Paul Penley

Charity Navigator added nonprofit transparency practices to its financial efficiency formula to produce new charity ratings for thousands of US-based organizations. The new calculation for rating charities affected almost 50% of the organizations (2,626 new ratings) in its database. Here is how it affected the ratings:

• 30% of charity star ratings improved
• 19% of charity star ratings decreased
• Total number of 4-star ratings decreased by 20%

Why does it matter how one charity website is rating other charities? Charity Navigator is no doubt directing millions, if not billions, of charitable dollars. In 2010 Charity Navigator had 4.7 million visitors, and I have personally met with numerous foundation staff and board members who consult it during their grantmaking process. If Charity Navigator is getting it wrong, then millions of dollars aren’t getting to the best organizations!

Although Charity Navigator has received compliments for including more data in its rating calculations, it has yet to overcome its most substantial critiques. First, Holden Karnofsky at Givewell.org continues to highlight that Charity Navigator does not analyze the effectiveness of a charity when creating its four-star rating. To its credit, Charity Navigator does plan to include data about programme impact measurement in its next ratings upgrade. Second, Charity Navigator’s expanded rating still partially relies on a financial formula that gave four stars to organizations with recently questioned performance like the Three Cups of Tea’s Central Asia Institute. Putting a better house on a flawed foundation is not a road to long-term success. It may just mislead more people in the short term.

One key weakness that Charity Navigator has not addressed and has no plans to change is its source of information. The majority of information is still derived solely from the government Form 990 submitted annually to the IRS. The problem with relying on this government file is the date of the information. On average, when you view a charity’s rating, it is based on two-year-old information. What investor would make investments for the future based on two-year-old annual reports? It does not happen. If your financial manager takes this approach, fire him immediately!

For giving decisions to be informed and intelligent, philanthropists need up-to-date information and analysis. Reformatting two-year-old information (as Guidestar.org does) or rating that outdated information (as Charitynavigator.org does) may be better than nothing, but the best resources will provide up-to-date infrastructure and performance information that empower donors to make informed and confident decisions today. That is why groups like the BBB’s Wise Giving Alliance and http://www.IntelligentPhilanthropy.com require annually updated information from each organization in their databases. IntelligentPhilanthropy.com, which I created out of a desire to establish the best online charity evaluator for mass use, even collects budgets for the current fiscal year and plans for one to five years in the future! That current and future data is combined with 120 other data points about governance, staff, financial management, strategy, sustainability and impact. All this annually updated data is summarized in a two-page Analytical Overview and placed in an online platform that you can search by topic, location, people served, nations served and leader name. It is a better balance of analytical complexity with user-friendly simplicity. Charity Navigator must follow suit and find a way to get up-to-date and to acknowledge the complexity of analyzing nonprofit health and performance.

Since online charity evaluators like BBB’s Wise Giving Alliance and Intelligent Philanthropy require annually updated information, these platforms do not have databases as large as CN’s 5,500 charities. That is the trade-off. BBB has about 1,575 charities and Intelligent Philanthropy has 275 (increasing every week according to a database counter posted on the home-page). Charity Navigator’s scale is one of its strengths, and CN plans to reach 10,000 charities in the next five years. However, if you want Charity Navigator to rate a new charity that isn’t in their database, it will cost you $1,000 to sponsor a new rating! That’s $1,000 for an analysis of two-year-old information! Intelligent Philanthropy includes five requests for new charities in its annual subscriptions, which cost $59/year – less than 6% of CN’s cost for one new charity request.

In the end, I am concerned that more givers will turn to Charity Navigator and expect it to deliver more than it can. The simplicity of a four-star rating and the announcement of a more comprehensive calculation involving transparency and accountability may cover up the outdated information and a flawed financial formula. The attractiveness of analyzing a charity in one glance should not replace the careful analysis of all working elements necessary for identifying high-performing organizations (click here to learn how to analyze organizational health and performance involving all elements). If we want charitable giving to produce significant change in society, we must demand better, and employ the best tools available. In philanthropy, good is the enemy of the best. Let’s keep working to direct the most charitable dollars to the highest performing, best managed and society-improving charities in the world!

Paul Penley is director of research at the philanthropic advisory firm Excellence in Giving and creator of IntelligentPhilanthropy.com