Websites shine light on charities

But rating nonprofits for effectiveness is proving to be difficult

Published: Saturday, May 19 2012 9:10 a.m. MDT

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Marcia Wallace doesn't go to charity dinners. She hates auctions and door-to-door cookie-dough fundraisers.

"I don't need to be entertained," she says. "I want to give my money to charity, and I don't want to waste one penny."

To accomplish this goal, Wallace, a retired senior-level banking executive, has worked out a systematic approach to selecting charities. When nonprofits call her on the phone asking for money, the 64-year-old wants to know just one thing: "Do you have a four-star rating with Charity Navigator? No? Well, call me back when you do."

Intelligent charitable giving isn't a new idea, but at no point in history have everyday people had access to such sophisticated tools to make sure money is put to best use. Over the past decade, more than a half-dozen organizations devoted to rating nonprofits and educating donors have set up shop online. Websites like Charity Navigator, which is arguably the best-known nonprofit rating system in the country, have changed the giving game, not just for donors, but also for nonprofits.

More than just an informational resource, they have become powerful watchdogs in the nonprofit world.

Some worry, though, that charity rating systems do more harm than good. Because of a scarcity of public data about charities, organizations like Charity Navigator are forced to analyze nonprofits narrowly, putting a lot of emphasis on financial statements and largely ignoring an organization's impact.

Charity accountability

When Charity Navigator launched 10 years ago, the nonprofit world was embroiled in scandal. At Covenant House, the largest privately funded agency in the U.S. providing shelter and food to homeless and runaway youth, the founder and CEO had been accused of sexual and financial misconduct. William Aramony, CEO of United Way, was facing criminal charges for fraud. Concerned, self-made millionaire couple John P. and Marion Dugan went looking for a third-party, objective source of information to help guide them in their giving.

There were already a few organizations, like Guidestar, on the scene that supplied information about nonprofits for donors. But the Dugans wanted experts to interpret the complex reports for them. And they wanted it to be free of charge.

"They couldn't find it," said Ken Berger, president and CEO of Charity Navigator. "So, being entrepreneurs, they created it."

With a similar goal in mind, more than a half-dozen charity rating organizations, like Root Cause and Philanthropedia, would follow over the next decade.

The increasing interest in rating organizations is driven in part by a loss in trust among donors, Berger said. Seventy-one percent of Americans still trust nonprofits more than the government and for-profit ventures, according to a survey conducted for the American Express Leadership Academy, but that's down from 90 percent 10 years ago.

"For a long time, there has been this assumption to one degree or another that all charities are good because they are mission driven and not about the money," Berger said. "We are swimming in a sea of change. Cynicism is growing. If you poll a lot of charities, you will find that more and more and more and more of them are getting demands for accountability from funders."

When Charity Navigator started out, Berger said nonprofits were reluctant to provide information.

"You could hear a pin drop," he said.

As of 2008, only 13 percent of nonprofits were posting their audited financial statements online, according to research conducted by GuideStar. Less than half of nonprofits surveyed posted their annual reports online and only 3 percent provided public proof of their tax-exempt status.

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