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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

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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.

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.

"A lot of what the nonprofit world does is put smiles on people's faces," said Leslie Lenkowsky, a professor with the Center on Philanthropy at Indiana University, who is working with Charity Navigator to develop a tool to rate the effectiveness of charities. "It's hard to measure the value of a smile."

For this reason, Aviv argues charity watchdog organizations should steer clear of attempting to rate nonprofits on efficiency.

"It's almost impossible to understand how they would do that," she said.

She does maintain, though, nonprofits should be tracking their own progress and reporting back to the public — a practice, she said, not many embrace. It's also imperative, she said, that donors stop basing giving decisions by relying on their heartstrings, and start rewarding charities that get results.

"I would cajole, I would urge, I would press, I would do everything in my power to get folks to do it," she said. "As tax-exempt organizations, nonprofits have a public responsibility to fulfill their missions."

Charity Navigator hasn't given up on objectively rating nonprofits on results, but, for now, Berger is focusing on getting the information out in the open. Instead of rating organizations on their effectiveness, Charity Navigator plans rate them on their results reporting.

"We are the voice and the advocate for the public," he said. "The thing that matters most to donors is the effectiveness of charities, so that's the information we are going to go after."

Wallace, for one, appreciates it. While she wants to make smart giving decisions, she doesn't want to devote a lot of energy to it. She likes the way Charity Navigator boils down the facts.

"I don't have time to be fooling around," she said. "I keep things simple."

email: estuart@desnews.com

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