Wednesday, May 4, 2011 - 12:47pm
posted by
Mark Hager, Ph.D.
,

Associate Professor,

ASU School of Community
Resources & Development

This post is about a bad dog and the role that a class of ASU students is playing in its quest for redemption.

Back in the early 1990s, I had a day job studying nonprofit spending and reporting as part of something called the Nonprofit Overhead Cost Study, a joint project between the Urban Institute and Indiana University. The project grew out of the observation that nonprofits were not tracking their spending very well, and many were putting down some pretty crazy numbers on their annual reports and Form 990s. It seemed that the world wanted nonprofits to spend nothing on administration and fundraising, and many were reporting just that.

Turns out that part of the problem was that many nonprofits didn't understand functional expense accounting or reporting rules. Another part was that many nonprofits didn't have systems in place to track and allocate expenses accurately. However, story after story pointed to pressures from donors for nonprofits to invest as little money as possible in administration and fundraising. After all, people want their contributions to go to programming. The average donor doesn't want to pay for "frilly" stuff like accounting software, talented executives, and fundraising campaigns. So, to conform to expectations, nonprofits had three bad options. One was to keep making necessary investments in overhead and potentially have donors walk away. A second was to trim administrative and fundraising expenses to the bone. The third was to fudge the accounting.

Where do donors get trained to think that investment in administration and fundraising is bad? Well, lots of places. In their quick-takes on "making smart donations," media stories frequently tell donors to pick the charity that spends the least on administration and fundraising. Magazines like Forbes, U.S. News and World Report, and Money routinely publish stories that emphasize program spending and fundraising cost ratios. Federated campaigns often "help" their donors make giving decisions by prominently publishing such ratios next to the organization's names. And those ratios are two of the accountability standards at the Better Business Bureau.


The training of donors to rely on financial ratios picked up steam when seed capital, the easy availability of IRS Form 990, the power of the internet, and enough-knowledge-to-be-dangerous coalesced to form Charity Navigator in 2001. The scary appeal of this new watchdog was that it boiled several of the key financials down to one easy-to-read judgment of donation-worthiness. Don't worry about how well the nonprofit actually carries out its mission — just look at how much of its spending it puts toward non-program costs. Well, as I've already mentioned, nonprofits weren't doing a great job of tracking and reporting these end-all/be-all numbers in the first place. Suddenly, they had incentive to do even worse.

A lot of people really didn't like the approach. The popular criticism was that this media-savvy watchdog was emphasizing the wrong things: financial ratios tell us little about how well a nonprofit is delivering on its mission. My criticism was that this odd emphasis on financial ratios caused nonprofits to race to the bottom, leading them to under-invest in critical systems and communications. To make matters worse, Charity Navigator seemed standoffish and unwilling to work with the field or adjust its approach despite some pretty obvious shortcomings in its methods.

Zooop — fast-forward to 2008: Charity Navigator gets new executive leadership in Ken Berger. By the end of 2009, Charity Navigator is doing two extraordinary things. One is that Ken is publicly calling financial ratios the worst way to choose which charity deserves your donation. The other is that Ken joins with other watchdogs and philanthropic leaders in a call to move beyond financial ratios and search for new and better methods of measuring donation-worthiness. Sean Stannard-Stockton likened this to McDonald's telling people not to eat junk food.

Well. So.

Apparently Charity Navigator is reborn, a once-bad dog that has stopped peeing on the carpet. But does it have any new tricks? Well, by all accounts, it certainly is trying. The Holy Grail for an informational watchdog like Charity Navigator is to actually (gasp!) report on whether a nonprofit is doing a good job at what it does. However, that's hard enough to do when evaluating any one nonprofit organization, let alone the many thousands that we would like to compare. We can believe it when we see it, but Charity Navigator has ideas about bringing outcomes reporting into its CN3.0.

But that's getting ahead of ourselves. Right now, Charity Navigator is in the midst of beta testing CN2.0, which is the first step beyond simple ratio analysis. Well, ratio analysis will still be part of the new package, but the old methods are being revamped and supplemented with more information about subject nonprofits. So, what kinds of information, if not outcomes? Accountability and transparency. The idea here is that another dimension of donation-worthiness is whether a nonprofit communicates essential aspects of its people, programs, and policies to its stakeholders.

I'm not allowed to talk about the details of what's brewing inside CN2.0, but I got a good test drive because 23 students in my graduate seminar (Theory and Practice of Philanthropy) here at Arizona State University have been invited inside this spring semester to both learn about and hone the evaluation process. Frankly, that's another amazing sign of Charity Navigator's willingness to work with the field and take criticism and direction from it. Over the course of this past semester, teams of students have been working through the rating process for a pool of organizations. It's a work-in-progress, and students already have reported the expected bumps in using the pilot methods to evaluate the accountability and transparency of their subject nonprofits. But that's okay. They will learn a lot by digging, and their trials will provide essential information to Charity Navigator about how and whether we can truly develop a reasonable common metric of accountability and transparency of nonprofit organizations.

It's an exciting time. Students get first-hand interaction with cutting edge innovations in our nation's most well-known charity watchdog. The watchdog gets to show off its new look and practice its new tricks. Hopefully, and my fingers are crossed, Charity Navigator will pull this off. If they succeed, we can start down a new path that gives donors better information for evaluating and selecting the organizations they want to support.

Comments

Wow, Mark, I learn a lot from the blogs you post! Love this kind of straight-forward, informative writing about complex subjects in the nonprofit sector. I'm looking forward to learning more about how your students impact Charity Navigator--and even how nonprofits are empowered to evaluate and report about their work to donors and stakeholders. Thanks for educating me/us in such an entertaining way!

Creating “new and better methods of measuring donation-worthiness” is not going to be an easy task for Charity Navigator, let alone the charities themselves. As one of the graduate students in Mark Hager’s “Theory and Practice of Philanthropy” class at ASU, I got a pretty good taste of what Charity Navigator is trying to do, and a lot of it makes good sense.

As Dr. Hager noted, CN’s past emphasis on financial ratios was overly simplistic, and not necessarily an accurate barometer of nonprofit efficiency. At very least, it seems that CN’s 4-star rating system will have to be expanded, so that different nonprofit attributes can be broken out and rated separately, similar to how Zagat currently rates restaurants in four different categories, not just cost. The new rating system will eventually give CN the data required to do much of this.

But, as we discussed in class, measuring RESULTS – how effectively a nonprofit delivers their services – will be far more complex than growing and mowing an acre of hay. It’ll be more like having a rainbow garden – a row of carrots, a row of corn, a row of strawberries, a row of collard greens, and so on. The inputs and outputs, combined with vastly different goals, budgets and staffing constraints, create significantly different types of nonprofits, and on the “corn row” alone, there will be several hundred varieties. None of us could see how a single set of measurements could realistically measure thousands of different organizations’ effectiveness in delivering such vastly different programs and services.

But we could see that Charity Navigator IS now trying to measure more than just management and fundraising costs. Most of our class agreed that the CN effort would lead to better accounting and reporting by the nonprofits, which will hopefully create a more transparent and well-documented nonprofit sector. And that will be good.

One thing we all agreed on: working with Charity Navigator on “the inside” for a few weeks, and actually evaluating a couple of nonprofits, taught us just how complex an undertaking this actually is. Anyone working in the nonprofit world should volunteer to do the same… to get an idea of how nonprofits might be measured in the future. It’s an eye-opener.

Mark,
Thank you so much for touching on this topic and misconception of overhead in the NP sector. I am guilty of using Charity Navigator for snooping and investigating on nonprofits and how they are using their money. But because of this blog post and this concern being addressed in some current NLM courses, I have become a huge believer in the fact that overhead does not always reflect the organizations' success in carrying out their mission. Much debate over an organization's disbursement/use of funds has risen from the KONY 2012 Campaign that the the 501(c)(3) organization, Invisible Children launched, just last week. Because this organization did a PHENOMENAL job at marketing and utilizing social media, people are starting to wonder how much money they are using for 'promo videos' versus the mission. The Invisible Children Facebook fan page has actually had to insert an update about 'fans' being way to rude. Check out this quote: "Let's be clear: We love everyone on this page. Everyone. We welcome questions, different views and comments. But we won't tolerate profanity, hate speech, offensive slurs, racism, or sexism. We will delete your post." Despite all the misconceptions going around, the organization is continuing to do a phenomenal job at clearing those up. What do you think? With over 75 million viewers on their new campaign Youtube video, are they fulfilling their mission? Or simply blowing money on media?
https://www.facebook.com/#!/invisiblechildren
http://youtu.be/Y4MnpzG5Sqc

Thanks for your post. I feel as long as people do their part in researching an organization, inside and out really, before they criticize or form assumptions/opinions, then we will all be in a much better place to make a difference.
Emily Denes

Thanks for your post, Emily. I haven't seen the debate you're describing, but it sounds strange to me. If an organization's mission is to raise awareness through media, then spending money on media seems spot on. Get Dan Pallotta's book "Uncharitable" and read chapter 2. He's got a nice section about people's attitudes toward "advertising" there. He gets exasperated that people fully expect businesses to market to them, but then expect nonprofits not to market.

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