Charity Raters Part I: Charting the Bad and the Bad
Wouldn't it be great if there were an objective rating system so that donors could choose the best nonprofits to donate to just as investors use rating agencies to pick the best companies to invest in? Don't answer; it's a rhetorical question. Here's what you need to know about some of the best-known charity rating organizations:
In this Part I of a two-part article, we take a fast look at six charity raters -- Charity Navigator, Charity Watch, Better Business Bureau, GuideStar, Combined Federal Campaign (CFC) and Great Nonprofits -- and who they rate and the criteria they use to rate them. In Part II in our next issue, we'll cover what you should do to manage your nonprofit's ratings, and what we should do collectively as the nonprofit community.
1. Charity Navigator is the heavyweight: the best known and the most often quoted. As a result, they are influential beyond just how they rate individual nonprofits.
Who they rate: About 6,000 of the largest U.S. 501(c)(3) nonprofits with revenue of more than $1 million including public support of more than $500,000
- 4 stars: exceptional
- 3 stars: good
- 2 stars: needs improvement
- 1 star: poor
- 0 stars: exceptionally poor
- Donor Advisory: "Serious concerns have been raised about this charity"
How are ratings determined? The two core areas in Charity Navigator are:
- Financial Health Rating, based on a combination of seven metrics from IRS Form 990. The exact formula is proprietary (that is, secret). Charity Navigator favors organizations with low percentages of fundraising and administrative costs. They also favor organizations that are growing. Data comes from the 990 and as a result does not include in-kind contributions such as donated food or volunteer time, making organizations such as food banks and hospices look inefficient. Note that in contrast to audit guidelines, Charity Navigator attributes all "joint costs" to fundraising.
2. Charity Watch, formerly the American Institute of Philanthropy (AIP), is a paid service which charges $50 to access their ratings.
Who they rate: about 600 national nonprofits with revenues of $1 million or more, including some C4s "of national interest" such as the ACLU and the Sierra Club.
Rating types: Grades A+ to F
How are ratings determined? In a direct slap at Charity Navigator, Charity Watch says "no to robo-ratings" and claims its analysts "dig deep" by looking at audited statements as well as the 990. But if they do more than compare those two documents and do a web search to see if a local paper has reported a scandal, it doesn't show. Financial criteria include:
- 60% or more spent on charitable activities
- 35 cents or less to raise $1
- Small reserves -- assets of more than 5 years' operating expenses results in an F grade
Commentary: Charity Watch says, "The nonprofit sector has little oversight and much room for financial manipulation." We say: Charity Watch has no oversight and misleadingly manipulates nonprofit financial data. And: it's going to cost more to raise fundraising dollars for new and controversial causes . . . perhaps inadvertently, Charity Watch favors conventional organizations with good accountants.
3. Better Business Bureau/Wise Giving Alliance, in a case study of brand confusion, issues the BBB Wise Giving National Charity Seal which states "BBB Accredited Charity." Nonprofits that meet their criteria must pay for the seal on a sliding scale from $1,000 to $15,000/year.
Who they rate: About 1,300 national nonprofits; in addition about half of local BBBs have review programs that in total review another 10,000 nonprofits
How are ratings determined? BBB's long list of process objectives is reminiscent of the old United Way checklists. There are four areas, each with a set of standards which are graded "met" or "not met." Below are some examples:
- Governance: five or more board members; three in-person meetings per year; no more than 10% of board members are paid; etc.
- Effectiveness: "Board has a policy of assessing no less than every two years the organization's effectiveness"; annual written report from staff to the board assessing effectiveness; etc.
- Finance: 65% or more of expenses are program expenses; unrestricted reserve of three years or less; board approval of budget; etc.
- Fundraising: "Solicitations are . . . accurate, truthful, and not misleading"; publishes annual report with mission statement and financial information; provides opt-out for donors who do not want their names disclosed; etc.
Commentary: Emphasis on processes and documents inadvertently favors large, conventional organizations with lots of conventional processes. And there's something distaseteful about charging such high fees for the seal (although it's a good business model for BBB?).
4. Combined Federal Campaign (CFC), the workplace giving vehicle for federal employees. Not technically a "rater," CFC has a lengthy enrollment process for nonprofits to be included; as a result, inclusion in CFC is seen as a kind of certification or accreditation.
Who they enroll: about 20,000 health and human service organizations, including some international nonprofits
Criteria for enrollment: The application for annual acceptance includes a long list of criteria, such as:
- Submit a Form 990 if required to do so
- Certify that it is "directed by an active and responsible governing body . . . a majority of which serve without compensation"
- Certify that contributions are "effectively used for the announced purposes of the charitable organization"
Commentary: In addition to the national name-brand nonprofits, many community-based organizations obtain important contributions from constituents who are federal employees. CFC has low hurdles, but it takes an estimated 2 - 3 days to complete the application.
5. GreatNonprofits: the Yelp or Zagat of nonprofits. Staff, volunteers, board members, clients, audience members, donors and anyone can post their reviews of nonprofits. Other raters (such as Charity Navigator and Guidestar) and donation platforms (such as JustGive and GlobalGiving) have click-throughs to GreatNonprofits' reviews.
Who they rate: GreatNonprofits provides a page for every nonprofit listed on Guidestar. There are currently 150,000 reviews of about 16,000 nonprofits.
How are ratings determined? Anyone can write reviews anonymously or signed, and choose a 0 - 5 star rating to go along with the review.
Commentary: Too often the posted reviews sound like jargon-y press releases written by the nonprofit's staff, or ill-informed donors who were wow-ed by (and repeating) an organization's fundraising materials, or by a crank. But when you see something authentic -- whether positive or negative -- it has meaning. And at least there's the opportunity to look at impact, not just irrelevant financial ratios.
6. Guidestar: the semi-official site for nonprofit 990s and other information. GuideStar does not rate nonprofits, but publishes information about nonprofits, allowing the reader to bring his or her own assumptions to analyzing the data. Much information is free (although you have to register) and paid services are offered as well.
Who they have information for: about 1.8 million nonprofits
What information is available free on Guidestar:
- Form 990 for most recent years (which includes financial information, board member roster, compensation of some top staff, etc.)
- Mission statements and impact statements if the nonprofit has uploaded them
- "Charting Impact Report," a statement by the nonprofit that responds to narrative questions
- For a fee: "Premium Report" (about $125) which combines 990 information over several years along with nonprofit-submitted information and "Financial SCAN" ($250) which graphs nonprofit financial information from the 990 over several years
- Nonprofits that upload additional information (such as the audit) to Guidestar Exchange get the "Guidestar Exchange Seal" as a "Valued Partner" (remind you of a "participation ribbon"?)
Commentary: For the most part, GuideStar offers information rather than making judgments. We like this approach.
Next issue: Part II of this article with analysis of what your nonprofit should do about your ratings, and what our nonprofit community should do about these rating agencies. And if you have comments on what we should write in Part II, let us know that, too.
Thanks to Leslie Hatamiya for assistance with this article.
Jan Masaoka is publisher of Blue Avocado. She has developed her own proprietary protocol for rating chocolates.> Read more