Charity Navigator Confronts Its Critics as It Seeks to Expand

MARK ABRAMSON, FOR THE CHRONICLE

Few charity founders have had as much influence on the debate over how donors should decide where to give as John (Pat) Dugan. After he came into some money thanks to a business deal in 1998, he wanted to be sure his donations to charity did not go to a mismanaged or crooked organization like some that had recently been in the news.

“I didn’t know anything about charities,” he says. “I looked around and there really wasn’t anywhere to go. It was a daunting feeling.”

So he started Charity Navigator, in Glen Rock, N.J., in 2001, creating a resource for people like donors who want to give after a disaster and journalists writing about charity wrongdoing — and a bête noire for nonprofits that say they have been unfairly dinged by its ratings.

The group remains the most prominent, and thereby most controversial, charity watchdog in an ever- burgeoning field.

It now rates more than 8,000 large nonprofits, awarding from zero to four stars based on their financial health and good-governance policies, with plans to increase the number to 10,000 by 2016. More than 7 million people consulted Charity Navigator’s website last year, and hundreds of groups that get the top rating advertise Charity Navigator Four Star Charity logos on their home pages and fundraising appeals.

They include the Center for Victims of Torture. Peter Dross, director of external relations, says a fundraiser calls everyone who has donated at least $250, and “with increasing frequency, when she calls first-time donors and asks how did you learn about us, they say, ‘We looked you up on Charity Navigator.’ "

But as Charity Navigator’s influence has grown, so have the attacks from nonprofit leaders who contest its methodology and its capacity to evaluate so many diverse organizations. The watchdog is seen as a key propagandist for a message that has become increasingly anathema in the nonprofit world: that donors should favor charities that keep their overhead costs low.

TODD J. DONERY

That notion penalizes nonprofits that invest in fundraising or administrative functions that could strengthen their operations, the argument goes.

More militant critics, like Steven Nardizzi, chief executive of the Wounded Warrior Project, urge their colleagues to ignore Charity Navigator and set up alternative ways for donors to judge whether a charity is worth their money.

But others see an opening for a new conversation with the group, thanks to an unexpected development: the departure last month of Ken Berger, after almost seven years as chief executive. He left after the board decided the group needed a more tech-savvy leader as it launches its most ambitious undertaking to date: an effort to assess how well charities measure and report on their impact.

Shortly afterward, the California Association of Nonprofits dashed off a letter to Mr. Dugan, who chairs the board, and other trustees suggesting several changes to Charity Navigator’s methodology and urging them to spread the message that spending too little on overhead is a more common problem than overspending.

“A factory that underinvests in overhead,” it wrote, “will soon find its roof is leaking, its electrical systems failing, without adequate insurance, and without the investments in staff compensation and training that are key to success.”

Hard to Judge

The overhead conflict reflects deeper questions that have dogged the nonprofit world since the Internet opened Form 990 tax filings to the public eye, making it much easier to compare how charities get and spend their money. What is the best way for individuals who don’t have a sophisticated understanding of nonprofit operations to select charities? In the absence of third-party evaluators, how can they be sure they are giving to a financially sound organization?

“What do these people propose?” says Mr. Dugan. “That nothing be done, that we don’t give people any help?”

Critics of what is now called the “overhead myth” say donors should judge a group by how much impact it has. But few charities document that in a methodical way, and third-party evaluations are extremely time consuming.

Charity Navigator, which traditionally has relied mostly on Form 990 data to calculate its ratings, still gives higher marks to charities that keep fundraising and administrative costs low as a percentage of overall spending. But it has gradually diminished overhead’s importance, first by starting to assess accountability policies and transparency as well as finances in 2011 and now by introducing an effort dubbed “Charity Navigator 3.0.”

If the group raises enough money, it plans to factor “results reporting” into its ratings by the end of 2016. It won’t assess the results itself but will look at things like whether charities post evaluation reports or survey their primary constituents.

The move has drawn praise from some nonprofit experts. “Charity Navigator has been very effective in moving the needle culturally,” says George Mitchell, an assistant professor of political science at City University of New York, who studies charity evaluation. Now that it is examining “logic models,” or tools for assessing program effectiveness, “nonprofits notice that and say, Do we have logic models? Maybe we better get one.”

Shunning 4 Stars

Others are less impressed. “Charity Navigator has unfortunately distorted the market,” says Ned Breslin, chief executive of Water for People, a global water and sanitation group. “They’re kind of scrambling now to almost undo it.”

He likens Charity Navigator’s efforts to trying to fix a bad pasta sauce by throwing in carrots: “It doesn’t hide the reality that the sauce is off.”

Water for People has four stars but refuses to advertise it since Mr. Breslin says the rating tells donors nothing about whether his group is having any impact. If the charity can show that water is flowing, he says, “do you really care how I’ve invested that money? Probably not. If I wasn’t achieving those goals, it means my investments sucked no matter what box they’re in.”

The water charity has developed its own way to report on its finances, activities, and impact — an online interactive platform called Re-Imagine Reporting — and Mr. Breslin says charities need to make more efforts like that to help educate donors.

Questions of Growth

Other nonprofit leaders are more receptive to Charity Navigator’s results-reporting effort but want the watchdog to fix its existing methodology.

“We feel very confident about Charity Navigator 3.0,” says James Tuite, vice president for finance and operations at ChildFund International. “We have very good impact reports.”

But Mr. Tuite, a member of a group that advises Charity Navigator on its financial measurements, says he hopes the new chief executive will revive conversations the two sides were having about the watchdog’s practice of scoring charities higher if their primary revenue is growing, something he says reflects a “for-profit mentality.”

“When people are giving $28 a month to support a child in one of our programs, I don’t think they’re so focused on whether ChildFund is growing at 10 percent or 15 percent a year,” he says. A group might have a good reason for declining revenues, he says, for example, if it is withdrawing from a country where it has achieved its goals.

InsideNGO, an association of global relief and development nonprofits, also criticizes Charity Navigator’s emphasis on revenue growth and overhead costs and hopes to persuade its new leader to improve the methodology, or even ditch evaluations of charity finances altogether.

“If Charity Navigator continues to rely so heavily on old financial metrics,” says a critique by Eric Walker, a senior adviser to the association, “it is at risk for becoming obsolete.”

Mr. Nardizzi of the Wounded Warrior Project says his group never could have grown the way it did — its net fundraising proceeds increased from $16.5 million to $273 million from 2008 to 2014 — without investing in direct-mail and TV appeals to acquire donors, an expensive undertaking.

Charity Navigator is not ready to budge on the overhead measurement, arguing it protects donors from charities that, for example, send most of the money they raise to commercial fundraisers.

“I only wish them well if they’re doing good work,” Mr. Berger said of the Wounded Warrior Project in an interview before he left Charity Navigator. “But to completely abandon the importance of overhead is reckless for most charities.” The notion that a group could spend 99 cents of every dollar on such costs, he said, “would be offensive.”

The watchdog also argues that small to moderate revenue growth assures donors that a charity is financially sustainable but says it will continue to meet with charity leaders about ways to improve its rating system in that area.

Susan Barrows Libby, InsideNGO’s director for external relations, highlights a more fundamental concern about Charity Navigator as it expands the number of charities it rates and adds results reporting to the mix: “It’s impossible to give any kind of meaningful rating to all of the nonprofits they’re trying to rate.”

“I think they’re trying to bite off too much,” agrees Jacob Lief, founder of the Ubuntu Education Fund, which provides services to children in South Africa. Charity Navigator stopped assessing Ubuntu in 2014 after the nonprofit protested its two-star rating, which was based solely on its Form 990 tax filing. By discounting the group’s combined audit, which reported program spending by its international affiliates, the watchdog calculated high overhead percentages and other negatives.

The watchdog eventually conceded that its methodology did not fit a group like Ubuntu. “The individual 990 does not capture the charity’s foreign affiliates, which are substantial to its work and model, and so we removed the rating,” says Sandra Miniutti, vice president for marketing.

But Mr. Lief is still miffed about the two stars, wondering how many potential donors were put off. “It could be nobody, it could be hundreds of donors. Who knows?”

Bigger Staff

Charity Navigator, with revenue in 2014 of $1.8 million, is the first to say it would like more money and employees. It plans to double its staff to 28, partly by tapping into its reserves, and expects to add three fundraisers who can persuade more people who use the site to donate. Less than 1 percent of them do now, the watchdog says.

“If there’s anything I lie awake at night and worry about, it’s that,” says Mr. Dugan. “We have this tremendous opportunity with Charity Navigator 3.0 to be just the ultimate answer to selecting a charity.”

Eventually, he says, “we’re going to have to double, triple our staff, and all the expenses that go with it, like where do we put them, and consultants and all the other stuff you have to do as your organization gets larger.”

Mr. Dugan, who made money when his pharmaceutical-sales company went public, and his wife, Marion, provided the bulk of Charity Navigator’s funding through 2007. Today, 69 percent of revenue comes from users of the site, 17 percent from board members, 14 percent from foundations, and a small amount from advertising, sales of data, and speaking fees.

The group received $575,000 over five years from the William and Flora Hewlett Foundation’s Nonprofit Marketplace Initiative, but the grant maker has wound down that program.

Even in Mr. Dugan’s vision, a small number of people will be asked to handle an enormous task. Jacob Harold, chief executive of GuideStar, an online service that posts information about charities, says he hopes his group can team up with Charity Navigator in a “kind of division of labor.”

Watchdog critics often portray GuideStar as the “good guy” because it supplies information to help donors evaluate charities, but it makes no judgments. It posts data on 1.7 million charities, including Forms 990 and information that groups provide themselves.

Charities can earn Bronze, Silver, or Gold Exchange status, depending on how many details they submitted — from basic information like mission statements to sophisticated “Charting Impact” reports on their goals, strategies, and progress.

GuideStar employs 72 people and has collected 2.5 billion pieces of data, including reports from 106,000 Exchange participants, Mr. Harold says. “If we focus on what we’re good at, which is collecting and organizing data at scale, they can focus on analyzing that data,” he says.

The nonprofit world can’t ask donors to rely solely on GuideStar, Mr. Dugan says, calling the service a great resource for professionals like his group’s analysts but not so useful for the “man in the street.”

“Most people are basically lazy. They don’t have a lot of time to devote to this,” he says.

But the watchdog has been talking to GuideStar about a division of labor, Ms. Miniutti says, and “it is something we will continue to explore.”

As Charity Navigator responds to its nonprofit critics, its first chief executive, Trent Stamp, executive director of the Eisner Foundation, offers some advice: “I hope they keep in mind that they were founded to protect donors, not to be a friend of the nonprofit sector.”