Charity Navigator, the prominent charity-ratings group, has been trying to transform itself into an organization that tells donors not only how a nonprofit spends its money but also how well it measures its impact.
But Michael Thatcher, a former Microsoft technology executive who was named chief executive in August, is discovering just how challenging that can be. Shortly before he joined the organization, Charity Navigator decided to stop gathering data for “CN 3.0,” its much-vaunted effort to add results reporting to its ratings system, and to reevaluate its approach.
The problem: Most charities could not provide the information that Charity Navigator was seeking, about things like how they assess their progress or get feedback from the people they serve. “Most organizations are not yet truly working on a results basis,” the watchdog group explains on its website.
Mr. Thatcher, who says the results-reporting project was a key draw for him when he accepted the Charity Navigator job, was unaware of the decision when he started work.
“It was a bit of a surprise,” he said in an interview, “but I totally understand why we did what we did. The rethink is going to benefit everyone in the long run.”
Now he is exploring ways to recharge that project while reviving an effort to tweak the often-criticized way Charity Navigator evaluates charity finances — a venture that lapsed as the organization focused on CN 3.0.
“We’re looking at taking our own observations of what works, feedback we’ve had over the years from charities themselves, from people in the sector,” he said.
The group is sending out surveys on the issue this week to members of its advisory panel and financial-measures task force, both composed of charity leaders and other experts, and it hopes to announce changes this spring, Mr. Thatcher said.
Slip in Focus on Financial Ratings
Mr. Thatcher, former public-sector chief technology officer at Microsoft, succeeds Ken Berger, who left Charity Navigator in April after the board decided it wanted a leader with more technology expertise. Mr. Thatcher, who earlier in his career was one of the founders of an international dance company, became interested in charity results after he joined the board of Keystone Accountability, a group that helps organizations measure their performance, in 2012.
Charity Navigator inaugurated CN 3.0 in 2013, a response to critics that lambasted the group for fueling the “overhead myth,” or the idea that donors should favor charities solely because they spend low percentages on fundraising and administration. The label reflects the group’s evolution from one that initially rated charities only on their finances, then moved in 2011 to evaluating how open and accountable they are, and now is adding a third evaluation category.
The watchdog organization, which awards from zero to four stars to more than 8,000 charities, never reached the situation of using results reporting to calculate its ratings. But it had posted data for about 3,000 charities that answered a series of questions like “Does the charity publish evaluation reports that cover the results of its program at least every five years?” and “Is there some indication of how much of what action is required to produce what effects?”
Those results have now been pulled from the website.
“What came back showed us there needed to be more work done,” Mr. Thatcher said. “As I understand it, there was also quite a bit of resistance. Those who had been here for a while said it felt similar to when it first started the ratings. There wasn’t necessarily a welcoming of the request for results reporting.”
What’s more, he said, Charity Navigator fell behind in updating its existing ratings, something that is supposed to be done annually. The board decided to “get our core business running” while waiting for him to begin work, he said, then to restart the CN 3.0 process “based on how I was seeing driving that forward.”
Mr. Thatcher has concluded that Charity Navigator asked for too much in its initial data-collection effort for CN 3.0, and he wants to find a more “accessible” way to get charities on board.
“If you’re able to articulate your outcomes, you’re so much in a better place,” he said. “What stronger marketing to actually solicit funding and attention than to show you my outcomes? But if it’s set up in such a way that it just looks like I’m going to fail when I try to do this and I don’t understand it, we’re not going to be successful.”
He said he plans to consult with charities and associations to see what kind of impact-measurement systems already exist and to get their advice about how to assess milestones and outcomes that are appropriate for different kinds of causes. “I don’t want to be inventing this,” he said. “I want to be the custodian of a collaborative process.”
Mr. Thatcher will devote more immediate attention, however, to revising the financial-ratings criteria, a project the organization has dubbed internally “CN 1-Plus.”
Reconsidering Approaches
He also said Charity Navigator:
- Is thinking of ending one of its most controversial practices: giving higher marks to charities whose primary revenues are growing. Mr. Thatcher said that unfairly penalizes some organizations and unfairly rewards others, and gets complicated when, for example, a charity gets multiyear grants that are recorded in just one year. “There are often really good and credible reasons for maintaining certain levels of revenue that won’t necessarily fit that metric,” he said.
- Will continue to measure overhead spending, but might tweak the way it calculates its ratings. Charity Navigator awards higher marks to charities that devote bigger percentages of spending to programs versus fundraising and administration. But its formula makes it impossible to win a perfect score. Mr. Thatcher said it doesn’t make sense to take points away for overhead costs 100 percent of the time: “Overhead is a reality for all organizations.”
- Is considering whether to “rebrand” its “donor advisories” and “CN Watchlist,” which alert people in slightly different ways that a charity has been accused of illegal or improper conduct. The group could consolidate the two categories, he said, or limit the listings to charities with “really bad behavior that needs to be known” — say, a group continues to raise money even though it is going out of business. Mr. Thatcher said he also wonders whether Charity Navigator could issue positive counterparts to the donor warnings, highlighting good news about charities “without showing favoritism.”
- Has no plans to reconsider its policy on “joint-cost allocation,” which has drawn criticism from some charities that rely heavily on direct mail. Charities can, under accounting rules, count some activities connected to fundraising activities — for example, educational messages — as program expenses. But Charity Navigator started in 2012 categorizing those in most cases as fundraising costs, which can lower a charity’s rating. Mr. Thatcher said fewer than 500 of the 8,000 rated organizations were negatively affected by the new policy, though some are “large, vocal organizations.”
- Has backed away from its earlier goal to expand the number of charities it rates to 10,000. However, in the long run, Mr. Thatcher said, “I don’t feel that incremental growth in the number of charities we’re rating is as interesting as exponential growth.” He added: “Ten thousand is interesting, 100,000 is really interesting.” He said Charity Navigator users, for example, consistently say they wish the group rated smaller, community-based charities. But the watchdog would have to develop the technology and business processes to maintain the integrity of the ratings, he said. The growth of digital information about charities — for example, the Internal Revenue Service’s plan to provide machine-readable nonprofit tax forms — will help, he said.
Mr. Thatcher said once Charity Navigator decides on proposed changes to its financial-ratings sytem, it will notify all of the charities it evaluates and ask for comments before they are made final.
Meanwhile, he is offering an olive branch to some of the most vocal Charity Navigator critics. He hopes to meet with Dan Pallotta, a marketing executive who has led a crusade to stop donors from evaluating charities based on their overhead costs. And he met in September with Steve Nardizzi, chief executive of the Wounded Warrior Project, who has blasted the watchdog for its emphasis on low fundraising expenses.
“We had a lengthy discussion,” Mr. Thatcher said, “and at the end of the day, we both want the same thing: to improve the relationship and trust between donors and charities.”
Mr. Nardizzi said he welcomed Mr. Thatcher’s overture. “He seems very open to having a dialogue with leaders in the sector and understanding the rationale behind some of the criticism of the current approach,” he said.
While he is a fan of rating charities on their impact, Mr. Nardizzi said, he thinks Charity Navigator was right to put the results-reporting effort on hold until there is better data from charities and the group can develop criteria that are not “as misleading as the financial-rating criteria they have right now.”
