News and analysis
October 02, 2011

Charity Watchdog’s New Standards Focus on Nonprofit Governance and Openness

The watchdog group Charity Navigator revamped its ratings system last month as part of a plan to move beyond evaluating charities based solely on their financial performance.

The Web site now places equal weight on a charity’s governance and openness about its operations as it does on financial information when it awards ratings of one to four stars.

Ken Berger, Charity Navigator’s president, said the new system would give donors a clearer picture of how charities are managed and nudge nonprofits to improve their governance practices.

“Our basic belief is that any charity that a giver should be considering should have certain basic best practices, governance procedures, and openness in sharing information,” he said. “Organizations that have those procedures, those practices, and that are open are less likely to get into ethical problems.”

For three years, Charity Navigator has been exploring how to improve its ratings system. Critics say the watchdog group’s emphasis on what share of a charity’s money goes to administration has been misguided.

Mr. Berger said last month’s change was a first step. With help from chief financial officers and other experts, the watchdog group is now examining whether it ought to adjust the way it assesses charities’ financial performance. The organization is also exploring how to evaluate what steps charities are taking to measure whether their programs are effective.

Charity Navigator expects to announce further plans for changing its methodology sometime in 2012.

‘A Welcome Addition’

Nonprofit leaders and officials of other watchdog groups called Charity Navigator’s move a step forward but said they still had concerns.  

“It’s a welcome addition,” said Jeff Whisenant, executive vice president of Lutheran World Relief, an international aid group. “Charity Navigator hasn’t really done any favors for the nonprofit sector by directing such focus to administrative costs.”

H. Art Taylor, president of the BBB Wise Giving Alliance, which also assesses nonprofit groups’ governance practices, said Charity Navigator’s reliance on nonprofits’ tax filings and Web sites means that its ratings won’t capture some important information about nonprofits’ policies that BBB gleans from its back-and-forth with charities.

Mr. Taylor also said he wondered if it was really possible for a charity to be fairly assessed using a simple star system.

Holden Karnofsky, co-executive director of GiveWell, which seeks to assess the impact of a nonprofit’s programs, also applauded Charity Navigator for taking a critical look at how it evaluates nonprofits. But he said the ratings system still ignores the key question about a nonprofit: how good is it in carrying out its mission.

“The problem we had before is still the problem we have today, which is, you can’t look at this and learn very much about whether a charity is succeeding in helping people,” said Mr. Karnofsky.

To perform well on Charity Navigator’s new system, a nonprofit must share certain information on its Web site and in its tax filings.

A charity can no longer receive four stars, the top score, if it doesn’t have a board of at least five people, if its money has been diverted for purposes that don’t relate to the charity’s mission, and if the group lacks an independent audit of its financial information.

Other factors include whether the group has a whistle-blower policy, lists its chief executive’s salary in its tax filings, and keeps minutes of its board meetings.

Mr. Berger said he initially thought that adding a transparency component wouldn’t be “that big of a deal.” But 2,700 groups, about half the nonprofits rated by Charity Navigator, received different ratings under the new system.

Shifting Ratings

About 30 percent of groups got higher marks. Lutheran World Relief, for example, earned four stars instead of three because it met Charity Navigator’s standards on transparency.

It didn’t do as well under the old system because it didn’t record steady income growth, a common problem for international aid charities that receive much of their money after natural disasters.

The American Red Cross and the Juvenile Diabetes Research Foundation International also did better under the new system because they met all of Charity Navigator’s accountability standards.

Other groups saw their ratings drop. For example, the William J. Clinton Foundation, Dress for Success, and Operation Blessing International lost their four-star ratings largely because they did not have at least five independent board members with voting rights.

Diverse Circumstances

Another group that went from four stars to three was Volunteers of America.
The group was downgraded because, according to Charity Navigator’s Web site, it didn’t have an independent audit of its financial information, make its donor privacy policy readily available on its Web site, or provide a copy of its federal informational tax return to its board in advance of filing it with the Internal Revenue Service.

That is not entirely true, said Jatrice Martel Gaiter, the group’s executive vice president for external affairs. The organization does have a privacy policy on its Web site, she said.

In other ways, though, Ms. Martel Gaiter said her nonprofit appears to be an example of how Charity Navigator’s one-size-fits all rating system doesn’t take into account different charities’ individual circumstances.  

Because the faith-based social-service organization is registered as a church, it isn’t required to file a Form 990 with the IRS. But it does voluntarily fill out a 990 and share its financial information with its board.

As for the audited financial statements, Volunteers of America is a national group with 36 affiliates. The national group and the affiliates all have independently audited financial statements, but it has no audit of those aggregated financials, she said.

Asked by The Chronicle about the organization’s audit, Mr. Berger said the group did seem to meet Charity Navigator’s criteria on that count and would probably receive more points. Ms. Martel Gaiter, who said she was pleased that Charity Navigator seems open to receiving feedback, said she would be giving Mr. Berger a phone call.

“We are going to do everything we can to become a four-star charity,” she said. “Every nonprofit needs to go back and look at their ratings with a fine-tooth comb and make sure their intent is being conveyed.” 



The Results of Charity Navigator’s Standards Changes

• 30% of the 5,500 nonprofits rated by the watchdog won higher ratings

• 19% of charities performed worse under the new system

• 22% of groups now have the top rating, four stars, a 20% drop as compared with the old system

• 47% of groups are now rated three stars, compared with 33% before



Charity Navigator’s New Standards

What’s different: A charity’s governance and transparency practices are now considered along with its financial information in determining its rating.

How the rating system works: An organization loses points from a perfect score of 70 for governance and transparency if its money has been diverted for purposes other than its mission, if its financial information is not audited by an independent accountant, or if the group doesn’t have at least five independent board members.

Points may also be docked if the charity doesn’t share information on its process for determining the chief executive’s compensation; does not list its tax filings, board members, or certain other information on its Web site; or lacks whistle-blower and conflict-of-interest policies, among other factors.

What’s the same: Charity Navigator’s process for determining a group’s financial health is still based on how it spends money and whether its revenue is growing.