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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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Alongside philanthropy, nonprofit offers a way for people to cultivate compassion and advocate altruism in society. A nonprofit is a word used by the IRS to define tax-exempt organizations that benefits the public interest at no cost.  In the nonprofit sector, there are a number of ethical dilemmas that tend to decelerate the progress of these socially innovative organizations. The way majority of modern society considers nonprofit organizations harmonize with imbruted overhead. Some entrepreneurs believe that the aversion of overhead dampens nonprofits' success in ending things like world hunger, homelessness, breast cancer, and other things residing in the realm of world problems. Others would say that keeping a low overhead does not lower a nonprofit's success. Yet, those aforementioned problems are incredibly large issues fought with little money from charities causing the discrepancies. The innovators on the side of overhead would suggest that there is a clear discrimination within the areas of the nonprofit sector compared to the rest of the economic world.

The differences between a nonprofit sector and the rest of the world is “an apartheid and it discriminates against the five areas of the nonprofit sector” (Pallota 2013). The five precincts of a nonprofit that conveys the unfairness include: compensation, advertising and marketing, taking risks on fundraising endeavors, time, and the growth for risk and idea capital. Implying that these areas contain discrimination offer unconventional ideas regarding the traditional nonprofit fundraising and shows an overall distaste for keeping a low overhead. Compensation is the notion that the more value one produces then the more money is made. This idea is typically shown in the for-profit model and not so much for the nonprofit ideology. Nonprofits don't want to promote money as an inducement for people to generate more community services. It goes against everything a nonprofit stands for, conventionally.

The idea of making money by not caring about money isn't as much as a manipulative strategy, but it is certainly a mentality that nonprofit organizations can implement to make money from donors. For instance, doctors are motivated by the desire to help people rather than having a monetary motive. This reputation will make the money follow after the initial motivation of altruism. “If you say our goal is to help people…in a non-profit setting, that is to make the most money,” (Munger 2010). On the other hand, if a nonprofit were to make the claim that it would like to make the most money, it wouldn't do well. For-profits industries can make as much money without the concern of damaging its reputation.

Advertising and marketing are deemed as another area of discrimination because for-profit sectors can spend as much as they'd like on advertising and in turn, they receive an abundance of money. Yet, with the dehumanization of overhead and an evident ignorance of morality with frugality amongst the masses, charities ought to spend less in fundraising. In turn, they don't make as much money as a corporation like McDonald's would. The old saying, “in order to make money you have to spend money” correlates into the breakdown that without a budget allocated to fundraising, the nonprofit can't make money. If a nonprofit cannot make money, then it cannot grow. Lastly, if it cannot grow then the goal to end big problems is diminished.

There are people who would disagree by claiming that nonprofits are not underinvesting in advertisements and they aren't punished for investing in advertising. Some would also argue that there is hardly a difference in advertising between for-profits and nonprofits because the “average advertising percentage among the nonprofits is 1.2 percent, whereas it is 1.8 percent among the for-profits” (Mittendorf 2013). To further the opposition of the discrimination within advertising and marketing against nonprofits, we cannot thoroughly prove the harsh perusal of high overhead. “Among its over $49 million in advertising and promotional expenses, only 1 percent is treated as overhead; the rest is considered program spending” (Mittendorf 2013). This claim essentially shows that advertising spending increases the organization without crushing its reputation.

Another area of supposed discrimination ties into taking risk on new fundraising attempts. Nonprofits are generally thought to stray away from attempting new revenue ideas because if it fails then the character is questioned. Time is one of the factors that nonprofits are thought to not have. It seems almost impossible for a nonprofit to set long-term objectives to succeed in its plan because donors would want to see the expected return in a short amount of time. For instance, there is the argument that we should have already found the cure for breast cancer with its many donations. However, some nonprofit entrepreneurs would suggest that breast cancer has increased in success with its many donations. “The breast cancer mortality rate has dropped substantially from 100 percent sixty years ago to 23 percent today, a success that did not hinge on big salaries for talent” (Kweder, Denis, Scully 2013). This implies that debaters of nonprofit must consider the public sector. People who share the same mindset of Pallotta are believe to rest on “stubborn myths about meritocracy- and it is precisely these myths that impede efforts to address poverty and inequality in the United States” (Kweder, Denis, Scully 2013).

The last area of the nonprofit sector is attracting risk capital. In the for-profit sector, it can pay people profits in order to attract their capital for new ideas. However, in a nonprofit sector, you cannot pay profits. It would presumably defeat the purpose of a nonprofit. The for-profit thrives economically by dominating the capital markets and leaving the nonprofit organizations to starve “for growth and risk and idea capital” (Pallota 2013).  Charitable giving in the United States has remained stagnant at 2% of the gross domestic product for the past decades. Thus, how does a nonprofit build scale without capital still persists as an underlying question.

 Considering these problems and different perspectives, nonprofit organizations are not exempt from the principal-agent problem. The principal-agent problem defines a discrepancy between principals and their agents. Typically, the principal is the top authority who hires agents to act on his/her behalf. In the nonprofit world, it is unclear who should be guided as the principal. However, we can still analyze the donor and nonprofit relationship using the principal-agent problem. We can label the donor as the principal who does not seek to solve a certain social problem, but relies on a nonprofit to act as an agent. Thus, in the case for the principals, they expect the nonprofits to act in our self-interest. The expectations placed on the nonprofits by the donors are a part of the assumed reasons that it doesn't thrive because sometimes the nonprofits do not meet those expectations. The world problems still exist.

Although there is no way to thoroughly guarantee ethical conduct, nonprofits can take certain steps that will make it more likely to succeed and meet some expectations.

 Some agree that we need to change the way we think so that non-profits can successfully right big issues. While you can also narrow it down to ensure effective codes of conduct and compliance programs, promote effective financial management, and institutionalize ethical culture. We can also develop some type of stock market or capital market for charities where donors could invest since states own charities. So you'd create for-profit charities, in essence, where you keep the feature of tax deductibility but otherwise there can be equity ownership in the organization. You wouldn't be stripping away the ability for donations to be tax deductible while still producing charitable goods.

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