Conference Roundup: Rating Charities

Nonprofit professionals say charity watchdog groups like Charity Navigator, which aim to ensure nonprofits are financially responsible, don’t give donors a clear picture of an organization’s effectiveness.

Watchdog groups look at an organization’s tax records (the 990 form) and little else in determining its rating, said John Melia, founder and executive director of the Wounded Warrior Project, the Jacksonville, Fla.-based organization that provides programs and services to severely injured service members during the time between active duty and transition to civilian life.

Melia and other nonprofit professionals discussed issues surrounding charity watchdog groups and their rating systems at the session “The Costs of Fundraising: How do I Keep the Lights on and the Staff Paid Without Running Afoul of the Watchdogs?” at the DMA Nonprofit Federation’s 2008 Nonprofit Leadership Summit held last week in Palm Beach, Fla.

The session was moderated by Creative Direct Response’s President and CEO Geoff Peters and introduced by Russ Reid’s President and CEO Tom Harrison, who told the crowd that conference planners tried in vain to get representatives from a number of watchdog groups to attend the forum.

Feedback from session participants found that some nonprofits can get saddled with ratings that aren’t very reflective of their organizations or their good works — and that it can affect donations.

The ratings are unfair, Melia said, because the groups don’t factor in outcome measurements — how many people organizations help. Melia further explained that the watchdog groups use no official government standard for rating charities and no uniform criteria.

They do base the rating on fundraising efficiency (how much it costs to raise a dollar), cost allocation (expenses allocated to program administration/fundraising), capacity (how much money they have in reserves), and governance (board independence and oversight).

“None of it evaluates an organization’s effectiveness,” Melia said. “Or growing pains; the time it takes to get the word out (about your organization). And it doesn’t reflect (the nonprofit’s) age.

“You’re a D charity so your work isn’t worthwhile,” he said, using this example to get his point across: “If I was to start a charity tomorrow with the sole purpose of abolishing the dollar bill, and you send in the money and I got an incinerator and burned them [the dollars], I would be a four-star charity because I did exactly what I said I was going to do with the money.

“That’s how ridiculous it is,” he said.

Co-presenter Leslie Crutchfield, managing director of Ashoka Global Academy for Social Entrepreneurship and co-author of the book “Forces for Good: The Six Practices of High-Impact Nonprofits,” said her research showed that truly effective nonprofits implement several practices, including advocating and serving, nurturing nonprofit networks and inspiring evangelists.

She added that the nonprofits her book found to be “high-impact” had both high and low ratings from the watchdog groups like GuideStar, Charity Navigator, the American Institute of Philanthropy and the Better Business Bureau.

What she and co-author Heather McLeod Grant found was that “high-impact nonprofits create ways to engage supporters.”

“They share values and create meaningful experiences,” she said, pointing to Habitat for Humanity as a good example. “They engage volunteers to go out and build houses. And then they share their meaningful experiences.”

There needs to be a new “framework for success,” Crutchfield said, adding that nonprofits need to build the organization and build the movement, find points of leverage to achieve maximum impact, and “move beyond measuring just what’s measurable and measure what matters.”