Charity Watchdog Studies Have Merit, Challenges

Dan Moore

The nonprofit sector has been buzzing lately over two new studies, funded by the Direct Marketing Association’s (DMA) Nonprofit Federation, alleging that “charity watchdogs” like Charity Navigator and the BBB Wise Giving Alliance cause more confusion than clarity. The recent Chronicle of Philanthropy article sums it up nicely.

There is some merit to these studies─and, frankly, quite a few challenges. On one hand, GuideStar has long viewed that an emphasis on “overhead,” or fundraising costs as it is being used in this context, to judge or rate nonprofits is an inaccurate measure of success. It only describes a piece of the total package, and in fact many nonprofits seem to have been harmed by an overemphasis on overhead ratios.

Another problem with the watchdogs has been a challenge in scaling their work to review small nonprofits. Small nonprofits, some of which are extremely effective, have often been left out of these rating systems simply because the watchdogs have not scaled sufficiently to review more organizations. (The BBB Wise Giving Alliance has tapped the Better Business Bureau state network to respond to this concern.)

Therein lies the problem. As Einstein once stated, “Not everything that can be counted counts, and not everything that counts can be counted.” Overhead ratios, for example, appear to be a seemingly easy standard of measurement. “Find out how much money the charity spends on program,” donors are advised. But watchdogs don’t always point out that the way nonprofits’ allocate these costs are based on judgments that a ten year study of nonprofit reporting by the Urban Institute’s National Center for Charitable Statistics and the Center on Philanthropy at Indiana University has criticized as unreliable. Garbage in, garbage out.

The simple truth is that watchdogs that use overhead ratios do so because the data can be found. But is this a good way to evaluate nonprofit performance? To quote GuideStar’s president and CEO, Bob Ottenhoff, “judging a nonprofit on the basis of overhead is a little like judging an airline on how little it spends on maintenance.” Anyone interested in flying with their families on that airline?

To be fair to the watchdogs─something
the DMA Nonprofit Federation-funded studies do not always do─the BBB Wise Giving Alliance standards cover many more factors than overhead ratios, although their standards do cover these factors. Ken Berger has publically admitted that Charity Navigator’s ratings are insufficient to render a fair judgment about a nonprofit’s performance and Charity Navigator has embarked on a process to release a new rating formula that attempts to assess a nonprofit’s commitment to transparency and to its effectiveness. These are important factors that appear to be largely ignored in the new DMA studies.

It should be noted that I attempted to raise these concerns directly with Chris Quinn, Executive Director at the DMA Nonprofit Federation, but I was advised that Mr. Quinn does not comment to non-news organizations. Too bad. Chris, we invite you to guest blog here to clarify anything that I have not gotten correct.

While GuideStar is not a rating group, we agree with the concept that donors need an ability to easily evaluate the organizations to which they want to donate. And we understand that the nonprofit sector needs to meet donors where they’re at. As Katya Andresen points out, donors don’t, and won’t, conduct exhaustive research to determine which nonprofits are worthy of their gifts. We need to do that work for them. The DMA studies seem to miss new research that confirms that donors want something like a “Good House Keeping Seal.”

At GuideStar, we are working to develop an independent benchmarking standard that will allow donors to easily evaluate nonprofits before they make a giving decision. In the meantime, our Guidestar Exchange initiative is designed to let nonprofits speak directly to anyone who comes to our website with the information they most want to know about: missions, programs, and accomplishments. And the GuideStar Exchange Seal is a signifier to donors that a nonprofit shares our commitment to being transparent about its practices. We have partnered with GreatNonprofits to provide donors with access to user generated reviews and to write their own reviews about nonprofits. And we are partnering with experts from Philanthropedia, GiveWell, and Root Cause to bring expert analysis on effective nonprofits to our users. We hope to add the views of other experts in the future.

In the next few weeks we will be introducing a few friends and partners in the industry to follow-up on this important discussion. In the meantime, we’d love to hear from you. What do you think about the charity watchdog studies? And what do you think is most important for donors to know about a nonprofit before making a giving decision?

Full Disclosure: GuideStar is working with the BBB Wise Giving Alliance on a project to collect data about nonprofit effectiveness and serves together with BBB Wise Giving Alliance and Charity Navigator on a number of sector panels and advisory groups. GuideStar has presented at DMA Nonprofit Federation conferences in the past.

2 responses to “Charity Watchdog Studies Have Merit, Challenges

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