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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

Using tax information recently made publicly available through the IRS, though, organizations like CharityWatch and Charity Navigator are trying to push nonprofit financial dealings into the light. Last year, Charity Navigator launched an additional measure of accountability, which measures transparency and anti-corruption controls within nonprofits

Their reports heavily influence donor behavior — and, as a result, nonprofit behavior.

Changes in a nonprofit's Charity Navigator rating has a "very robust" correlation with a change in contributions, according to a study conducted by the University of Wisconsin-Milwaukee. Using a random sample of 405 charities, researchers observed charities that boosted their ratings saw an increase in contributions. Organizations that had a decline in ratings also saw a decline in donations. Similarly, a survey of Charity Navigator users revealed 60 percent changed which charities they supported after viewing ratings. Forty-three percent of users said they altered the number of charities they support. Twenty-one percent said they tweaked the amount of money they donate to charity.

Under pressure to keep and attract donors, nonprofits are heavily invested in keeping ratings up. Since Charity Navigator started implementing its new transparency and corruption standards, a full 25 percent of nonprofits have changed the way they do business.

"We're responsive to feedback from rating organizations," said Carl Arky, spokesman for the Humane Society of Utah. "We have to be. We rely on the kindness of strangers to do our work. If you're asking people to support you, I think it's your duty to be candid."

Evaluating a good deed

Berger speaks of Charity Navigator's mission with almost reverenced tones. He sees the organization as a watchdog, protecting donors from unscrupulous practices.

"We are a voice for donors," he said. "And we're not afraid to be blunt."

Some argue, though, rating systems, which overwhelmingly focus on analyzing financial data, only capture part of what makes a nonprofit successful. While concern about how their money will be spent does rate high on a donor's list of priorities when choosing charities, according to research from Hope Consulting, donors are equally concerned about the impact a nonprofit is having on the community.

"The rating organization must be very clear that they are only rating certain types of charities on certain criteria," said Diana Aviv, CEO of Independent Sector, the country's leading coalitions of nonprofits, foundations and corporate giving programs. "Too often we're using a yardstick that isn't good enough to apply to everyone."

Nonprofit finances aren't as cut and dry as watchdog organizations might lead the public to believe, Aviv said. For example, ratings organizations tend to look down on nonprofits with high fundraising expenditures. But, if a nonprofit is going to take on a big project, it will often have to spend money wining and dining wealthy donors in order to bring in the needed cash.

As a result to one-size-fits-all approaches to rating, a 2010 study from Syracuse University concluded watchdog groups are biased against smaller organizations. Economies of scale make larger charities seem more efficient.

"If they spend in huge amounts and net nothing, that's not a good use of money," Aviv said. "But to really understand what's going on, you have to know the context and the timing."

Berger is candid about Charity Navigator's shortcomings. A decision to add transparency standards last year was an attempt to make ratings more comprehensive. Now, the organization is working with several universities across the United States to devise a method for measuring nonprofits' effectiveness.

It has been a difficult road. Charity Navigator initially hoped to launch the additional measure this year, but now, after two years of research, Berger said, "What we have learned so far is that publicly available information on the results of charities is pathetic."

The problem is rooted in the nature of the nonprofit sector.

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