Wednesday, October 26, 2011

Charity Navigator 2.0 in Context

A somewhat shorter version was just published on the Tactical Philanthropy blog.

On September 20th of this year, Charity Navigator (CN) launched a significant change to our rating system (called CN 2.0). In follow-up, Sean has kindly offered me the opportunity to put this event in the context of CN’s present and future. In addition, it offers me the chance to address some criticisms from the “three C’s” (critics, competitors and charities with lower ratings).

In 2010 CN formed an Advisory Panel. Sean is a member, along with a number of other members of the Alliance for Effective Social Investing, nonprofit operators, academicians and other experts in the nonprofit arena. We shared with them our preliminary thinking on the new Accountability and Transparency dimension and used much of their feedback, along with all our staff and our Board, in the final product you see today on our site. The end result is a dimension we have weighted a full 50% of the rating score for each nonprofit. As a consequence, there has been a major shift in the rating of many nonprofits we evaluate. A few statistics to prove the point:

  1. We saw roughly 40% (around 600 out of 1500 nonprofits) lose their four stars rating, and another 20% gain it (around 300) with a net loss of 20% of four star rated nonprofits in our system.

  2. 49% of the nonprofits we rate saw a change in their overall star rating (around 2,650). 19% saw a decline in overall score and 30% an increase.

  3. There was an 8% increase in the number of nonprofits rated good (3 stars) or better.

Overall, the collective response of our site users has been positive, if not thrilled with the new information. Nonprofits as always, given the nature of “winners and losers” at ratings, have been both positive and negative. However, the vast majority do not question the importance of a good portion of this information. After all, the Nonprofit Panel (formed by Independent Sector) spent years to devise a set of Principles of Good Governance and Ethical Practices that encompass good part of the territory covered by our new rating dimension.

One of the most striking results of this change in the rating system is the amazing response of many nonprofits (both “winners and losers” in the new rating system). This is a far cry from when we began operations ten years ago and you could hear a pin drop when we asked for information! The number of new governance and ethical practices implemented by nonprofits we evaluate, as well as posting of information on their web sites, has already totaled over 1,000 and continue apace. Here and here are two examples of web site pages that reflect these types of changes.

As noted earlier, some of the members of the Alliance for Effective Social Investing have been helpful advisors to CN in thinking through how we have been moving forward. Below is a chart that reflects one iteration of some Alliance member’s thinking on the critical qualities that define a high impact organization.

The basic point is that all these dimensions must be present to maintain a high performing or high impact organization. Therefore, for those who question the importance of financial health in measuring a nonprofit’s performance, I refer them to our advisors, as well as to any nonprofit CEO or CFO who must constantly concern him or herself with the financial efficiency and sustainability of the organization. To say results are all that matters is to deny the question of whether the organization will be able to afford to operate and provide those same results for the long haul.

Regarding overhead, show me a nonprofit that uses 70% of its funds for overhead and and I’m 90% sure it is an organization that is either clueless or focused on lining someone’s pockets rather than serving others. People may disagree on what the best metric of overhead should be, but to say overhead is dead or a red herring is to deny a useful indicator of where many thieves and scoundrels dwell. I have worked in enough nonprofits with unethical leaders to say without question that we need to get serious about their existence as more than a rarity (see the book Silence, by Gary Snyder). This is not meant to imply that we think our financial metrics can not be improved upon! I refer you to a blog post I wrote a while back on the limits of focusing on overhead alone. In addition, we have recently formed a task force of financial experts to think through possible changes to our traditional financial metrics.

As to the value of Accountability and Transparency (CN 2.0), if a nonprofit does not have strong governance and ethical practices it greatly increases the risk that someone will rip them and their donors off. Therefore, good impact today can once again be of short duration if you do not have such practices and oversight in place. Furthermore, measures of transparency such as posting critical information on the nonprofit’s web site, provides all stakeholders with a chance to monitor the organization to at least some degree. That further mitigates against unethical behavior that could take a nonprofit on the road to ruin.

Of course results are the key and the central quality that every nonprofit should be focused on! However, to suggest that results (impact, outcomes and the like) are the only concern a nonprofit should be focused on reflects a fundamental denial of what is necessary to sustain those results. My thirty years of operating nonprofits provides me with an endless stream of examples of how critical all three dimensions are to assuring ongoing high performance and ultimately impact.

Looking ahead we are now in the second year of developing the third dimension of our rating system which evaluates the quality of results reporting of nonprofits (which we are calling CN 3.0). Thanks to seed funding from the Hewlett Foundation, we have been testing a number of possible prototypes for how we will go about this analysis. In addition, we have secured the help of a number of graduate schools and volunteers from around the country to do background research as well as try out the prototypes we have developed.

We are hopeful that we can formally announce what the selected tool will look like by next year and then begin the process of compiling this data on all of the nonprofits we evaluate. However, we intend to continue to conduct basic research and continuously improve the results reporting metrics as we learn. For example, it is conceivable that we will measure results differently at least to some degree, by nonprofit cause area, based on the aforementioned research.

Furthermore, as always, we will provide this information at no cost to our users. In addition, we will provide our four star seal at no cost to the nonprofits who receive it. Therefore, the added effort that will be required to analyze nonprofits performance in all three dimensions requires us to scale up our operations significantly. We plan to do this with the growing support we anticipate from voluntary donations from our users, foundation funding and earned income. In addition, we hope to recruit a significant number of volunteers to expand our capacity to deepen our rating system (to CN 3.0) and broaden our coverage (we have a goal to roughly double the number of nonprofits we evaluate from 5,500 to 10,000).

Looking further down the road, we hope that some day we and our competitors will truly collaborate by aggregating data to deepen our rating system even further. However, that is a blog for another day.

A leading nonprofit consultant recently observed that CN is the only non-funder that his nonprofit clients ever mention as changing their behavior. He further predicts that, given our ongoing efforts to deepen our analysis and increase the number of nonprofits rated, we could become the most significant game changer for the nonprofit sector in the coming decade. I hope his prediction comes true so that we drive more money to high performing nonprofits by giving donors/social investors the most robust and scalable system yet to be devised. As a result, we can more fully guide intelligent giving/social investing, so that together we change the world for the better!

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