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

Rating types:

  • 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.
  • Accountability and Transparency Rating: Each organization starts with 70 points from which points are deducted based on a number of items such as having fewer than five board members, not having a conflict-of-interest policy, not publishing a donor privacy policy on the website, not having a CPA audit.

Commentary: Isn't it ironic that Charity Navigator -- which rates nonprofits for accountability and transparency -- is neither transparent about its ratings protocols nor responsive to protests and complaints from nonprofits they have rated? And where is the evidence that organizations with "low" percentages of admin costs and a donor privacy policy are more effective?

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.

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Comments

Thanks for the details. This is very good information to have for donors and Charities.

I don't agree with your comment about Charity Navigator not being transparent about their methodology. There are many areas on their web site (including videos) where this is explained....such as http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=1526

Interesting comment about transparency, submitted by Anonymous. - Pete Non profit manager Puente a la Salud Comunitaria www.puentemexico.org.

They say what helps you get more points or fewer points, but not the number of points or the weighting. To me that's not transparent.

Thank you for pointing out that at Charity Navigator we go to great lenghts to be very transparent in how we rate charities. We've always been up front with our methodology so that charities and donors can follow our analysis.

From Bill Huddleston, The CFC Coach

A few clarifications about the Combined Federal Campaign (CFC):
1. In terms of the applications, all non-profits must submit a full 990, even if they are not required by the IRS to do so. A "pro-forma" 990 is accepted if the charity does not usually file one. The reason for this requirement is that the overhead rate is calculated from 2 numbers that are only on a full 990.

2. There are three size criteria, and the application requirements are more stringent as the size increases. The three categories are (1) Less than $100,000 in revenue, (2) $100,000 to $250,000 and (3) Greater than $250,000.

3. There are three types of CFC charities: National, International, and Local. At present there are about 1500 national and international and the 20,000 figure mentioned is the number of local charities.

If you would like to learn more about the CFC, please send an e-mail to billhuddleston at verizon dot net with CFC Special Report in the subject line, and I'll be glad to send it to you. Thanks! Bill Huddleston, The CFC Coach

An interesting omission in this report is an acknowledgement that the vast majority of nonprofits will never hit the radar of these groups. The small in the weeds social service agencies under $1 million might appear in a CFC catalogue but the other organizations would never look at them – too small. The other point not addressed is who is the audience for these ratings? I can find no place on any of organizations’ website indicating how they are really used and what impact their assessments have on the donation process. Is there any empirical data showing that these organizations have any significant impact on donations to those agencies they have rated?

Excellent points. The question of audience is very much un-answered, and the question fo impact of these sites is important. We discuss that a bit in Part II, but there isn't research from any reliable sources we can find. If you have data or thoughts about this, please give us your contact info and we'd love to talk. Jan

Jan, I have some experience working for an organization that did not receive favorable ratings but was able to sustain much of its fundraising activities. What I did find were individuals who went to state sponsored websites listing fundraising contracts and the amount of monies an organization was likely to receive were more inclined to shy away from an organization because they had a 'bad' rating. It might be possible to do a year over year analysis of fundraising success of an organization that had a significant change in its rating if you could get Guidestar to be involved in the data analysis. While this would not state definitely that the rating was the cause, it would provide some indication as to whether a rating had any influence on donations.

When I ran a nonprofit that had a 501(c)3 and a 501(c)4, as well as a 527 and a connected PAC, we had a less than 4 star Charity Navigator rating. This was primarily because many staff split their time between the c(3) and the c(4), and thus under the law their salaries were split according to time spent on various projects, between the c(3) and the c(4). Charity Navigator would only count the c(3) part of staff salaries, and the c(4) allocated costs were primarily program expenditures. Thus,our proportion of M&A cost vs. c(3) salary expense was inappropriately weighted toward the M&A side, and our rating was lower than it should have been. We appealed a number of times to Charity Navigator, and their answer was that their model wouldn't allow them to acknowledge this reality in their ratings. It was discouraging, but frankly, most of our donors didn't seem to care because the quality of our organization's work was well known.

Jan et al, please check out the Charities Review Council's approach, www.crc.org, likely the grandfather of them all (40 yrs) and possibly the most comprehensive (albeit time consuming to compete the application), as the saying goes, "garbage in, garbage out."

Check that: Charities Review Council is www.smartgivers.org

"The other point not addressed is who is the audience for these ratings?" Well, anecdotally, there's a lot of everyday people out there who feel vaguely suspicious of charities and nonprofits and seek The Very Best place for their funds. As a fundraiser, I hear this skepticism referred to regularly.

What's your opinion on ECFA - Evangelical Council for Financial Accountability? ECFA is an accreditation agency dedicated to helping Christian ministries earn the public’s trust through adherence to Seven Standards of Responsible Stewardship™, which focus on board governance, financial transparency, integrity in fundraising, and proper use of charity resources.

I know that the ECFA program has built quite a admirable  program over the years.

Jan -- Thanks for a great article! You raise some very good points about the evaluation methods of the rating systems and problems with some of the rating organizations. And I couldn't agree more that smaller organizations are almost always overlooked. I have always found this frustrating since they are the ones that need our support the most. I'm confident that all of these rating organization are trying hard to give us better information and detailed reports about the organizations we are putting money into, but I don't think any one of them alone gives us a clear view. I've come up with a slightly different solution. On Givalike, we offer an aggregated view of this information (aka a "one-stop shop"). We also provide links to reports like GuideStar and NCCS so that donors can easily access even more information about nonprofits. It's not a perfect solution, but I think it's better than anything else out there right now. I'd love to hear your thoughts and can't wait to read part 2 of this article! Thanks! Ben Katz, CEO - Givalike.org

CharitiesReview Council in MN is another option.  Qualifying to be certified by CRC has made our non-profit much stronger as an organization. 

 

Mary Jo Schifsky
Executive Director

Store to Door
 

I wanted to register my concern about these "rating" organizations mentioned in your 
recent newsletter. How do we educate them? Rating organizations based on 
program/admin ratios instead of impact?? They all need to watch Dan 
Pallotta's TED Talk. So frustrating to see they are part of the problem 
instead of the solution.
 

Woods Bowman's article "Should Donors Care About Overhead Costs? Do They Care?" in Nonprofit and Voluntary Sector Quarterly (May 2006), touches on the question of the influence of overhead ratios, a major concern of several ratings services. "...several charity “watchdogs” have adopted standards for program spending.8 Silvergleid (2003) used multiple regression to analyze the relationship between lagged donations to a charity and its rating by the American Institute of Philanthropy. After controlling for size, year, subsector, and organizational characteristics, he found that neither rating nor a change in rating had a statistically significant effect on donations. He found some evidence that giving to regionally focused charities in Minnesota responded to whether they met the standards of the local Charities Review Council (CRC); however, his Minnesota sample consisted of only 125 charities, of which 86% received perfect evaluations across all 4 years in his study, so it is a suspect result." (p. 294)

Very informatve

Did this article push the announcement I received today?

In a historic move, the leaders of the country’s three leading sources of information on nonprofits – GuideStar, Charity Navigator, and BBB Wise Giving Alliance – penned an open letter to the donors of America denouncing the “overhead ratio” as a valid indicator of nonprofit performance.

I hope so!!

How timely. Did you see the email put out by BBB, Charity Navigator, and Guidestar about overhead? http://overheadmyth.com/ I have my opinions, but curious about your thoughts.

Dear Editor, Thank you for framing an important question! I will add a good African proverb, "Only the donkey knows how hot the ground is'. I would extend that to rating companies and our actual nonprofit organizations. We need to lead from the grassroots up . .always . . as complicated as it sometimes, and/or as empowering as it is during our best times! Saludos, Pete Noll

You might be interested in my tale about the role of Guidestar and Great Nonprofits during the response to the Haiti earthquake in 2010.
http://www.ceffect.com/blog/effectiveness/my-worst-nightmare-is-now-true...

Another area you might want to review is the interlocking relationships between the raters,like GuideStar and Great Nonprofits.

As the raters attempt to move beyond financial issues to measuring impact, I fear even more what their analysis will reveal. For example, you may wish to look into GiveWell,which seems rarely to have met a charity it feels has done any good.

And here's my concern about who is deciding what impact we should care about exactly.
http://www.ceffect.com/blog/effectiveness/hope-dignity-and-quality-of-li...

Rather than rating charities herself, Saundra Schimmelpfennig was working on a process to help guide donors understand what to look for and what questions to ask http://thecharityrater.com/rater/index.php?sid=89988 I'm not sure what the status of this is, worth looking into.

A major oversight in this article is Philanthropedia, which has a different and (in my opinion) much better ratings system than the others. I encourage you to check it out. http://www.myphilanthropedia.org

Since Charity Navigator launched its service in 2002, we have always been 100% transparent in how we rate charities. All you have to do is go to the methodology section of the site www.charitynavigator.org/methodology to see in detail how the ratings are determined.

Charity Navigator's analysts are always accessible to any charity that has a question about its rating. We answer all such inquiries so we dispute the claim that we're unresponsive. We even give them the opportunity to post information on their page on our site about their rating.

As to the question about the relevance of financial efficiency, please read our President & CEO's blog on the topic: http://www.kenscommentary.org/2013/06/the-best-and-worst-way-to-pick-charity_17.html

It is truly unfortunate that you are spreading false information about CharityWatch, also known as the American Institute of Philanthropy in a public session at the Independent Sector and in your two Charity Rater articles. Please correct your false articles and your speaking notes. We do far more than you falsely claim that we do. Just last Monday regulators from your own state of California told us me that CharityWatch's work played a major role in its recent case against the founder of Help Hospitalized Veterans. This was after decades of poor ratings from CharityWatch, numerous critical articles from us, and even spurring U.S. Congressional hearings in 2008 on this charity and other poorly performing veterans charities. There have been a number of problematic groups that we have been the only raters to early on stick our necks out to warn the public about. Contrary to what you have written and said we pointed out financial wrongdoings and gave a "?" grade to Central Asia Institute a year before the 60 Minutes piece. 60 Minutes came to us for that story and said that we were one of the main pillars of it. http://www.charitywatch.org/articles/CentralAsiaInstitute.html Your Charity Rater articles also falsely claims that in-kind cash donations are not included in revenue on the IRS form 990. This is not correct. Nonprofits report billions of dollars of in-kind goods in their IRS form 990 income numbers. In-kind services are not included in the tax form, though many groups go ahead and include it anyway. This was probably the first article about how nonprofits were wildly evaluating gifts in kind. It involved years of discussions and heated questioning with honest insiders in the field. Hardly something that could be written by simply comparing forms and audits as you wrongly claim in your article. http://www.charitywatch.org/articles/valueinwonderland.html Sadly, you and others in the nonprofit field are making a hugh mistake in telling people that spending rations are not important. We are motivated now more than ever to alert the public about how nonprofits are really spending their donations. http://www.charitywatch.org/articles/overhead_ratios_essential.html

Daniel Borochoff

President CharityWatch

charitywatch.org

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