But it became the priority because funders could relate to it personally.

This is how mission drift happens: not through malice, but through proximity. Funders fund what they understand, what they can measure, what looks like the solutions they would design.

And if you want their money, you have to become what they recognize.

Ann Goggins Gregory and Don Howard's 2009 Stanford Social Innovation Review article "The Nonprofit Starvation Cycle" documented a four-stage vicious pattern that systematically starves nonprofits of necessary infrastructure.

Stage One: Unrealistic Expectations

Government contracts and private foundations typically allow only 10-15% for indirect expenses. Better Business Bureau surveys show over half of American adults believe nonprofit overhead should be 20% or less.

Yet for-profit service industries report average overhead rates of 25%, with none below 20%.

Nonprofits are expected to operate at overhead levels that no successful for-profit company would dream of. We're supposed to compete for talent, maintain technology, ensure compliance, and produce extensive reporting—all while spending 10 percentage points less on infrastructure than businesses that don't have to produce any of that reporting.

Stage Two: Pressure to Conform

The Urban Institute's Nonprofit Overhead Cost Study found that 36% of nonprofits felt pressure from government agencies, 30% from donors, and 24% from foundations to keep overhead artificially low.

One organization in their study spent 31% of a grant's value just administering it—while the funder specified only 13% for indirect costs. The organization had to subsidize the funder's unrealistic expectations from other sources.

It forces nonprofits to engage in 'cost-shifting' and while funders get to look good by claiming low overhead, nonprofits scramble to find other money to cover the real costs of doing the work.

Stage Three: "Low Pay, Make Do, and Do Without"

Many organizations studied had nonfunctioning computers that couldn't track program outcomes, and their staffs lacked necessary training.

One staff member spent 50% of her time manually typing data into an outdated Access database (I've done as much myself).

This means the people who should be working directly with homeless individuals, or teaching kids, or providing healthcare, are instead hunched over computers entering data by hand because funders won't pay for the databases that would automate this work.

And then those same funders ask for detailed impact reports generated from that data.

Stage Four: Misleading Reporting

An analysis of 220,000+ IRS Form 990s found that more than one-third of the organizations reported NO fundraising costs. One in eight reported NO management and general expenses.

These are statistical impossibilities leading to systematic misreporting.

A Chronicle of Philanthropy survey confirmed that accountants advised nonprofits to report zero in fundraising sections. Not because fundraising was free, but because reporting real costs would hurt their chances of receiving future funding.

The actual overhead rates for four studied youth-serving organizations ranged from 17-35%, yet they reported 13-22% on their 990s.

We choose to lie because telling the truth is punished. And lying just reinforces the unrealistic expectations.

Here's what some funders don't understand: every hour we spend managing your restrictions is an hour we're not spending on the mission you claim to support. You're stealing time from the people we serve.

When you fund programs but not infrastructure, you're building houses without foundations and then acting surprised when they fall down.

I remember when the Dan Pallotta story broke. I was living in San Francisco and a close friend of mine was an executive working on the AIDSRide. Dozens of our friends rode every year. The AIDS ride is almost a sacred event for our community. It's been known to change lives, not just through the programs it funds but of the riders themselves. When the story broke, the sense of betrayal and misunderstanding was universal. The papers told us to be outraged and we were. It wasn't until years later that I learned what really happened.

Pallotta TeamWorks created the AIDSRides and Breast Cancer 3-Days events. Over 9 years, they raised $236 million for HIV/AIDS. And over 5 years, they raised $333 million for breast cancer. These were among the most successful charity fundraising events in history.

To build that capacity, they spent 40% on overhead. They invested in professional marketing. They hired talented people and paid them competitively. They built infrastructure to scale.

And when the press discovered the 40% overhead rate, sponsors pulled out and the events shut down.

Two of the world's most successful charity events were eliminated. Thousands of beneficiaries were harmed. And $569 million in future fundraising capacity was destroyed.

Dan Pallotta didn't fail at fundraising. He was immensely successful at it. He failed at meeting an arbitrary overhead ratio that no one can actually link to effectiveness. This "overhead apartheid," as he called it, judges nonprofits by different standards than for-profits and pushes talented people from the nonprofit sector into for-profit work because they can't afford to live.

The impact of "overhead apartheid" looks like this: since 1970, only 144 nonprofits have crossed the $50 million annual revenue threshold. In the same period, 46,136 for-profits did. A ratio of nearly 9:2,900.

Yet as of 2023, Pallotta notes the overhead myth persists in public consciousness—"the average member of the general public still thinks you ask about overhead."

If you invest in capacity, you will be punished.

Next week I'll write about my experience with Lava Mae, the Bay Area's favorite nonprofit, until it wasn't. Until then, stay safe.

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