Charities need to be liberated to enable them to use the tools of commerce if they are to make any dent in the world’s most intractable problems, US fundraiser Dan Pallotta told delegates at Charity Finance Live last month.

In his address, Pallotta set the scene by reciting some depressing figures about the lack of progress made worldwide in the last few years on issues like breast cancer, Aids and malnutrition. “If we want change to occur at the rate of molasses we have a very suitable system for that,” he said.

He said the world currently has two rulebooks, one for charity and one for the rest of the economic world, and this prevents charities from fulfilling their potential.

The fact that charities can’t pay their executives the kind of salaries that the private sector can means that the best graduates have two stark choices – “between doing well and doing good”.

Pallotta said that ten years after graduating, MBA graduates from Stanford University earn, on average, £400,000 a year. The average salary for a chief executive of a US hunger charity is £84,000.

He compared the total salaries of the five highest-earning chief executives of healthcare charities in the US - $2.48m - with the salaries of the five biggest-earning health insurance company chief executives - $138m. “It’s an upside-down world that values the management and institutionalisation of disease 74 times greater than its eradication.

“If you want to make £5m selling violent video games, you’re hailed and get your photo on the cover of business magazines. But if you want to make even half a million curing leukaemia you are vilified.  Where is the logic in that?”

Pallotta also attacked the pointless focus on overheads and administrative costs, and the reluctance of charities to take risks. “We let Paramount Pictures spend £100m making a movie that flops, and don’t bat an eyelid, because more of their movies succeed than fail.  But if you do a £5m charity fundraising campaign that doesn’t return 70 cents on the dollar in the first 12 months, you get the Attorney-General knocking at your door.”

In the US in the last 39 years, 46,136 for-profit businesses have crossed the $50m annual income barrier. This compares with just 144 non-profits.

“So we put the sector at a disadvantage on every level possible – and then we call it charity.”

Adam Sampson, former Shelter chief and now chief ombudsman at the Office of Legal Complaints, responded by contending that there is little that prevents the UK sector from adopting the strategies Pallotta mooted, and indeed it has grown massively in the last decade.

But he cautioned that the bigger an organisation gets, the greater the erosion of its connection with the people it represents, and the growing danger that it loses touch with its mission in the drive to keep increasing income.

“I don’t think money is the motivator here in the same way,” Sampson said. “Money is not the ultimate aim of the sector, money is a means to an end.”

He cited the example of the Halifax Building Society, which launched in 1863 as a group of men who clubbed their money together in order to borrow to buy housing.  Some 140 years later, when the Halifax demutualised and became one of the UK’s biggest financial institutions, it caused “untold misery” to clients of Shelter.

“My judgement is that we need to stay true to our mission, because we can add value in a way that I don’t see either the state or the private sector can.”

Charity Commission chief executive Andrew Hind said he agreed with Pallotta about wanting to liberate the sector, but added there “no restraints on salaries in the sector except the test of public opinion”.

He said Pallotta was painting a picture of a US sector that is “more draconian and narrow-minded” than it is here, where “you can do anything as long as you are absolutely transparent with the donating public”.

However, Hind conceded that the UK sector needed some “Googles and Microsofts” to shake up the landscape and inject some dynamism. He added that there was a question mark over charities’ ability to innovate, because the trustee structure of charities can act as a brake on innovation.  “Innovative ideas that are coming up through the executive line aren’t always percolating through the system,” he said.

Debra Allcock Tyler, chief executive of the Directory of Social Change, conceded Pallotta’s arguments were persuasive but suggested he had “got them the wrong way round”. 

She said that instead of arguing that charity sector chiefs should be paid similarly inflated salaries to private sector heads, the sector should be attacking the huge amounts paid to their commercial counterparts.

Pallotta concluded by saying that organisations in the sector do need to get bigger, because the scale of the problems facing the world are so huge that they will never be overcome by small organisations. “You have to invest in the fundraising engine because this is where revenues are going to come from. Fundraising is the black sheep of the sector but it is the only hope.

“The issue is that we have to maintain public trust, but not if the sector is trusting the wrong thing. We have a responsibility to educate the public, not to tell the public what they want to hear.”

He said the original concept of charity – “an insurance policy against eternal damnation” – is not longer appropriate in today’s world. “People say to me that charity is a balance to capitalism, and that we shouldn’t contaminate it.  But I think it is a betrayal of all those who donate to it.  Charity does not exist as a balance to capiatalism, it exists to help people.  If we are more focused on our own sanctimony than on the needs of the children or the poor then it is a morality that I don’t want anything to do with.”