Should the media have a role in rating charities?

No one wants to be ripped off in the name of charity.

Everyone has heard of charities whose practices may be or are questionable. When the situation is serious enough it makes the news.

In response to public concerns several institutions exist that "rate" charities. The information published by these organizations is accessed by individual donors, foundations, employees, volunteers, independent contractors, and even private and government watchdog groups.

As a freelance grant writer and consultant, I can attest that if you aren't rated by one of these organizations, or you have received a poor rating or some sort of alert it will impact your fundraising capabilities.

How they work.

The information available to the public on rating sites can range from simple proof of nonprofit status to an actual assessment of the legitimacy of the organization and its practices.

Spoiler Alert!  Almost without fail, these private, usually nonprofit organizations have a minimum revenue qualifier that determines which charities they will rate.  For most it is in the one million dollars and up range, but at the very least it requires the filing of a 990, not just the postcard.

For that reason, you are not likely to find your local food pantry or animal rescue on some of these websites.  Some, like GuideStar, will list the basics even for smaller charities, which at least allows you to be sure they are registered.

You can also search the IRS website for verification of approved status, the general web for anecdotal reviews or consult your local Better Business Bureau.

I don't recommend social media sites like Facebook as a single source for rating a charity, but they may flesh out the dry facts available elsewhere.

   

But who rates the raters? Are these just online collectors of  raves and rants by fake reviewers, disgruntled employees, clients or donors?

For the answer to that you have to ask yourself a few questions. Questions such as: how did they come to be in existence, how reliable is their information, and what criteria do they use to assign ratings?

One well known organization is Charity Navigator or CN so let's see what they have to say about their process.

Charity Navigator has been in business as a nonprofit since 2001 according to their website, arising out of a perceived need to shed light on the inner workings of charities.

Originally conceived by Pat and Marion Dugan, whose story is available on the website, CN is a bellwether rating organization.

It is definitely one of the top three starting points on my list of charity verification sources.

On September 1, Charity Navigator instituted a new rating scale.

The website goes into great detail about their methodology. You can view it here.

I mentioned that CN is one of several sources I use before deciding whether to agree to offer my services, as well as my own donations to a nonprofit.

One thing has always caused me to view some of the information  available throughout the industry with a squinty eye, and the CN website details it perfectly.

That is the way media reporting is included in a list of rating criteria alongside nonprofit experts, seemingly assigning those reports the same level of credibility as those done by experts.

For instance, one of the ways to get a poor rating is to have an employee or official who  embezzles from your charity, a story often first reported by a news agency.

While some might see that as blaming the victim, there is sound reasoning behind it.

It goes to the ability of the charity to monitor its use of funds by having adequate financial security safeguards in place and actually using those safeguards to prevent theft.  It addresses the character of the organization itself.

But it also goes to the accuracy of the information.

CN freely admits that it does not, and indeed has no ability to, assess the accuracy of the media information it uses.

For me that's a cautionary flag.

Yes, where there is smoke there is usually fire, and news reports are definitely a smoke signal.

Conversely, one has only to look at the media's conduct during this election season to have serious concerns about the ethics, veracity and credibility of the media.

For that reason, if the allegation of financial mismanagement or criminal activity is one of the major knocks against the organization being rated, I tend to hold my opinion in abeyance until I can ascertain if it was an isolated incident in an otherwise sterling record.

I would also want to know whether anyone followed up with actual arrests and/or prosecution of the persons involved and whether there is any past history or indication of financial malfeasance or incompetence.

Charities, even more than Caesars wife, have to be above reproach and the larger and more visible they are the less leeway they have.

Still, accusations usually make the front page, while any retractions or exonerations are usually  buried on page 52 under last week's stock market report.

I am not saying that you or CN should disregard this type of information. I don't, and neither should you.

I am saying that media reports should be vetted as thoroughly as the charity before it they are used as a criteria for either approval or condemnation.

Cancer Charities Fraud Fallout – Will it affect you?

Current news is bad news for online and small scale charitable giving programs.

When four cancer charities were charged with fraud, one of the disturbing facts published was that most of the actual money that was donated came from small donors, $20 or $30 at a time.

The total amount, as charged in the settlement was reported at more than $187 million. The published terms of repayment apportion repayments between the main defendants, but give no specific date for final payment. Consumers will likely not receive more than pennies on the dollar, since the proceeds of the scam have been spent.

Another disturbing fact was that although these charities (all tied to one family) had been under scrutiny for several years, their websites and fundraising activities were not shut down

.

Charity related fraud is one of the FTC's most often reported offenses. That puts all charities in a bad light.

There were indications that these charities weren't on the up and up, and donors who regularly decline telemarketing calls until they have vetted the charity in question through sites like Charity Navigator soon saw that something was amiss.

It's apparent from the amount of money in question that most people didn't bother to check them out at all.

   

The problem is that going forward, most people still aren't going to do that. They are simply going to say no to any and all fundraising calls.

There were red flags for those who did the research, particularly the amount of in-kind donations and fundraising costs, but most people aren't going to do that. It just isn't worth their time for a measly $20 or so.

Smaller nonprofits seeking to expand are going to bear the brunt of that public distrust. Larger organizations can withstand temporary revenue downturns but the little guys and startups can't. Given that very new charities depend mostly on individual donations, they may well be the real losers.

How can you counteract the bad press?

It goes without saying, or should, that you need to establish as much publicly available legitimacy information as you can.

•          Have a well done and informative website in addition to social media accounts.
•          Make your contact information easy to access, including a phone number.
•          Have an IRS determination letter and corporate documents.
•          Have good board and executive staff bios online
•          Have unrelated board members with online profiles on the board of directors.
•          Have audited financials on hand to back up your 990 filings.
•          File long form 990's even if you qualify to use the e-postcard
•          Keep detailed and accurate records of your donors.
•          Limit your large-scale fundraising costs. Frankly, if you are only getting 15 cents on the dollar, they aren't worth your time anyway. That's only viable when you are talking about millions of dollars in donations.
•          If you are truly new, have a business and strategic plan, complete with financial projections.
•          Track your results and impact and be prepared to provide that documentation when asked. 
•         Where possible, provide names of people or agencies that you partner with or who have received assistance from your charity.
•         Register your charity with one of the ratings sites, like Charity Navigator or GuideStar. (Although they may not actually rate you, since rating criteria are often based on minimum revenue amounts, often over $1 million, just the fact that you proactively offered up your information helps interested donors make decisions.)

Eventually, the bad PR will fade, but it's going to remain important to avoid even the appearance of impropriety or mismanagement. You can do that by being as business-like and professional as possible. 

Evaluating the charity evaluators

As any nonprofit client or prospective client who has worked with me can tell you, I am committed to nonprofits providing documented proof of legitimacy to donors.

I don't work with or support scammy appeals or organizations, and I qualify my clients on many of the same criteria that donors use. Why? Because if they can't meet minimum reporting  requirements, they aren't going to find funding. I do a lot of research to ascertain if they have a shot at succeeding with their funding plans.

Unfortunately, some of the research resources available to me don't cover most of the clients I serve.

I'm talking about the so-called charity rating or evaluation sites/organizations. Most of these organizations do not rate any charity that files anything other than the 990. They don't accept audited financial statements, annual reports, 990EZ's and certainly not the 990N, the so-called postcard.

In effect, that means that if your revenues aren't already well above six and even seven figures, you aren't going to get rated.

For instance, one of the best known and most highly respected evaluation organizations is Charity Navigator (CN). I use them where applicable, and I support their mission to bring transparency to the world of charitable giving, so I definitely don't have an axe to grind with them. And you can access information about some smaller charities, you just can't get a rating for them.

CN's rating criteria is an excellent example of the shortcomings of the methods used to rate public charities. They don't rate every public charity, not even close to it. They rate about 7500 charities as of July 2014, according to their own reporting. The National Center for Charitable Statistics (NCCS) lists over 1 million 501(c)(3) IRS-approved organizations in the U.S. as of 2010.

You can't even get a rating from these ratings organizations unless your nonprofit meets certain criteria.  For example, on CN's website they list this information relative to qualifying revenue dollar amounts and length of time in business required to receive a rating:

"We do not evaluate organizations that file the Form 990-EZ. The Form 990-EZ requires less financial reporting than the Form 990, and as such, we would lack important data needed in our analysis.

Sources of Revenue:  Because our goal is to help individual givers, we evaluate only those charities that depend on support from individual givers. Specifically, we require public support to be more than $500,000 and total revenue more $1,000,000 in the most recent fiscal year. And we do not review charities that receive most of their funding from government grants, or from the fees they charge for their programs and services.

Length of Operations: We require 7 years of Forms 990 to complete an evaluation."

In theory, I don't have a problem with revenue or time in business being used as qualifiers. The 990 is a legal document that implies that the data is certifiably reliable, and that's a good thing. It's not only the criteria that the rating sites use, it's the criteria used by both grantors and individual donors as well.

Substantial existing revenue and longevity certainly impact the effectiveness and scalability of programs, so I understand why it is important to both rating organizations and grantors or donors. It's good in theory, as far as it goes.

When theory meets reality

Between theory and practice there often exists a wide gulf. In practice, these ratings almost guarantee that substantial funding for smaller nonprofits is, if not nonexistent, certainly drastically curtailed.

Again, it isn't the concept of ratings I oppose. Anything that protects donors from the all-to-prevalent con artists using charity as a cover story is a good idea. But it allows for some serious gaps that put both smaller nonprofits and the general public at risk.

As someone who works with both start-up and small but established nonprofit clients, I can attest that concept doesn't serve to maximize diversity in problem solving.

In general, small nonprofits aren't particularly attractive grantee prospects until they have been around for awhile. Typically about three years is the point at which they are somewhat stable and have results to display. That still leaves a big gap between three and seven years, at precisely the point where the nonprofit needs to be actively growing.

Obviously, these rating favor larger charities. But is larger always better?

Large organizations tend to be cumbersome for front line staff working at the grassroots level. There are so many layers of bureaucracy to penetrate that some of the best solutions to problems never make their way into the communities or demographic that the parent organization purports to serve.

Still, size does matter. The larger the organization, the larger the revenue line gets and that supposedly equates to greater effectiveness. For charities working at the local level, that simply isn't true. In a way, when we only donate to the big, visible and well funded charities, we may in fact be perpetuating rather than solving problems.

At the same time, we want to know that the money we donate isn't going to pay for a fancy car or a private island in the Bahamas for the CEO or the charity founder. The only somewhat objective way we have to assess legitimacy is through the rating organizations. It's a vicious cycle. You can't get rated without money, and you can't get money without being rated.

Why should we care about some little grassroots charity?

All industries need new ideas and fresh approaches. The communications industry did not develop the personal computer, the shoe-box sized mobile phone or the smartphone. They exist because someone saw a need to approach old problems in new ways. Every big company was once a small company.

Not every charity should survive, any more than any other small business should survive. Be that as it may, there is a huge gap between 7500 and 1,000,000-plus. Somewhere in that gap there are good small organizations with the potential to become much greater forces for good.

If not this way, then how?

There has to be a better way to evaluate start-ups and smaller organizations for effectiveness than just their revenue.

When revenue is the main criteria for even selecting a charity for review, it does a disservice to everyone.

If a small or newer charity is taking in $50,000 and growing that figure by 10% Y-O-Y and achieving maximum impact with that money,  it may very well have discovered or implemented an approach that can be repeated elsewhere if it can expand. It can't build capacity without more money, and it can't get more money if prospective donors can't research it. Capacity building grants are usually not something that are awarded without considerable research by the grantor and most of them start with the ratings organizations.

 Instead of growing, many of these smaller NPO's struggle at the same level year after year, never realizing their full potential. They can't hire better, more effective staff or attract capital because from a ratings standpoint they simply don't exist.

If the goal of charity evaluators is only to keep existing organizations in business and stifle competition for already scarce support dollars they do a very good job. If they exist to help donors make informed decisions about supporting new blood and better ways to solve problems, I rate them at less than one star.

What's the answer?

There has to be a way for these evaluators to include a "small organization" component.

Perhaps they could reduce or eliminate the revenue requirement in favor of an effectiveness rating for smaller organizations.

Smaller nonprofits could receive a rating like "effectiveness increasing, effectiveness adequate or insufficient effectiveness". The financial reporting might be accomplished by accepting audited or accountant's reviewed financials or annual reports together with the 990EZ. Or even put them on a progress watch list. If they continue to report stable performance for a period of time, they could receive a "OK to donate" stamp.

What are your thoughts on the matter?

AHA! - It costs money to run a nonprofit.

GuideStar, Charity Navigator, and the BBB Wise Giving Alliance recently put out a letter cautioning donors against placing too much emphasis on artificially low administrative costs. It seems that they finally recognized that ranking the effectiveness of nonprofits by how little they spend to keep their business operations running might be harmful to the health of nonprofits.

The problem is, they have spent many years carefully and repetitively convincing  (dare I say brainwashing?) donors that there was some magic percentage that nonprofits should not exceed for administrative costs. It might be just about too late for these revered ranking organizations to have their "AHA" moment.

The truth is, just like any other business, nonprofits have to have a certain amount of money to keep their operations going, and that number, or more properly the ratio of administrative (overhead) to program costs, is going to differ according to the operational needs.

Nonprofits with  large staffing requirements, expensive equipment like trucks or warehouse racking or who require large buildings  to house and distribute goods are going to spend a higher ratio of their funds to maintain those than a nonprofit that runs a say, a suicide hotline in the basement of someone's home. Both should be equally evaluated for funding according to how effectively they accomplish their mission.

Very few businesses can operate efficiently and effectively and still keep overhead below 35%. All the ranking organizations accomplish by encouraging reporting of those expenses at 10 or 20% of revenue is to encourage creative bookkeeping. The result is that many good, useful and effective nonprofits go under because they simply don't have the infrastructure to maintain the organization at even minimum operating efficiency.

Another truly irritating metric that is often evaluated is whether key staff salaries are "too high". Too high compared to what?  It is undeniably true that some charitable organizations are simply a way for the founders and their cronies to get paid an exorbitant amount of money. But to say that the CEO of a nonprofit with 100 million dollars in revenue is overpaid just because of the dollar amount of their salary is ludicrous. If the CEO of a comparably sized for-profit is making $500K a year, why should the CEO of the nonprofit be expected to make a third of that figure?

If the salaries of nonprofit key staff are considered as a part of the whole, they often make in the aggregate less than 3% of the total revenue figure. Try hiring a competent CEO, CFO and COO for a for-profit and stay at that level. The turnover and retraining costs at nonprofits are the subject of much hand-wringing. Perhaps if the staff was compensated at levels comparable to for-profit industry standards and evaluated based on results instead of cost, that wouldn't be such a problem.

No one is advocating that nonprofits should spend the bulk of their donations and financial donor support on overhead. That's as ridiculous as spending too little. There is a point where overhead, including fund raising costs do exceed an acceptable level when compared to results.  But starving any operation of reasonable operating capital is a sure way to put it out of business, and far too many nonprofits are facing that reality every day.

I'm ecstatic that these three organizations have finally recognized that their effectiveness measurement metric is flawed.  Hopefully they can apply some common sense to their operations and provide better donor guidance reporting in the future.