Wiser.org Blog

As I sit at my computer right now, I am reflecting on celebrating Philanthropy today. We are blessed to be surrounded by so many amazing non-profits and so many philanthropists. Today is a celebration for all the givers, for giving their time, expertise and money, and to say thank you!

Celebrating philanthropy

Philanthropy Day is the special day set aside to recognize and pay tribute to the great contributions that philanthropy has made to our lives. It is a voluntary giving act that can take many different forms, and this is what makes it so powerful. Giving to charitable organizations rose 2.1% (adjusted for inflation) in 2010; total giving by individuals, foundations, and corporations was $290.89 billion according to Charity Navigator.

There was a recent Twitter conversation on What role should philanthropy play in strengthening the U.S. economy? Participants shared advice on partnerships between nonprofits and foundations with businesses and government, discussed how they are working to help communities become more competitive, and offered suggestions about what the nonprofit world can do to be more effective in spurring economic growth.

Recommended readings

I have recently read quite a lot of great books and blog posts on philanthropic giving and wanted to share them:
- You’re seriously over-farming your donors by Chris Abraham. This is a great piece which really made me smile. I know, at WiserEarth, we have been reaching out to the same donors over and over, and we do indeed need to rest the land and spend more time to appreciate our supporters!

- Are Your Donors Superheros or Cash Machines? by Amy Einsenstein. It starts with a simple fact but a very important one: “people give to satisfy their own needs, not the needs of your organization”. So many organizations forget about it!

- Giving 2.0 by Laura Arrillaga-Andreessen. I have been reading Giving 2.0 and just want to share it with everyone. It is such an important book as its message is very clear and simple: philanthropy is not just about $$. Every one can be a philanthropist, donate time, expertise.
Beth Kanter did an great blog post entitled “Good News for Giving 2.0: Your Organization’s Champions Are Your Most Valuable Resource“.

I feel blessed to be surrounded by so many amazing non profits leaders, Happy Philanthropic Day!

Peggy Duvette
Executive Director

Photo by aeu04117

Beware of reading too much into a nonprofit’s Charity Navigator rating. They don’t measure outcomes, they don’t rate most smaller, grassroots organizations, and they are based on questionable financial data. Worst of all, they create perverse incentives that can hurt rather then help the nonprofit sector.

Here are a couple of my observations based on my years of experience as a Chief Operating Officer and Director of Operations of several nonprofit organizations. Please feel to post a comment if you disagree or have a bone to pick with Charity Navigator. Who knows, maybe we will influence the next generation of charity ratings being developed by the Alliance for Effective Social Investing which include Charity Navigator, Guidestar, the Better Business Bureau and numerous foundations and nonprofit consultancies.

• Ratings are not tied to outcomes: Since the ratings are based solely on financial data they do not tell you much about whether the organization is meeting its mission and delivering its services effectively. As Ken Berger, President and Chief Executive of Charity Navigator has said himself: “There arguably could be organizations [on the site] that have good financials, but their outcomes are not so good.”
• No ratings for smaller organizations: Charity Navigator only rates organizations that have revenues over $1 million, raise more than $500,000 from individuals and foundations, and file a Form 990 with the IRS (many organizations are exempt). That leaves a whole lot of effective grassroots and volunteer-led organizations out in the cold. See Charity Navigator’s Requirements here.
• Ratings are based on questionable financial data: When a nonprofit files their data with the IRS they have to allocate their expenses to program services, management and general, and fundraising. It’s pretty much up to the nonprofit to decide how to allocate to the different categories. Was an Executive Director fundraising when he made that trip to see a donor, or gave a talk at someone’s home? Or was he simply raising awareness around an issue which would be counted as a program expense? Was that mailing about your organization’s recent successes to raise funds or raise awareness? You get the idea. The problem is that nonprofits are incentivized to bend the truth. Charity Navigator has a scale that ranges from zero points for a fundraising budget over 25% of expenses, up to 10 points for expenses under 10%. So much creative accounting goes on to manipulate the results that the numbers become almost meaningless.
• Ratings discourage investment: When an organization invests in building a fundraising team it often takes 18 months or more to see results. With expenses in one year and income in the next an organization can quickly unbalance its expense ratios. Perversely Charity Navigator penalizes organizations that invest in growth.
• Ratings encourage resource hoarding: Charity Navigator gives points for how long (in years) a charity could sustain its level of spending using only its available assets. For some types of organizations like schools, museums, and parks the optimal level is three years worth of operating expenses. This encourages a conservative mindset, building large endowments and operating reserves, and withholding funds rather than spending them on program. Large amounts of cash on hand can blunt one of the few ‘market feedback mechanisms’ for nonprofits- namely whether donors are voting with their dollars in support of an organization or deserting it because of poor performance. Cynthia Lewin, senior vice president and general counsel of The National Wildlife Federation, has gone as far as saying having more than two-thirds of one year’s expense in reserve would be a “breach of fiduciary duty” for her organization.
• Ratings encourage empire building: Charity Navigator gives points to organizations with growing incomes and programs. But should we encourage all organizations to grow? Perhaps an organization has reached the natural limit of its service area, the capacity of its management, or the number of donors interested in its mission. We should cherish small but effective organizations. A great example of staying on mission versus building an empire is the Exploratorium, a children’s science museum located in San Francisco. Instead of opening up its own museums around the world, it uses a network to “share the fruits of forty years of research” with 23 “science-rich institutions around the United States and the world.” The Exploratorium has had more impact by helping others replicate its model rather than build its own museums.

So having said all this above, when should you use Charity Navigator’s ratings? They are best used to identify organizations that have very poor financial management and unacceptably high fundraising and management expenses ratios. But take the results with a pinch of salt – benchmark your target organizations with others that work in the same space in order to compare rankings. Most of all, talk to nonprofit professionals and board members and ask their opinion before you make your next donation.

For more information read these posts:

How do we rate Charities?, Ratings Tables, Charity Navigator

Charity Rankings Giveth Less Than Meets the Eye, Wall Street Journal

Beware The Nonprofit Watchdog – Charity Navigator, Don Griesmann’s Nonprofit Blog