Veterans Group Fights Back at Watchdog Ratings

In the normally polite, fear-of-offending-someone world of nonprofit discourse, Steven Nardizzi qualifies as a firebrand.

Many nonprofit leaders grumble about charity watchdogs, especially Charity Navigator, the biggest and most influential arbiter, with its zero-to-four-star ratings.

But Mr. Nardizzi, co-founder of the Wounded Warrior Project, a fast-growing veterans charity known to many Americans through its ubiquitous television commercials, has declared war.

“What these groups are doing is passing judgment on decisions that are made by charity boards and staff on how to best fulfill their missions, meet the needs of their constituencies, and sustain their organizations over the long term,” Mr. Nardizzi declared at a fundraising and marketing conference in Washington last summer. He also slammed CharityWatch, a smaller group that awards charities grades from A-plus to F.

“They are at best horribly ineffective and misinformed,” he said, “and at worst they are outright misleading the public.”

He won a standing ovation.

While Mr. Nardizzi is more blunt than most, he is tapping into a current of frustration that has been building in the nonprofit world for years. Much of it has to do with what is now dubbed the “overhead myth,” the notion that charities should strive to keep their fundraising and administrative expenses low so they can channel more money to their programs.

Mr. Nardizzi says his group could never have grown as it did without investing in direct-mail and TV appeals to acquire donors, an expensive undertaking. Its fundraising costs grew from $4.7 million in 2008 to $130.5 million in 2014. But its net fundraising proceeds also grew, from $16.5-million to $273 million — thus, Mr. Nardizzi argues, providing a much bigger pool of money to help veterans.

Mr. Nardizzi, whose group earns three stars from Charity Navigator and a C-plus from CharityWatch, wants charities to ignore the watchdogs and give donors alternative ways to evaluate charities. “In the coming months,” he said in an interview, “you are going to see a groundswell of individuals who are not going to play the rating games anymore.”

He started a LinkedIn group, the Alliance for Charitable Trust, to further his cause, and he serves on the advisory board of the Charity Defense Council, a group set up by the author and marketing executive Dan Pallotta to defend charities against accusations of overspending on salaries and fundraising.

Contentious Issue

The watchdogs, naturally, take issue with Mr. Nardizzi’s crusade. “What I worry about listening to his speech is that he’s a false messiah,” says Daniel Borochoff, chief executive of CharityWatch. “He has this false premise that charities could have unlimited money if they raised fundraising to the max.”

The Wounded Warrior Project, which operates economic, physical, advocacy, and other programs for injured veterans and their families, has a “highly popular cause” and “they know how to market themselves very well,” Mr. Borochoff says. “They’re an extreme outlier.”

The number of charitable dollars is limited, he says, and not all groups that followed Mr. Nardizzi’s strategy would get the same returns, thereby siphoning away money from programs.

“I only wish them well if they’re doing good work,” says Ken Berger, the just-departed chief executive of Charity Navigator. “But to completely abandon the importance of overhead is reckless for most charities.” The notion that a charity could, for example, spend 99 cents of every dollar on such costs, he says, “would be offensive.”

Challenging the Critics

Mr. Nardizzi has won fans, however, among fundraisers who feel defensive about the drumbeat of negative media stories about direct-mail and telemarketing operations.

“The things he’s saying are things that people in the industry have seen saying, honestly, for years,” says Amy Sukol, executive vice president at the direct-marketing firm Lautman Maska Neil and Co. “He finally brought it to the forefront, saying OK, folks, we need to be really proactive on this.”

Ms. Sukol heads a new “Taking Back Fundraising Committee” that the Direct Marketing Fundraisers Association set up, she says, to try to shift the conversation from “you’re spending this percentage of dollars on fundraising” to “this is what fundraising is accomplishing.”

One challenge with Mr. Nardizzi’s approach, however, is that many donors want the bulk of their contributions to support charitable programs rather than help a group find other donors.

The Wounded Warrior Project itself seems to recognize that: Its website includes data about the organization’s accomplishments and posts annual surveys of the veterans it has helped. But the site also assures people that the group strives to keep fundraising and administrative costs low, adding that in 2013, “80 percent of total expenditures went to provide services and programs to wounded service members and their families.” (A spokeswoman for the veterans group says it plans to rewrite that page.)

But the amount spent on programs is a matter of interpretation. Charity Navigator calculates that the organization actually spent only 57.7 percent in 2013. CharityWatch pegs the amount at 54 percent.

Uneven Ratings

The main reason for the disparity stems from one of the watchdogs’ most controversial practices. Both Charity Navigator (generally) and CharityWatch (always) subtract from program expenses money spent on joint educational and fundraising appeals when calculating their ratings. Under IRS and accounting rules, charities can apply some of those costs to programs, for example, if a direct-mail solicitation also encourages people to take action for a cause, under a practice known as “joint-cost allocation.” But the watchdogs argue that donors want to know how much of their money is paying for actual services, not fundraising messages.

Charity Navigator adopted its policy in 2012 after CNN’s Anderson Cooper asked the watchdog’s chief executive at the time, Ken Berger, why a veterans charity had earned a three-star rating when a CNN investigation had found that the group spent almost all the money it raised on commercial fundraisers.

Mr. Nardizzi says the conflict over joint costs shows that “the ratings groups won’t be honest about the true costs of fundraising,” especially for a group like his that wants to engage the public in its cause rather than rely heavily on government money (which it doesn’t accept) or foundation grants. He says the Wounded Warrior Project’s direct-response TV ads, which highlight the struggles facing injured veterans, are among the group’s most effective fundraising channels because they draw a lot of monthly donors.

At the same time, he says, the ads are the “number-one driver” of veterans who sign up for the charity’s services. “Should I pay for two separate ads and pay double the cost?” he asks.

Broader Measures

Charity Navigator prides itself on looking at factors besides overhead when evaluating charities. Mr. Berger notes that the Wounded Warrior Project’s rating improved when the watchdog in 2011 began measuring accountability and transparency, for example, whether charities list their board members online or have whistle-blower policies.

The group jumped from two to three stars that year, earning 96 out of 100 points in the accountability category.

Its score on financial health has also steadily improved as the group has grown. Charity Navigator gives a charity extra points if its primary revenue and program expenses are increasing, which assures donors the group will be around for a while. For the first time last fall, the Wounded Warrior Project earned three stars, instead of two, for the state of its finances (its overall rating of three stars stayed the same).

Mr. Nardizzi says he could get four stars for the group if he wanted to, but he has no intention of trying.

“I’m not going to work with a flawed system,” he says. Furthermore, he says, he will not participate in Charity Navigator’s new effort to rate charities based on how well they report their results, saying no single organization can be an expert in outcome measurement for so many different kinds of groups.

The charity leader has a history of bad blood with both watchdog groups. He threatened to sue CharityWatch in 2008 after it gave his group a D based on the finances of the United Spinal Association, its former parent organization. CharityWatch included the grade in a charity guide that it released close to Veterans Day, when people were thinking about giving — a move “designed to get Dan Borochoff in the media, “Mr. Nardizzi says.

Mr. Borochoff says the guide was not timed to Veterans Day and that he gave a joint grade because donors were asking about the Wounded Warrior Project, but it was too new to have its own track record. The project had been an arm of the United Spinal Association, which transferred both employees and donations to the new group. But CharityWatch agreed to tell the public in the future when it was rating a charity based on another organization’s numbers.

Mr. Nardizzi blasts Charity Navigator, meanwhile, for giving good marks to Wounded Warriors Family Support, a Nebraska nonprofit that was ordered to pay his charity $1.7 million after a jury found in 2010 that the Nebraska group had tried to deceive donors into thinking they were giving to the Wounded Warrior Project.

But Charity Navigator, which now gives Wounded Warriors Family Support four stars, makes no mention of that history. “I find it patently offensive,” Mr. Nardizzi said during the July fundraising conference.

Sandra Miniutti, Charity Navigator’s vice president for marketing, says her group was not aware of the lawsuit at the time it occurred but has been advised since then that the Nebraska group has complied with court rulings and taken “corrective action” to clear up donor confusion.

Looking ahead, Mr. Nardizzi says the nonprofit world needs to come together to find ways to measure results in a standardized way and present them to donors. “I’ve been having talks with people about what is an effective way to report impact,” he says. “That has to be part of the dialogue.

“You can’t just say, Don’t look at fundraising [costs] alone, and say ‘good luck’ to the American public.”