Beware The Nonprofit Watchdog – Charity Navigator

Here is why small and mid-size nonprofits and donors should be wary of the watchdog Charity Navigator. I am no fan of Charity Navigator. Charity Navigator is a tax exempt nonprofit organization. It holds itself out as the number one charity evaluator. Charity Navigator (CN) says of itself that they are “America's premier independent charity evaluator, (that) works to advance a more efficient and responsive philanthropic marketplace by evaluating the financial health of over 5,400 of America's largest charities.” They measure NPOs basically on previous Form 990s, a troubled, unclear and mistake prone IRS annual report. Not even CPAs agree what goes into certain financial parts of the 990 – what are administrative expenses, what are program expenses, what are fundraising expenses? Where are the issues of effectiveness, evaluation, outcomes, impact, results, change, morality, integrity and ethics in Charity Navigator's ratings? The new family of 990s may help but they are still new and will not address all the issues. Here are the problems with Charity Navigator.

Yes, there is a need for oversight and evaluation of nonprofits

There is a need for oversight of the third sector. Nonprofit organizations need to be accountable, transparent - their feet held to the fire as to what they say they are going to do. States’ Attorneys General, the Internal Revenue Service, independent groups and certain individual funding sources such as government funding and foundations are insufficient at this time to do that job.

• But who should be doing this evaluation for the giving public?
• What are the measurement standards?
• Who should be reviewed?
• How can the public trust their support will be used for the announced purposes?
• How often should they be reviewed?
• How can nonprofits appeal the findings?
• How are international organizations to be reviewed?
• How should advocacy groups be monitored?

These are important issues and there are no easy answers. Charity Navigator does not address them.

We need to assure the public that nonprofit tax exempt organizations are acting on measurable goals and objectives, that we are looking at effectiveness, outcomes, results, impact and change. Is that what Charity Navigator and others are doing? No way!

The movement to establish standards for high-performing nonprofits

On April 2009 GuideStar, BBB Wise Giving Alliance and Charity Navigator met to discuss new approaches to identifying high-performing nonprofits:

The Press Release about the meeting states:

The Alliance for Effective Social Investing, a network of nonprofit leaders, which includes the CEOs of GuideStar, Charity Navigator, BBB Wise Giving Alliance and Network For Good met in Washington, D.C. and agreed to work together to drive more funds to high-performing nonprofits.

Organized by Social Solutions, the Alliance for Effective Social Investing is an international effort to identify promising new metrics of organizations’ social impact and promote the development of a more robust environment for effective social investing - replacing financial measures as the sole barometer of an organization’s performance.

The Alliance, representing over 25 leading U.S. and European social sector organizations, is committed to supporting each other and working together to strengthen the evolving social capital market.

(Snip)

At the recent gathering (the Alliance’s second meeting) the group received updates from the Urban Institute, GuideStar and Charity Navigator about how each was moving to improve their websites and rating methodologies as well as develop new tools to support a more impactful nonprofit sector.

(Snip)

http://www.alleffective.org/news/Alliance_Press_Release_041409.pdf

Do the ratings at Charity Navigator help or hinder fundraising?

There is no mention of transparency about who become members of the CN closed membership. I wonder if the U.S. members of the Alliance have spoken loudly and forcibly that CN is hurting small and mid-size nonprofits by not including everyone required to file one of the 990 forms – or no one. There is no level playing field. There is no voice for the small and mid-size nonprofits in this group. Donors are also given a limited assortment of charities they could support.

At some point the factors for transparency and accountability of the Recovery Act (AARA) will impinge upon funded nonprofit contractors and sub-contractors.

No matter what the Alliance is attempting to do, Charity Navigator is the name of the game of ratings. See the article from CN about the media attraction listed in RESOURCES, below.

The ratings by CN are shown by numbers of stars from four stars as best and zero stars as worst.

Charity Navigator (CN) stands as the most popular, most cited, most perceived credible monitor of the nonprofit world by the nation’s press and media. For instance CNN and CN have an arrangement that CNN will use CN’s rated groups in a disaster or catastrophe, many times bypassing four star nonprofit groups on the ground in the affected community. CN should itself be held to a higher standard. In my view it does not pass muster and is dangerous to the public’s perception of the nonprofit world.

But all is not well in the CN world. Six days before Christmas 2008 the Wall Street Journal featured this article, Charity Rankings Giveth Less Than Meets the Eye - The Ratings of Nonprofits Are Often Uncharitable, Sometimes Failing to Credit Crucial Factors Such as Success Wall Street Journal by Carl Bialik. It says in part:

Call it a false sense of humanity.

It may make you feel better to know that your charitable donations are going to organizations that have been highly rated by any number of online charity rankings. But these sites fail to quantify the most-important and most elusive charity measurement: success in achieving its mission.

Like stocks, charities typically are rated by their financial numbers or by qualitative characteristics such as corporate governance -- or both. Unlike stocks, charities have no single measure akin to business profit to determine successful performance. There is a widespread search for such a number, but the challenges may be too daunting. Meanwhile, some of the measures that are used may inspire bad actors to try to game the system.

"In the nonprofit world, it is a billion times more complex," Michael Soper, a consultant to nonprofit groups based in Midway, Utah, said. "They're not here to produce a profit; they're here to provide a service."

And donors giving a relatively modest amount may not want to invest the necessary time to evaluate charities thoroughly. Their quickest recourse is to search Charity Navigator, one of the most popular sites that assigns ratings from zero to four stars to more than 5,000 nonprofit organizations that file a certain tax form with the Internal Revenue Service (some religious groups are exempt). Charities are evaluated in several financial categories, and compared to their peers. Food banks, for example, typically spend 1.9% of their expenses on administrative costs, far below the median for all charities of 9.6%. So a food bank that spends 8% on administrative expenses gets just five out of 10 possible points for that category.

"Our assumption is that the average person in our society doesn't have the time or expertise to wade through these kinds of financial statements," said Ken Berger, president and chief executive of Charity Navigator. "We're providing an analysis."

The ratings do more than measure charities; they can change them, not always for the better. Mr. Soper, the nonprofit consultant, said that some charities, focused too much on rankings, adapt to climb them, much like universities play to college rankings' criteria. Only "what gets measured gets done," said Mr. Soper.

Some critics of Charity Navigator said it can create backwards priorities, encouraging them to withhold funds instead of dispersing them. The ratings, for instance, encourage charities to keep assets in reserve that total as much as their annual budget -- and more for certain types of charities with big ongoing expenses such as museums and schools.

The National Wildlife Federation gets two stars from Charity Navigator, in part because it has on hand assets equal to about two-thirds of one year's expenses. Cynthia Lewin, senior vice president and general counsel, said that having more cash on hand would be a "breach of fiduciary duty."

(Snip – full article linked in RESOURCES)

The Washington Business Journal in January 2009 ran an article entitled In Focus: Nonprofits Making sure that the dollars do some good

U.S. charities took in $230 billion from individual donors in 2007. Now nonprofit experts are looking for ways to see if that money has any impact.

Donating to a local charity can be an incredibly rewarding experience. If the organization is smart about fundraising, it shares stories of success: Their newsletter shows photos of children smiling and laughing. The annual report reveals that a large portion of donated funds goes directly to people in need. At the awards luncheon, volunteers and recipients share heartwarming stories of changed lives, crises averted and hopes restored. Tears are shed.
Individual donors gave around $230 billion to U.S. charities in 2007, about twice the gross domestic product of India. But do they know their donations are being used to maximize social outcomes? Do they even know if they are helping recipients in any lasting way?

(Snip)

Administrative costs and fundraising prowess are key measures in one of the most popular charity-rating tools, CharityNavigator.org.

Charity Navigator, based in Mahwah, N.J., employs a star-rating system like those for restaurants or hotels. It also publishes a bevy of Top 10 lists, like “10 Slam Dunk Charities” and “10 of the Best Charities Everybody’s Heard Of.”

An estimated $10 billion in annual donations are affected by the research that donors do on the site, said Ken Berger, the chief executive officer of Charity Navigator.

He acknowledged the site is probably better at weeding out grossly wasteful organizations than it is at separating the effective from the not-so-effective.

“There arguably could be organizations that have good financials, but their outcomes are not so good,” Berger said.

An explainer on the site says the ratings should not be the only factor when making donations, but the stars overwhelm that message, Berger said. “I think what happens is some people go to the site, they type in the name, they look at the stars, they leave.”

That dynamic incenses [Steve] Butz, a former youth instructor at the Living Classrooms Foundation, a Baltimore-based nonprofit that just opened a D.C. campus. [Butz is president of Baltimore-based Social Solutions Inc., which makes software that enables human services workers to track and analyze program data.]

By rewarding nonprofits for lowering their administrative costs, “you’re valuing whoever can look the most harried and frenzied,” he said. “That’s the person the sector holds up as the gold standard.”

(Snip – full article linked in RESOURCES)

Well over 1 million nonprofit tax exempt organizations are hindered in fundraising by Charity Navigator and its self-styled assistance.

How Charity Navigator leaves you out of its rating system

There are over 1.4 million tax exempt organizations in the U.S. CN measures and lists 5,400 with 1,691 of them receiving 4 stars, barely making a dent in the charitable choices available for potential donors to consider. They limit charitable choice. They do not make the charity marketplace fair, competitive, open and transparent. It is a club with membership requirements.

Charity Navigator was developed to assist donors, not nonprofit organizations.

There are limitations and barriers to be included in the CN club:

• Sources of Revenue: They require public support to be more than $500,000 in the most recent fiscal year.
• Because their goal is to help individual givers, they evaluate only those charities that depend on support from individual givers.
• Length of Operations: They require 4 years of Forms 990 to complete an evaluation. Elsewhere they say they need five years of 990s.
• They eliminate charities that receive almost all of their funding from government grants, or from the fees they charge for their programs and services. Additionally, they exclude charities that report $0 in fundraising expenses, as they are interested only in charities that actively solicit donations from the general public.
• If a particular region of the country is underrepresented in one of those lists, they add to that particular list a reasonable number of the largest available charities from the underrepresented region. They then combine these separate lists into a new master list of charities.
• Very few small and mid-size NPOs will ever be listed. They will be nonexistent to the giving public who use CN to assess charitable giving
• A nonprofit that expends funds on significant evaluation of its programs and participants will be penalized for higher administrative costs
• An international nonprofit that provides security at its offices will have an inflated administrative cost and be downgraded.

They also look at –

• Donor Privacy Policy - In order to meet their criteria, the charity must have a donor privacy policy in writing, guaranteeing that they will not sell or trade their donors' personal or contact information with anyone else, nor will they send mailings on behalf of other organizations. Furthermore, the policy must be prominently displayed on the charity's website or in its marketing and solicitation materials. They review each privacy policy annually when they update a charity's financial evaluation.
• Finally they review also look at CEO Pay, Income Statement, and Mission (if known)
  From their FAQ section:

Why doesn't Charity Navigator evaluate program effectiveness?

At this time, evaluating the effectiveness of a charity's programs is out of our scope. We hope over time to expand the information we provide donors, and that includes developing a methodology for measuring an organization's output. For now we're still seeking a methodology that would allow us to apply a uniform standard to all charities and thus allow us to continue to provide donors unbiased, trustworthy ratings.

They see the IRS Form 990 as a “uniform standard”, an “unbiased, trustworthy” an original source for ratings. I shudder every time I read that. They are not looking at outcomes, impact and results. They and others may never be able to look that deeply to assist the donating public.

The issues of effectiveness - evaluation, outcomes, impact, results and change.

There are more aspects than evaluation, outcomes, impact, results and change. There are also issues of morality, integrity and ethics within each nonprofit organization. The difficulty of reaching a consensus about evaluations will be hard pressed to assess morality, integrity and ethics. Nevertheless they have been part of what has ruined too many nonprofits. The board and other staff failed to uphold standards of morality, integrity and ethics.

Nonprofits that place a high value on vital training on staff, board and constituents for one or more years may be penalized if those expenses are part of administration.

Charity Navigator competes with nonprofits - you - for funding. They are similar to those NPOs that advertise that for $x a child will be fed for one month. This is how CN phrases their plea in fundraising:

It costs Charity Navigator $1,000 to add a new charity to our database, and $100 per year to update each charity on our site.

Projects to Support
Sponsor an updated charity evaluation: $100Your contribution will enable our analysts to update a charity's financial rating and profile using the most recent data available. If you choose this project, please designate your gift as "updated evaluation" and let us know which charity you would like us to update. If current data is not immediately available, we will update the rating as soon as we receive the new information from the IRS.

Sponsor a new charity evaluation: $1,000With this contribution, our analysts will first determine whether or not the charity meets our criteria, then enter up to five IRS Forms 990 and research the charity's profile information. Please contact us if you would like to learn more about this funding opportunity.

Support a year's worth of data: $3,600Help Charity Navigator continue to directly acquire from the IRS every Form 990 filed in America just one month after the document is filed. These purchases are critical in our quest to supply America's charitable givers with evaluations based on timely financial data. With your permission, we would be pleased to recognize your support on our website. Please contact us if you would like to learn more about this funding opportunity.

Sponsor a block of charities: $8,500 Are you interested in seeing more evaluations of charities in your area, or in a specific charitable cause? Our analysts will review and select up to 10 new charities in your chosen area, determine if they meet our criteria, and prepare evaluations for our website. Please contact us if you would like to learn more about this funding opportunity.

Sponsor a study: $10,000Our in-depth studies, such as the Metro Market and CEO Compensation Studies, require that our analysts update thousands of charities and conduct additional analysis of their fiscal performance. Your contribution will help defray the costs of updating the ratings, compiling the findings and preparing these reports. Please contact us if you would like to learn more about this funding opportunity.

As you search for charities on the CN web site your search is interrupted by a solicitation for funds (emphasis in the original):.

Please contribute to Charity Navigator today. Your donation does so much good for so many--read on to find out how!

Dear Friend of Charity Navigator,

What do all of these GREAT CHARITIES doing GREAT WORK have in common?

These 9 [listed in the ad] are among an exceptional group of 1,691 charities receiving Charity Navigator’s coveted 4-star rating.

Charity Navigator rates itself as a four-star nonprofit worthy of contribution.

Conclusion

The third sector needs to be able to demonstrate to the giving public effectiveness, evaluation, outcomes, impact, results, change, morality, integrity and ethics which carry the worth of a nonprofit organization

CN has no way to measure the accomplishments or lack thereof in any charity. They have no clue what is happening as the result of the work of charities. They cannot demonstarte the change in peoples' and communities' lives affected by nonprofit groups.

They show a small wedge of light about very few charities and then claim they are the beacon on the mountain shedding light for all donors to know where wisely to give. The workhorse small and mid-size nonprofits on the Side Streets of America are not members of the CN club and are not listed on the CNN use of CN information.

CN does not and cannot show effectiveness, evaluation, outcomes, impact, results, change and morality, integrity and ethics which carry the worth of a nonprofit organization, not fiscal information.

CN does not show us their own annual 990 and other fiscal information about themselves and yet they are asking for donations. CN, because of its own serious limitations, does not help charities receive the deserved help they need. CN is a barrier to charitable giving. Our evaluations have helped millions of donors pursue effective philanthropy and influenced billions of dollars in charitable donations. But only to their club membership.

The organizations recognized by CN as worthy of four stars, the highest rating, help in the complicity against small and mid-sized nonprofits by emblazing its four star salute from CN as if it truly means something, that it is credible. The NPOs that receive the four star salute and list it at their web site have fallen into the trap of supporting CN in its meager selection of charities worth contributions. Some of those NPOs know it is a misleading rating and they short change their sister and brother groups that do not even get into CN’s website yet they put the rating up for all to see. They may be four stars but they are also being phony.

In a speech at the (Valuing Impact) conference, CN CEO Ken Berger said that sometimes he cannot sleep for worrying that Charity Navigator’s ratings (of up to 4 stars) “may do more harm than good”.

http://www.philanthrocapitalism.net/wp/2009/05/analyze-this/

Do you think?

Charity Navigator has to be called out about its weaknesses and fallibility. If the voices of the small and mid size nonprofits are not heard nationally and in local communities, nothing will change - for you. Do not be surprised if Ken Berger shows up in your area and lists the worst charities for the news media in the area. If you are one of them, what happens next?

What are your thoughts about Charity Navigator and evaluations of nonprofits for donors? What do you think can help the situation?

RESOURCES

Charity Navigator, http://www.charitynavigator.org/

Charity Navigator's New Course, Chronicle of Philanthropy, July 13, 2009.
http://philanthropy.com/giveandtake/article/1123/charity-navigators-new-course

Charity Ratings Based on Administration Costs can do More Harm Than Good by Saundra Schimmelofennig, May 20, 2009

http://informationincontext.typepad.com/good_intentions_are_not_e/2009/05/emphasis-placed-on-the-percent-charities-spend-on-administration-can-actually-lead-to-increased-wast.html

Charity Rankings Giveth Less Than Meets the Eye - The Ratings of Nonprofits Are Often Uncharitable, Sometimes Failing to Credit Crucial Factors Such as Success, Wall Street Journal by Carl Bialik, The Numbers Guy, December 19, 2008

http://online.wsj.com/article/SB122963299671419401.html

Nonprofit Leaders Meet to Discuss Driving More Funds to High-Performing Organizations, from Alliance for Effective Social Investing

http://www.alleffective.org/index.html

The Fallacy Of Financial Ratios: Why Outcome Evaluation Is The Better Gauge Of Grant Worthiness by Tony Poderis

http://www.raise-funds.com/100402forum.html

See the June 1, 2009 blog about outcomes by Ken Berger, the President of CN: Announcing an Open Forum on Outcomes

http://www.kenscommentary.org/2009/06/announcing-open-forum-on-outcomes.html

Ethics and Nonprofits, Stanford Social Innovation Review by Deborah L. Rhode & Amanda K. Packel, Summer 2009

http://www.ssireview.org/articles/entry/ethics_and_nonprofits/

Making sure that the dollars do some good, Washington Business Journal - by Jonathan O'Connell Staff Reporter, January 30, 2009

http://washington.bizjournals.com/washington/stories/2009/02/02/focus1.html

Rating the Raters, National Council of Nonprofit Associations and the National Human Services Assembly 2005

http://www.nydic.org/nassembly/documents/Rating_the_Raters_Final_3%20.pdf

The American Institute of Philanthropy (AIP) is a nationally prominent charity watchdog service whose purpose is to help donors make informed giving decisions, American Institute of Philanthropy http://www.charitywatch.org/

For Charities and Donors, Better Business Bureau for Charities and Donors http://www.bbb.org/us/charity/

Standards and Best Practices, Evangelical Council For Financial Accountability http://www.ecfa.org/Content/ECFABestPractices.aspx

Wise Giving to Charities, Compiled by Daniel Borochoff President, American Institute of Philanthropy http://www.heartsandminds.org/articles/wisegive.htm

Evaluating Charities: How do I choose?

http://www.libraryspot.com/features/evaluatecharities.htm

The Basics: How to tell a good charity from a bad one by Liz Pulliam Weston CNN/MSNBC

http://moneycentral.msn.com/content/Savinganddebt/consumeractionguide/P58021.asp

To What End? The Importance of Outcomes and Performance by Mario Morino, Venture Philanthropy Partners, April 2008

http://www.vppartners.org/learning/enews/archive/2008/apr08.html

Analyze This from blog philanthrocapitalism by Matthew Bishop & Michael Green

http://www.philanthrocapitalism.net/wp/2009/05/analyze-this/

Social Value Assessment Tool For Nonprofit Organizations in the Public Sector For Use by an External Evaluator by David Hunter and Steve Butz, June 20 2009

http://www.alleffective.org/docs/Nonprofit-Social-Value-Assessment-Questions-Version7.pdf

CN is not the only group attempting to measure the work of nonprofits. Here is a partial list of others attempting to rate quality from the blog Philanthropy 2173:

http://philanthropy.blogspot.com/2008/11/information-markets-in-philanthropy.html

Charity Navigator is the most visible nonprofit rater and is a media darling as detailed below from their web site:

“Last year alone, more than four million donors used the site that TIME Magazine called "One of America's 50 Coolest Websites for 2006." Additionally, the site is a two-time Forbes award winner for "Best of the Web," was selected by Reader's Digest as one of the "100 Best Things about America," and was chosen by PC World as "One of America's Top Websites." In 2007, BusinessWeek inducted Charity Navigator into its "Philanthropy Hall of Fame" for "revolutionizing the process of giving." Charity Navigator was singled out in 2006, 2007 and 2008 by Kiplinger's Financial Magazine as "One of the Best Services to Make Life Easier" and Esquire Magazine recently told its readers that using our service was one of "41 Ways to Save the World."

Charity Navigator's leaders have provided expert analysis and commentary on the charitable sector for The Factor with Bill O'Reilly, most CNN programs, and each of the network morning shows--NBC's The Today Show, ABC's Good Morning America, and CBS's The Early Show. We have also appeared on FOX News, CNBC, NBC Nightly News with Brian Williams, The Newshour with Jim Lehrer, Nightline, and Comedy Central's The Daily Show, among others, and served as contributors to National Public Radio programs Morning Edition and All Things Considered. We have been profiled in Fast Company magazine, Contribute, CFO Magazine, and The Washington Post, and quoted in nearly every major American newspaper or weekly magazine. We have published editorials and articles on charity accountability, the role of government regulation in the charitable sector, fund-raising ethics, and non-profit leadership in such newspapers as The Atlanta-Journal Constitution, The Chronicle of Philanthropy, The Seattle Post-Intelligencer, and The Los Angeles Times.

In order to expand our reach and better meet the needs of our users, Charity Navigator has worked hard to establish strategic partnerships with industry leaders in other sectors. We partner with CNN to identify and highlight charities for the global network's Impact initiative, with the World Economic Forum to review and approve prospective global leaders, with Foundation Source to supply philanthropists with quantitative research data to use in making charitable investments, and with Network For Good to offer the convenience of online giving.”

Now that is scary stuff.