May 13, 2011

Donors Need a Better Way to Rate Charities

The Three Cups of Tea scandal has highlighted many of the problems that face the nonprofit world.  More than 160 posts and articles have been written about the scandal.

Even so, one topic has received far too little attention: the wildly different scores that the Central Asia Institute, the nonprofit founded by the book's author, Greg Mortenson, received from charity rating sites. Those big swings suggest that the rating systems we have in place today are much too weak to protect donors.

The philanthropy consultant Lucy Bernholz did take on the issue in a recent post in which she links to the American Institute of Philanthropy's page criticizing the institute for its questionable response to requests for audited financial reports. The institute's founder, Daniel Borochoff, also appeared on the "60 Minutes" segment that touched off the controversy.

The post also linked to Charity Navigator's 4-star rating of the institute - which Charity Navigator amended with a donor advisory once the scandal broke.

Looking at other watchdogs, no clear trend emerges:

  • On Great Nonprofits, which allows anyone to rate a nonprofit, the institute received all 4-star reviews before the scandal broke.
  • GiveWell's site states that in 2009 it conducted a preliminary review of the institute, and it did not meet GiveWell's criteria to merit further investigation or recommendations.
  • I also evaluated the institute on The Charity Rater, a system I developed to help donors, and it received a score of 19 percent out of a possible 100 percent.

    What is the average person to do when two rating systems give Central Asia Institute four stars and three rating systems say that they can't offer a rating  due to a lack of information?

    The current system of rating charities is far too limited. Here are the key strengths and weaknesses of what we do today:

    Crowdsourcing. Systems like Great Nonprofits allow charitable watchdogs to gather information from a wide variety of people and sources and they do not rely on information from the nonprofit, so those evaluations are only as good as the crowd.

    Using information from the 990 tax form. These systems, like Charity Navigator, can evaluate lots of charities in a systematic way. But the information obtained is very limited and is often incorrect.

    Requesting information from the nonprofit. Organizations like the American Institute of Philanthropy and GiveWell seek out lots of information to conduct an in-depth evaluation.  But they can't do a thorough job if the nonprofit doesn't cooperate.

    It's not just average donors who can't find what they need. The Central Asia Institute received a nomination for the Nobel Prize, after all—and it got a large donation from President Obama. This high profile shows that very few people even turn to nonprofit rating sites to figure out whether an organization is reliable or transparent.

    So how do we encourage—or force—more nonprofits to share more information? And how do we develop—and finance—accurate systems that do not require the participation of a nonprofit?

    Discuss your ideas for the way forward in the comments section below.