New Ways to Rate Charities Don’t Help Donors Make Smart Bets
By REBECCA THOMAS
MANY OF US in the nonprofit world cheered when the watch- dog group Charity Navigator
threw in the towel on an evaluation system that focused narrowly on the percentage of expenses a charity spends on
overhead—a naïve indicator of nonprofit
efficiency and effectiveness.
Now a new movement is under way,
in the form of a cornucopia of nonprofit
ranking and assessment tools and Web
sites. These rating sites choose favorites, award gold stars (or their equivalent), and declare victory as they anoint
charities “impactful” and worthy of a
donor’s investment. But it is far from
clear that the new systems are any better than the ones they seek to replace,
and both donors and nonprofits need to
beware of the potential trouble spots.
Better would be to provide donors with
a truly meaningful blend of information
about an organization’s leadership, direction, revenue model, capital needs,
and program results.
The aspirations of the ratings movement are well intentioned. That philanthropists should focus less on a handful
of financial measures and more on the
connection between investment dollars
and program results is a given. Most
people would also agree that donors
will benefit from new sites that make it
easier to compare charities and that aggregate critical data in one place.
Encouraging openness among non-profit organizations is a critical goal for
anyone who cares about improving philanthropy. Charity Navigator’s recent-
It is far from clear
that the new charity
are any better
than the ones they
seek to replace.
ly announced efforts to catalog whether nonprofits make information easily
available on their governance and ethical practices, finances, effectiveness,
and results is one step in the right direction.
Equally important is the growing interest in more comprehensive information about financial health.
While financial strength does not
guarantee nonprofit effectiveness, financially strong organizations are far
more likely to have the leadership,
staffing, systems, and working capital in place to support successful programs. They stand a better chance of
recovering from mistakes and successfully adopting new, often risky opportunities.
But little attention has been focused
on the flaws in the new approaches to
ranking charities. A review of some of
the more prominent ratings systems
raises more questions than it answers.
While the rating models are different—
some offer Morningstar-style reports
based on an array of criteria while others depend on votes from experts or re-
viewers—certain widespread trends
Among the most prominent weak-nesses in the new systems:
Selection bias leads to herd mentality. In selecting “whom they know”
(or whom their “experts” know), many
ratings sites are rallying potential donors around a small number of nonprofits from a handful of arenas that may or
may not have the best solution for a given social challenge or opportunity. At
worst, it can seem at times like a popularity contest. How will this bias affect
highly effective charities that don’t ever
make it to the ratings table?
“Expert” affiliations aren’t always disclosed. Some of the new
sites are cloaked in too much secrecy.
We need to do a better job of disclosing potential conflicts of interest. Donors should demand that anointed experts disclose any relationships they
have with nonprofits they might be rating—board participation, volunteer association, grant maker, consultant, or
the like. Anonymity should not be an
Many new measures are arbitrary, inconsistent, and misleading. New measurements of financial
condition are, thankfully, replacing the
old rating gold standard: the comparison of spending on overhead and fund
raising versus a charity’s direct efforts
to carry out its mission. But new criteria that lead ratings sites to claim “cost
effectiveness,” “scalability,” and “
financial sustainability”—to name just a few
frequently cited in the rankings—are
often no better indicators of nonprofit
effectiveness than the overhead comparisons.
In some cases, the criteria used for a
specific assessment aren’t disclosed so
comparability across organizations is
questionable. In other cases, the definitions and standards are not grounded
in a nuanced understanding of nonprofit economics: They fail to account for
the variety of sound business models,
capital structures, and investment requirements.
Indeed, while Charity Navigator has
expanded its ratings methodology, it
continues to score organizations on “
efficiency” and “capacity” based on measures of how much a group spends in
specific categories and growth rates
that do not take into account the individual circumstances that might guide
a decision to expand or reduce a charity’s operations to improve its quality
Other charity-watchdog sites do no
better. Alarm bells went off in my head
when I was reading one site’s descrip-
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The Tea Party’s Grass-Roots Groundswell Holds Lessons for the Nonprofit World
AT LEAST since the Harvard schol- ar Robert Putnam turned “bowl- ing alone” into a social malady,
the philanthropic world has been encouraging Americans to become more
involved in the nation’s civic life, and
especially in elections. It has supported
efforts to increase voting, develop “
social media” and other types of grass-roots communications, and participate
in a wide range of community-service
activities, including “service learning”
classes at all levels of education.
How much impact those efforts have
had remains debatable. But many of
their advocates saw the election of
Barack Obama as president two years
ago as a sign they were working and
that American politics was becoming
more enlightened as a result.
Although the outcome of the elec-
tions was also driven by a grass-roots
movement that brought many Ameri-
cans who had been on the sidelines into
the political process, no such reaction
is likely this time. Part of the reason is
that the philanthropic world had little
to do with this effort. But also, many
nonprofit leaders have reacted with
dismay to it—though they are
misguided in doing so.
them were members of minority groups.
Not all the candidates the
Tea Party members backed
won, but enough did to give
conservatives, who were all
but pronounced dead two years
ago, an overwhelming victory.
Tea Party groups supplied
the energy that enabled the Republican Party to take control of the U.S.
House of Representatives by a comfortable margin and cut substantially into
the Democratic majority in the Senate.
They also helped it capture legislative
bodies in 19 states (at last count), including some places where Republicans
had not been dominant for more than a
century. With Congressional redistricting about to occur, these statehouse
gains could have long-term political significance.
Despite accusations by their oppo-
nents, money from wealthy donors and
businesses played only a small role in
these triumphs. To be sure, conserva-
tive and libertarian donors supported
organizations, such as Freedom Works,
a Washington advocacy group headed
by the former Republican Rep. Dick
Armey, that gave considerable assis-
tance to Tea Party chapters.