Ken's Commentary

Experts have noted that a one dimensional focus on nonprofit finances, if not supplemented by other information, can lead a donor/funder to make the wrong decision as to which nonprofit they support. They are correct. Further, they have noted that an overemphasis on overhead is misleading. That is also true. Many people are shocked that we would admit these things but, to some degree we always have. Perhaps we have not been saying it as clearly as now, but it was always in the narrative of a number of our web site pages (Holiday Giving Tips, Tips for Savvy Donors- item #8, etc.). We now realize that many, were not reading the narrative. It is in that spirit that we signed on to the press release that comes out today with the same title as this blog entry (link here). We do not agree with everything that is stated in this press release (we think overhead does have a place in rating charities, yet agree it should not be primary or overly emphasized) but we do concur with the fundamental truth that the most critical dimension in evaluating a nonprofit has to do with achieving meaningful results (we call them outcomes).

It is also an important reason why we are now on a course to change our rating system so that, even if you do not read the narrative and only look at the star results when you use our rating system search engine, you will be much more likely to make a well informed social investment decision. As we have been saying for some time now, we believe three dimensions must be considered for a social investor (donors/funders with their eyes wide open) to have the critical information needed to make a wise decision:

1. Financial health – Is the nonprofit sustainable? Does it have robust financial strength to survive in good times and bad? Is the overhead not at the extreme end of the continuum?
2. Accountability – Does the organization have ethical practices, good governance and transparency? Is it accountable to its constituents?
3. Outcomes – Can the nonprofit supply information about meaningful and lasting change in the communities and lives of the people it serves? Can they show evidence that these changes are as a result of their efforts? Do they have systems and processes in place to effectively manage their performance?

We intend to help social investors get the answers to these and related questions and use the same zero to four star system we always have used to get there. However, I suspect that the definition of the stars will change in two ways. First, embedded in the star system will be all of the three dimensions noted above in some type of weighted amounts with meaningful results (outcomes) getting the biggest piece of the pie. Second, whereas currently the star system benchmarks nonprofits according to how they compare to industry standard (from exceptionally poor for zero stars to exceptional for four stars), in the new rating system investment risk is likely to be the defining concept. In other words, a zero star nonprofit would be a very high risk social investment and a four star would be low risk. This more accurately reflects the reality of the situation that a social investor must consider. For example, if in the accountability review, it is discovered that a nonprofit is under investigation by a state agency for Medicaid fraud, the risk would increase. Although it is true that the nonprofit should be considered innocent until proven guilty, for a social investor the risk of a possible bad result for their support has increased!

As a start toward the changes described above, we have convened an Advisory Panel of experts and nonprofit leaders to help us. They all had to agree to three things to join the panel: (1) That a star system that rates nonprofits on a macro scale like ours is acceptable to them as a model to evaluate these organizations (2) That the aforementioned three dimensions are the appropriate components to include within that star system, and (my favorite – the no “kvetch rule”) (3) That if they have a criticism of something we are doing (currently or in our suggested changes to our rating system) they also MUST suggest a concrete solution that meets (1) and (2)!!!

We are in the final stages of developing the first draft of the accountability dimension and hope to have it reviewed, revised, tested and approved for implementation by the Spring of 2010. We then plan to modify our financial dimension to address some of the criticisms (regarding overemphasis on overhead versus sustainability, etc.) and hope to have it through the process by the Fall of 2010. Lastly, we anticipate submitting a prototype to the Panel for the outcome component in the Winter of 2010 with the hope that the entire new rating system may be up and running by the Spring of 2011. Some have said we are crazy (not on the Advisory Panel!) and that it is impossible given the complexity and scope of the nonprofit sector to do something like this. Our response is that we believe there are scalable tools that are macro enough to cover 5,500 nonprofits per year and meaningful enough to get to the essence of the question as to what level of risk a social investor will bear in making their decision to support an organization. Further, we believe it must be done.

Some question whether people who are “casual” (i.e. not super rich) investors, care about this sort of information. Our answer is proven by data. Over 3 million unique users come to our site for information each year and it is estimated to help them decide on where billions of dollars is going. That is with our existing, admittedly one dimensional rating system. Can you imagine what the new one will do?
Many experts and charity leaders have told us they are excited and emboldened by our plans. They also like that we are acknowledging the weaknesses of our existing system. That is what I learned over the 25 some odd years that I worked in homeless shelters, doing outreach on the street and a variety of other jobs in the helping professions. We need to be transparent and accountable for our actions. Charity Navigator will not just talk the talk, we will walk the walk. We are about to go through our own theory of change process and develop outcome indicators for our own work. We will be rating ourselves too! Hopefully, there will be a good outcome to our process. If not, we will keep trying until there is one.

Finally, let me tell you why we are so passionate about all of this. We believe like many others that this is a critical battle for the very soul of the nonprofit sector. We MUST get past the notion of doing the “good work” with no accountability. We MUST get past the idea that nonprofits are too complex or unique to be measured. I have seen it close up for years and it is not a pretty picture. The nonprofit sector must get its act together and make sure it is really helping provide meaningful change in communities and peoples lives. It is life or death for many of those we serve whether we are effective or not. So let’s work together to measure, manage and deliver what is really important to make our world a better place.