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NonProfit Rating Systems Give Donors the Scoop

NonProfit Rating Systems Give Donors the Scoop

Business Week/ Courtesy of Yellowbrix

January 22, 2010

When disaster strikes, as it has in Haiti, Americans dig into their pockets and give. While such generosity is unquestionably a good thing in a terrible time, few individuals do much research on the groups they’ve chosen to receive their money. The uncomfortable truth in philanthropy is that it’s not easy to know whether the group you’re giving to is particularly effective at what it does. With Americans giving more than $200 billion a year, that’s a lot of ambiguity.

A growing movement to review and rate charities on their real world results could give individuals a far better idea of where their donations can do the most good. Moreover, it could guide nonprofits to focus on the programs that have the most impact and to jettison those that aren’t working as well.

Charity Navigator, the largest nonprofit rater, is overhauling its rating system to look beyond financial measures and gauge effectiveness. Other online evaluative efforts include GiveWell, Philanthropedia, and GreatNonprofits. Their approaches vary, from crowdsourcing to research reports. In addition, GuideStar, which serves as a clearinghouse of information on nonprofits, has begun including some of these rating reports on its site. Two other initiatives, from Root Cause and Partners for Change Initiative, are working to get more and better rating information to financial advisers so they can help clients make giving decisions.

Not all the efforts are new, but they’re starting to reach critical mass. “There is a mindset shift going on in philanthropy,” says Sean Stannard-Stockton, chief executive of Tactical Philanthropy Advisors, a Burlingame (Calif.)-based advisory firm to high-net-worth donors. “People want to know that their money is actually making a difference.” That’s especially true in the current economic downturn: Donors have fewer funds to give, while charities need more cash to provide services to more people in need.

It may be smarter for donors to think about their giving as they would their investment portfolios. That means addressing the big questions first (what matters most to you?), then drilling down to the groups that have the most impact. “We as Americans like to do things immediately,” says GuideStar President Robert Ottenhoff. But a more thoughtful way to give away money is to have a longer-term plan.

Figuring out a charity’s effectiveness is not simple. A homeless shelter, international relief organization, or other philanthropy is not a business, and their social impact needs to be evaluated on different criteria than profit and loss. The true benefit of their programs may not be clear for years. “Social-impact assessment is the Holy Grail of people doing philanthropy and nonprofit work,” says Laura Callanan, a philanthropy expert at McKinsey. “How do you know what works and why? And how do you know that money is making a difference in people’s lives?”

If average Americans look to one place for advice on giving, it’s Mahwah (N.J.)-based Charity Navigator. It gives ratings—going from zero to four stars—to nearly 5,500 charities, and its site gets some 4 million page views annually. Those ratings have focused largely on financial yardsticks. For instance, it has given charities high marks for low overhead, but research now shows that metric is not as helpful as others in evaluating a nonprofit’s work.

So Charity Navigator—under the direction of Ken Berger, its executive director since June 2008—is devising a system that will still go from zero to four stars but will include measures of financial strength, accountability, and effectiveness. Berger says he is planning to roll out those ratings in the spring of 2011, with additional information appearing between now and then. "

The core concept is to look at this as a social investment, like a stock with a certain level of risk," he says. “So the rating we are looking to develop revolves around risk—what is the level of risk that you as a donor are willing to take on?” A small startup charity, for example, may have a more innovative but less proven—and thus riskier—approach to a problem than a larger, more staid organization.

To measure effectiveness, Berger says Charity Navigator’s advisory panel is considering the use of crowdsourcing—gathering data through some type of Wiki format. Another possibility: David Hunter, a philanthropic consultant, has created a social-assessment tool that uses 26 questions to get at issues of how a charity gathers data on its initiatives and whether it is using that data strategically—for example, to better its programs. “I believe it not only provides a reasonable statement of the level of risk that a social investor takes, but it also should provide an organization with a diagnosis to improve its work,” he says.

Charity Navigator’s competitors have come up with alternative methods. Brooklyn-based GiveWell, launched in 2007, offers rigorous Wall Street-like research on nearly 400 charities. Its analysts plow through data and write lengthy, footnoted reports about each one. Few nonprofits have enough data or analysis to demonstrate their successes, and GiveWell recommends only those that can meet that high bar. “The charity needs to do a lot of analysis on its own,” says GiveWell co-founder Holden Karnofsky. The upshot: GiveWell recommends just nine charities. Among them are Village Reach, which aims to improve the logistics of distributing medical supplies in rural Africa; Stop TB Partnership, which works to increase access to tuberculosis treatment; and the Nurse-Family Partnership, which supports programs that offer home visits by registered nurses to low-income, first-time mothers.


Root Cause, based in Cambridge, Mass., has recently begun creating similar research reports with financial advisers in mind. Its first batch covers educational groups (specifically, those focused on school readiness) in Massachusetts. Palo Alto (Calif.)-based GreatNonprofits, started in 2007, allows donors, volunteers, and social-service recipients to write reviews à la TripAdvisor or Yelp; it currently has reviews of some 3,000 nonprofits. The opinions are also available on GuideStar. Perla Ni founded GreatNonprofits in the wake of Hurricane Katrina, when people kept asking her where to give. “People who are served by nonprofits know which ones are good and which ones are not,” says Ni. “It’s like asking people who stayed at a hotel to write a review.”

Two groups have taken yet another route: creating portfolios of nonprofits. Recently launched Philanthropedia, based in Menlo Park, Calif., gathers the opinions of experts in different sectors and creates what it calls “expert mutual funds.” These are portfolios of nonprofits in areas such as climate change, microfinance, and education, with a dozen or so “holdings” in each. To put together its climate change fund, for example, Philanthropedia queried 139 experts, including funders, nonprofit executives, and academics. Top holdings include the Natural Resources Defense Council, the Union of Concerned Scientists, the World Resources Institute, and the Pew Center on Global Climate Change. “A lot of the other approaches [to rating nonprofits] ask too much of donors,” says Philanthropedia Chief Executive Deyan Vitanov.

Partners for Change, based in Chicago, is also working up a mutual fund-like strategy. Its portfolios, which it will share with financial advisers, will mimic those of successful foundations. So a donor interested in global health might be able to invest in a portfolio that looks a lot like the Gates Foundation’s beneficiaries. Executive Director Jim Litwin expects to launch the system in the summer. He hopes that by targeting advisers rather than individuals, he’ll be able to reach donors with $10,000 or more to give. As Litwin says: “These foundations have already done all the work on what the most effective organizations are, so why can’t you leverage that knowledge of where to give?”

For individual donors, all of this information could help in better decision-making. For the field of philanthropy, it could have far-reaching implications. The hope is that if nonprofits know their programs aren’t working well, they will revamp them. Also, if more of the $200 billion in annual donations ends up going to the most effective charities, it could push others to combine forces. “We’re starting to see a shakeout,” says Nancy Kelly, an accountant to nonprofit organizations at the Metis Group, a New York City-based accounting and business consulting firm. “You’re seeing more competition for dollars and more merger activity than in the past 15 years. It is forcing nonprofits to look at their operations like a business.”

Feldman is an associate editor with Bloomberg BusinessWeek in New York.

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