Monday, May 19, 2014

America Has More Than a Million Nonprofit Organizations: How Donors Can Sort Through the Good, the Bad, and the Ugly with Ken Berger, President and CEO of Charity Navigator

Originally published in Corporate Articles's Spring 2014 edition.

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Ken Berger joined Charity Navigator in 2008 after almost thirty years’ experience working in the charitable non-profit sector. He has held leadership positions at a variety of human service and health care agencies, both large and small, and has operated programs serving the homeless, the developmentally disabled, the mentally ill, substance abusers, the medically underserved, and persons with HIV/AIDS, among many others. Ken earned his Bachelor’s degree at the University of Buffalo. He went on to obtain a Master’s degree in Psychology from Antioch University and a Master’s degree in Business Administration from Rutgers University.

Ken has a deep passion for helping donors become wise social investors (charitable givers who see their donations as a long term social investment) by learning how to identify and then support high performing nonprofits. He also has a deep interest in encouraging charitable non-profits to perform effectively and thrive even in challenging times. He is a regular presenter at conferences on both the domestic and international stage, is frequently interviewed by regional, national and international media on nonprofit issues and has published numerous articles on issues affecting the nonprofit sector's effectiveness. In addition, he is the author of Ken's Commentary, a blog about his thoughts on the non-profit sector. Ken is also a LinkedIn Influencer and writes a monthly article on charity issues there.

He is a member of both the Alliance for Effective Social Investing and was a founding member of the Social Impact Analysts Association. He was also a member of the CFC-50 Commission which was formed under the U.S. Office of Personnel Management to strengthen the integrity, operation and effectiveness of the Combined Federal Campaign (the largest workplace giving campaign in the world).

Please tell us about Charity Navigator, its mission, and what makes it unique.
Berger:  Our mission is to be a guide to intelligent giving.  And that essentially means that we see our role as providing all the resources we can for donors to charities.  The key resource we provide is our website and within that is the system we use to evaluate the performance of charities through a rating system of zero to four stars.  It's a very rich site with all kinds of resources and tips.  In addition, we see ourselves as an advocate for donors in the public square, so whether it's speaking before Congress or interviews with the media or talking to nonprofit groups and their trade associations.  It's about providing a voice and perspective and interests of donors.  What makes us unique in this regard is the fact that we make judgments.  There are only a handful of organizations that actually rate charities. People often think that Guidestar does, but if you look at their exchange it just shows whether a charity has supplied certain information.  On the other hand, we actually judge the quality.   We are also somewhat unique in the sense that we don't charge anybody.  We don't charge the charities that we rate to use our seal and we don't charge the users of our service.  We are completely free to everyone.  I'm not aware of any service of the size and scope of Charity Navigator that is completely free.  I think we're distinctive in being the most scalable evaluation system out there that has some depth.  Scalable meaning that we're larger than anyone in terms of the number of charities we evaluate and we provide more depth of analysis than some of the crowd funding sites that are basically just the will of the crowd that often do not have expert analysis.

It sounds like Charity Navigator is similar to Consumer Reports in terms of your independence and objectivity in providing evaluations of charities?

Berger:  Yes!

How do you rank charities?  What are some of the major charity red flags donors should be aware of and how do you spot them?

Berger:  We rate charities on a scale of zero to four stars.  I emphasize that we rate rather than rank.  We use a three dimensional system.  Two of the dimensions are fully operational and the third is currently under development.  The first dimension looks at the finances of the charity and assesses their health from a financial perspective.  The second dimension, called accountability and transparency on the website, focuses on governance and best or ethical practices for their operations.  The third dimension, which we have begun to post information on but have not begun to rate charities on yet, is what we call results reporting.  It looks at matters related to outcomes, impact, and in some cases, outputs of the charity.  How are you meeting your mission in a meaningful way?  And are you reporting on that in a meaningful way in the public square, particularly on your website?  Those are the three major areas that we consider.

In terms of red flags for donors, there are a few that are quick and easy.  One is if a charity gets our lowest rating of zero or even a one start rating.  It means that it has poor or extremely poor performance compared to industry standards.  We would encourage donors to be very cautious about supporting organizations that are at that low level of scoring in our system.  There are two other ways that a person could quickly find red flags using Charity Navigator.  The second is called Donor Advisories.  We put up a Donor Advisory if we become aware that a charity has something significant going on that may go beyond what we typically rate a charity for that could be of serious concern to donors. Typically either the charity is currently under investigation by some governmental entity or had some major lawsuit going on often having to do with embezzlement or fraud issues. Even if the investigation or the court case is not concluded, it's something that might give a donor pause until that investigation or lawsuit has reached its end.  The last way to look for a red flag is something that is brand new called the CN Watch List.  These are situations where a charity might not be subject to a governmental investigation or lawsuit, but a reputable media outlet may have conducted an investigation and is reporting some concerns.  When there is a Donor Advisory we stop rating the charity because we wonder whether the information is necessarily accurate if there are other problems.  If there is a CN Watch List entry, we still continue to rate the charity since it doesn’t always rise to the level of severity of donor pause or a Donor Advisory.

Those are the quick ways we provide donors with red flags to be aware of.  Separate from Charity Navigator it would fall within these three dimensions.  So if you see a charity that has the vast majority of its money going into administrative and fundraising expenses rather than programs, we think that is a cause for concern.  However, remember we believe you need to look at an organization three dimensionally, so if an organization has slightly more overhead than another organization that you're considering, that should not be the only thing that you look at to make your decision.  What I'm talking about here is extreme cases, where let's say 60%-70% of the money is going to overhead.  But just because one organization has 25% overhead but another has 30%, it should not be the single factor in our opinion to decide which charity to support.

The second area for red flag would be in the issue of governance.  If you look at some of the metrics that we consider, one thing that we have found on a number of occasions that can be a worrisome indicator is a small board of directors.  The board is supposed to be in charge of the charity, not the CEO.  The board is supposed to set the direction for the organization and then the CEO executes that strategy.  But small boards that don't have diverse expertise or for boards that have friends and relatives of the CEO, the amount of oversight and independence is often not there.  We often see that these kind of fraudulent activities are much more likely to happen when the CEO is basically unfettered and unmonitored and unaccountable from a board perspective.

There have been several news stories about charities that spend most of their money on solicitors and a small percentage of their funds on direct cash aid in furtherance of their mission.  Some of the examples are quite shocking and may be hurting the reputation of the entire charitable organization sector.  Should Congress consider passing laws that impose minimum performance or conduct standards for charities to maintain their tax exempt status?  Or are there other ways to force sham charities out of business?

Berger:  Let me start by saying that because of the nature of this job I've had more exposure to the media and these types of stories than ever before.  There is a profound problem in the nature of news when it relates to the nonprofit sector because the typical news reporter will focus on controversy and problems.  Those charities that are doing bad things get highlighted and there really is a problem where some donors come to the conclusion, how can you trust anybody when there is all of this bad stuff going on?

Remember there are 1.5 million nonprofits and even if there are a hundred or even a thousand reports like this per year, it gets into the public consciousness more than the good news and it definitely can as you indicate hurt the reputation of the entire sector.   A number of my colleagues will still say that problems are very rare.  My experience is that it is not rare.  It is a real problem in the sector.  There needs to be more monitoring and oversight of the sector, but it's certainly not the majority of charities.  To say that it is rare as some in the sector do I think doesn't take it seriously enough.  It's a serious problem.

In terms of Congress passing laws in this area, when I think of that I think of a balloon and if you squeeze the bottom of the balloon then it all gets to the top.  I suspect that if you just pass a law with these kinds of things in place there will be other ways to manipulate and abuse the system.  It is one of the challenges of regulation.  I think a bigger problem here is the vast underfunding of enforcement organizations both at the state and the federal levels.  So even for existing laws, the amount of enforcement is minuscule at best and if anything we are moving in the wrong direction because with the imploding of state government funds and the fact that at the federal level the enforcement agency is the IRS whose mission is to collect taxes.  So if that's the mission, you can understand in part why its oversight of those organizations is tepid.  Additionally, you have lobbying efforts by multimillion or even billion dollar nonprofits such as hospitals and others.  So when I look at existing laws and their enforcement, we have a structural problem.  The point is if Congress were to simply passing more laws, they are not going to get enforced since the existing laws aren't.  I definitely do think that government needs to play a much more active role in investigating sham charities and in putting them out of business and in having clearer policies about what it is a nonprofit and what are the parameters around how a nonprofit operates.   The use of solicitors where only a small amount of money is going to the mission is an issue.   But a much bigger problem that has to be addressed is the increasing vagueness of what the definition of a nonprofit is.  I recently published an article titled Nudity, Ghosts, and Perpetual Indulgence and the question is what do these three things have in common?  They are the mission of a variety of charities promoting nudity, perpetual indulgence, and having ghost boxes in your house to get rid of your poltergeists.  Those are real charities!  On the other end of the spectrum you have nonprofit hospitals walk like a duck and talk like a duck when you compare them to their for profit peers.  More often than not they are virtually the same except they do not have to pay taxes, so they have the strategic business advantage.  I think the real fundamental problem in the oversight and the policy of how we define charities in the sector.

Are there any specific laws on the books that could be enforced easily that would have a big impact?

Berger:  There are a couple of states, I believe Oregon and Florida, that tried to pass laws stipulating that if you don't have at least 30% of your funds going to programs then they would revoke your tax exempt status.  These were the simple laws that they tried to pass and I believe the lobbying juggernaut wiped them out.  We're talking 30% and that can't pass!  There is an organization that was recently founded called the Charity Defense Council that is aggressively fighting against anything to do with overhead at all.  They argue that even if it cost a charity more than a dollar to raise a dollar, maybe that's not so bad because now you have a new donor list and in years two and three you could raise more money.  So there's a real resistance to this, some real opponents to any basic accountability in the fiscal realm. So to directly answer your question, no I do not think any specific laws could be enforced easily. However with hard work, laws are on the books that could have a big impact. For example, enforcing intermediate sanctions can penalize a “disqualified person” who is in a position to exercise substantial influence with respect to the organizations affairs and receives financial gain from the organization that exceeds the value of services provided.

If someone is interested in becoming a board member of a non-profit what steps should they take in terms of their due diligence, reaching out to an organization, etc.?  Are there any formulas that charities use to determine what their “give or get” requirements will be?

Berger:  In terms of due diligence I would humbly submit that looking at the kind of metrics that we consider at Charity Navigator would be a good part of the exercise, so looking at the financial statements, the 990's.  Does it appear the organizations are managing their money well?  Do they have sustainability?  Do they have some reserves?  Do they typically have a surplus rather than a deficit?  There can be deficits on occasion but overall there should be evidence of positive financial health. Does it have a diverse board?  Also really eyeballing the organization, going and visiting and seeing what they are doing on the ground, especially when it comes to the results that I mentioned as the third dimension we consider.  Unfortunately, there is just so little currently available in the public domain on the meaningful evidence of results for an organization.  So you probably have to go there.  There are all kinds of reasons for going and actually seeing for yourself what they are doing, and learning about how they measure their performance for meeting their mission.

In terms of give or get formulas, they are all over the parking lot.  There is everything from $100,000 for certain boards, such as universities and some of the arts organizations that may be in that sort of stratosphere. There are some that have no requirement at all, it's whatever you can give or get.  So there is tremendous diversity in requirements.  I think another thing a board member should do is very quickly, early on, find out about this because if it turns out that there is not going to be an alignment with their capacity or interest then you may not have to go through the rest of the process.  I do think though that there are a couple of fundamentals that anyone interested in joining a board should have in mind.  Every board member should have a responsibility for helping with fundraising or helping with getting the message of the organization out.  This could include going through their rolodex and seeing their friends and colleagues that might be able to support the organization or hosting events.  Even if they are not a person of high net worth, every board member should be involved in the critical role of raising the funds, especially because the most precious funds for many nonprofits is general operating support. Often government and foundation grants are restricted so the money for unexpected events and needs and services is critical and the board can help in that regard.  I think that the give or get requirements also vary by the size of the organization and the type of organization.  There are some organizations that are almost entirely government funded and may have a very soft touch on this subject, where there are other organizations that receive almost entirely private contributions and really need a much more involved board in that regard.

Governance best practices have been a major focus in the corporate world over the last several years.  Are non-profits also being scrutinized for their governance practices, and if so, what are the current hot topics?

Berger:  A few years ago, Independent Sector spent millions of dollars and years working with a number of nonprofit experts to develop a manual which is now free and online. Not only is there a manual of guidelines for governance practices but also a workbook that can walk you through implementing and ensuring you have the best governance practices.  It is called Principles of Good Governance and Ethical Practices – A Guide for Charities and Foundations.  There has been a lot of work on this for quite a few years and I think it was very much in the minds of Independent Sector, which is a major trade association, a few years ago when various scandals and problems arose in the sector.  If an organization is following the handbook they would be much less likely to have problems.  The issue is that people will start a nonprofit and not do their own due diligence.  So it's not just prospective board members; founders of nonprofits will often not do the due diligence to see what are the best practices for governance and finance and so forth. They also will not do the due diligence to see whether or not within the universe of 1.5 million nonprofits, perhaps there is already an organization that is already doing this that I should align with and put my ego at the door, rather than having to create yet another nonprofit with my name on it.

In the corporate world there was a backlash against “overboarded” directors, i.e. individuals that serve on too many boards at the same time to be effective.  Do non-profit boards take current levels of responsibilities and commitments into consideration for current or prospective directors?  If not, should they?

Berger:  They definitely should but I think just like in the case of give or get the reality on the ground is all over the place.  There are some well-run organizations where they have not just a nominating committee but a governance committee.  I think it is a best practice to have a governance committee rather than a nominating committee because the governance committee not only helps to recruit new board members, but also does a self-assessment of the performance of each and every board member on some periodic basis to make certain that they are fulfilling an adequate commitment to the organization.  There is not enough of that going on.  I think in the nonprofit sector, most are desperate for getting more talent and commitment on their board.  There are often boards where people are sort of show-boated and aren't really actively involved.  I think the best practice is that if you are on a board, you are not just there for your name; you are actively attending and participating at the board and committee meetings.  You see your role as funding and evangelizing for the charity as a core part of your duties and that the vetting of new board members considers their commitment and understanding of the responsibilities. There should be an orientation for new board members to reinforce their understanding of their responsibilities and commitment, and then there should be an ongoing assessment of those board members to see that they are indeed walking the walk of those responsibilities and commitments.  The governance committee should compile a scorecard on an annual basis or at least every three years, where they conduct an assessment of individual directors that includes attendance at board and committee meetings, meeting the give or get policy, recruitment of others, etc.

At one point attorneys were not considered ideal candidates for corporate boards but recent studies have shown an increase in lawyer-directors.  Is there a general bias towards or against attorneys as directors of non-profit organizations?

Berger:  It is perfectly fine to have attorneys on the board.  However, it is very important and many boards don't realize this - it is generally inadvisable for the attorneys on the board to provide legal advice to the board or the organization because of the exposure and conflicts that can entail and hamstring that board member. The best practice is if the board wants to have that legal counsel and I think it's a good idea, they should have a pro bono legal counsel attend the board meetings who is not a board member, and that distinction is important.  There are a lot of very affluent and influential attorneys out there, so generally charities would welcome their knowledge.  For example, the attorney that is on our board is very good at reviewing the factual accuracy of documents which doesn't put him in harm’s way, but his attention to detail and language, for example, is very helpful to the board.

Do non-profit boards reflect the same level of diversity (e.g. gender, race) as you find in society?  If females and/or minorities are underrepresented are there any efforts being taken in the industry to correct this?  

Berger:  The answer to the first question is no, the answer to the second question is yes, and now the details.  Absolutely there is a real problem in terms of the lack of diversity.  In addition to gender and race there also needs to be a diversity of skills on the boards.  Part of the reason for this may be that structural problems remain in the society that I think are reflected back in the boardroom. We still have the reality that women make less money than men.  We still have the reality that African Americans make less money on the whole than whites.  If a nonprofit board is looking for high net worth individuals to support the organization, there is an implicit if not explicit bias by gender and race because of the socioeconomics.  There is that built in challenge.  I think a lot of people within the nonprofit sector just by their nature and values aren't happy about that and are making efforts to change this, which also includes finding younger people too.  They are trying to get more of a match between boards and people looking for board service and I do think they have emphasized diversity in the people they are trying to bring in.  Nonprofits have been encouraged to be very conscience about setting policies in this area.  I still think we have a long way to go and there are some structural realities on the ground that nonprofits are struggling with.  In some cases there have been interesting efforts, like for community health centers to get funding from the federal government it is required that at least half of the board is made up of the people you are serving.  That is one kind of effort being undertaken to correct the situation.

What are the most frustrating and rewarding parts of your job?
Berger:  I think the most frustrating part of the job is that there is so much more we would like to do, and this is a typical nonprofit problem so I'm sorry if it sounds kind of generic but it's the case. There are a million 501(c)(3) organizations and we currently rate 7 thousand.  The good news is those 7 thousand receive 55% of all private contributions each year (not including houses of worship). That translates to our covering $110 billion out of $200 billion that Americans donate each year.   People will come to our site and say, well I looked up my charity and it’s not there, I'm frustrated.  I think a lot of people don't realize we are also a charity and that the only way we are going to get to the scale that they want us to will be if people step up voluntarily and help us to get there.

The most rewarding part of the job is that I spent 30 years running charities being in the trenches, and I observed a lot of the good, bad, and ugly in the nonprofit sector. After I started this job, all of a sudden people wanted to know my opinion and I had microphones in my face, I'm on CNN, NPR, quoted in the New York Times, etc.  The reward is being able to take those 30 years of experience and observations and have the opportunity to have a platform to share what I know and to have some sense of leverage and impact to be able to help to move along some changes to make things better for the way the nonprofit sector operates, and for the way people have information to give to charity and to think about charity.  That is definitely incredibly rewarding to be able to do that.  To be working in a charity where you can see the impact and feel the impact.  We estimate that we're influencing $10 billion of charitable giving each year at this point, and each year that I've been here we've broken records in terms of the number of visits to the site, the number of people who are using the information so that's been very rewarding.  I just continue pushing to do more.

More information about Charity Navigator, including how to donate, can be found on its website, www.charitynavigator.org.

Interview conducted by John Okray, chair of the Federal Bar Association’s Corporate and Association Counsel Division.


8 comments:

samwardjr said...

Ken, We support several of your three and four star rated charities with once a year donations. We have been disturbed that, even from four star rated charities, we are bombarded with additional requests for support - a waste of the donated dollars. This year we sent a letter to those charities informing them that our donations will be made only once a year since we are retired and on a fixed budget. Our letter also included a request that none of the money provided be used to solicit additional funds from us or, beginning next year, we will find another similar charity to replace them on our list. We hope it works. We will let you know next April, our month of charity donations.

samwardjr said...

Ken, We support several of your three and four star rated charities with once a year donations. We have been disturbed that, even from four star rated charities, we are bombarded with additional requests for support - a waste of the donated dollars. This year we sent a letter to those charities informing them that our donations will be made only once a year since we are retired and on a fixed budget. Our letter also included a request that none of the money provided be used to solicit additional funds from us or, beginning next year, we will find another similar charity to replace them on our list. We hope it works. We will let you know next April, our month of charity donations.

Ken Berger said...

Samwadrdr

Excellent strategy! I am looking forward to hearing the results.

Ken

William Brown said...

I am surprised that there are not more comments posted on this important topic! When I work with businesses to help them define their own unique Corporate Citizenship model we often get into discussions about the "right" charitable non-profit partner. Will the supported organizations branding resonate with the Customer, Employee, Stakeholder? Sure there are a few bad apples out there but let's focus on the "why" question first and look to organizations like Charity Navigator to help us in our diligence. Why should we select a specific partner to support? If we cannot stand behind our decisions with credible facts and data on performance and delivered outcomes the root problem is ours! Thanks for helping us Ken, we need it to make better decisions.

Ken Berger said...

William,

Thanks for your feedback William. I believe that there is plenty of "blame" to go around when it comes to the problem of data on performance and delivered outcomes. However, I think you have the right approach to look to ourselves first and identify our part in contributing to the problem.

My pleasure to be of service!

Ken

Anonymous said...

I am disturbed by what seem to be excessively high salaries by CEO's, presidents and other officials of many non-profits. Even if a charity has a large budget, does that justify salaries of a quarter to a half million dollars or more a year, considering the primary reason for the charity's existence is to benefit society or the world in general. Am I being unrealistic and behind the times?

Ken Berger said...

Anonymous,

The short answer to your question is it does justify a high salary sometimes. As we indicate in our annual compensation study (find it here -
http://www.charitynavigator.org/index.cfm?bay=studies.ceo#.U7qoMfldV8E) we believe that charities must pay what the market requires. Usually a CEO compensation study determines this via assessing things including - budget size, cause area, geography, and unique experience of the individual. It is typical for charities of mid-to-large size to pay a six figures salary. I have a problem with seven figure salary and high six figure salaries for all but the larges (i.e. billion dollar orgs). So the truth is somewhere in the middle in our view. These of often very large and complex organizations and we must pay for the talent required to run them. However the notion that people become millionaires running charities is something I find dead wrong and am on the same page as you are.

Best,
Ken

Anonymous said...

As a widow on a fixed income I have the same problem as samwardjr. The amount of correspondence from the groups I give to is unbelievable. Some send stamped envelopes or enclose stamps for my use. What a waste of funds! In addition it seems to spawn a whole lot of other solicitations from groups I don't support.

I am at the point where I may simply stop supporting all groups and I plan to send out letters to tell them so.

Lastly I find the fundraising by participating in runs, bike rides, half marathons etc. by individuals, friends, co-workers and such, a total coercion and a scam.