Published by Angus on 03 Mar 2010
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:
Charity Rankings Giveth Less Than Meets the Eye, Wall Street Journal
Beware The Nonprofit Watchdog – Charity Navigator, Don Griesmann’s Nonprofit Blog
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