Informing Donors About Nonprofit Performance

Feb. 25, 2009, The Huffington Post — Back in December, I wrote that the one thing I wanted to know before donating to a nonprofit was whether it was achieving its goals. Since it's hard to find that information, I was happy to see that Charity Navigator is exploring how to integrate data on outcomes — progress in achieving goals — into its notoriously distorted rating system for nonprofits. This has the potential to increase the total social good produced by the sector: Rating nonprofits based on outcomes will direct more donor dollars to the nonprofits with the greatest positive impact and will encourage all nonprofits to improve their outcomes.

As Jacob Harold described last week, the current system for getting donations to nonprofits is faulty. It's usually aggressive fundraising and slick marketing rather than high impact that bring in donor dollars. If donors do look for objective information about nonprofits, they'll often find Charity Navigator and rely its financial rating, which is virtually meaningless used alone. Since donors aren't deciding where to give based on impact, nonprofits have little direct incentive to strive for great outcomes or to track what they accomplish. Charity Navigator has asked a set of nonprofits if they would provide outcome data and so far less than 10% have done so. That doesn't necessarily mean only 10% have systems to measure outcomes. But it's not a good sign.

Charity Navigator can play a big role in increasing donor demand for information about what nonprofits actually accomplish. The site's more than 3 million annual visitors — combined with its brand recognition, proactive media outreach, and sometimes-sensationalistic top-10 lists — have made its flawed efficiency rating the most popular way of judging nonprofits. The financial ratings have created demand among donors for low administrative costs, in turn forcing nonprofits to cut administrative costs or finagle tax forms. Charity Navigator has created so much demand for these financial statistics that many nonprofits even report on them in their outreach materials, creating a contagion effect.

Now, Charity Navigator has the opportunity to catalyze demand for much more meaningful information about outcomes. Asking for and publicizing a nonprofit's progress in meeting its goals has the potential to turn donors' attention from inadequate financial ratios to actual accomplishments, increasing demand for social impact. It should give nonprofits a greater incentive to strive for greater impact and track accomplishments. Charity Navigator is likely to be most successful if it collaborates with Guidestar, GiveWell, GreatNonProfits, the BBB Wise Giving Alliance, foundations and others in this effort. A shared effort will reach more people--and, we hope, reduce the burden on nonprofit executives by streamlining the system.

Some argue that tracking outcomes takes money and time away from nonprofits' programs. But most of the information that donors need is just what the organization itself needs to know whether it is on course. Characterizing such information as diverting from an organization's mission is like characterizing an airline's expenditures on navigation systems as diverting from flying. That said, if we want nonprofits to measure outcomes, donors will have to be willing to let them use resources to do so. Ironically, right now Charity Navigator treats such expenditures as administrative expenses, which it counts against the organization.

Thus, while Charity Navigator's decision to incorporate outcome measures into its rating system is an important step towards the goal of turning donated dollars into the greatest possible social impact, it needs to find a way of rewarding rather than penalizing organizations for incurring the expenses necessary to acquire and provide this information.

In the next post, we'll discuss another approach that Charity Navigator could take to provide donors with meaningful information about nonprofits.