How Charities Handle Good – and Bad – Reviews From Nonprofit Watchdogs

IN THE TRENCHES

By Eman Quotah

One day about three years ago, the mail brought unexpected good news to Thomas Bailey. Mr. Bailey, executive director of Little Traverse Conservancy, a land trust in Harbor Springs, Mich., received a letter from Charity Navigator, in Mahwah, N.J., congratulating the conservancy on achieving the highest grade the watchdog group bestows on the nonprofit organizations it evaluates.

Though Mr. Bailey had not heard of Charity Navigator until then, the four-star rating — which measured his group’s financial health against that of similar charities — did not surprise him.

“We’re a high-quality organization, and we work hard to keep costs down,” he says. The conservancy included an article about the evaluation in the newsletter it sends to donors and posted the information, accompanied by Charity Navigator’s logo, on its Web site.

While he acknowledges that he has no way to measure whether the Charity Navigator accolade has helped his organization raise more money or attract new donors, Mr. Bailey still sees some good in getting a positive rating.

“I don’t think a rating like that can bring about a huge change,” he says. “But it can consolidate support if you already have a reputation in your community.”

Emphasis on Accountability

The important role watchdog groups play when donors are trying to make decisions about where to give has been underscored in recent weeks by the response to Hurricane Katrina. Watchdog groups say traffic to their Web sites has been unusually high. For instance, the Better Business Bureau’s Wise Giving Alliance saw as much traffic in one week as it normally does in one month as donors tried to figure out which relief charities to entrust with their donations, while Charity Navigator says it is seeing 10 times as many visitors per day to its site as it did before the hurricane.

Although the watchdog groups generally see their work as a service to donors, several allow nonprofit organizations receiving good marks to display their logos as a sort of “stamp of approval.”

“Any reputable charity should welcome this sort of thing to show we are who we say we are and do what we say we do,” Mr. Bailey says.

As donors and regulators have been putting charities of all kinds under increased scrutiny in recent years, evaluations are inevitable, says Art Taylor, chief executive officer of the Wise Giving Alliance, in Arlington, Va. “We’re at a time when charities that are in front of the public are going to be rated by someone, whether they choose to or not,” he says. “So it’s important that they try to participate in a rating program that they believe is fair and accurately administered.”

Still, many in the nonprofit world debate the value and methods taken by charity watchdogs — with criticism coming especially from those charities that feel they have received unfavorable ratings in error. And even some groups that proudly publicize their high ratings say that the kudos rarely do much to increase their fund raising or other forms of support.

Varying Standards

The proliferation of rating organizations might confuse both donors and charity managers: In addition to Charity Navigator and the Wise Giving Alliance, both created in this decade, major watchdog groups include the American Institute of Philanthropy, in Chicago, which publishes the Charity Rating Guide & Watchdog Report. Wall Watchers’ MinistryWatch, in Matthews, N.C., evaluates the finances of Christian groups. (For more about watchdogs, see this previous Chronicle article.)

The groups differ in the criteria by which they judge charities, and also by how they decide which organizations to examine. For example, Charity Navigator and the American Institute of Philanthropy rate charities’ financial practices based on publicly available information, such as the Form 990 informational tax returns that charities must file with the Internal Revenue Service; the institute also requests data from the charity being rated.

The Wise Giving Alliance reviews charities according to a set of voluntary standards that cover governance and oversight, effectiveness, fund-raising and marketing practices, and finances; it relies on self-reporting by the charities. The watchdog evaluates nonprofit groups in response to inquiries from the public, though organizations can also request an evaluation of themselves. Charity Navigator generally chooses its evaluation subjects on its own, though both donors and charity staff members can also request evaluations of specific groups.

Charity managers need to learn what standards the watchdogs are applying to the groups they rate, says Erica Greeley, director of strategic policy planning at the National Council of Nonprofit Associations, in Washington. In March, the council, along with the national Human Services Assembly, a coalition of health and social-services groups, released “Rating the Raters,” a report that compares nine charity-watchdog organizations and publications. “You need to know how to choose the group that you want to rate your organization,” she says.

She also criticizes raters that rely solely on public information without soliciting additional information from charities. Though they may strive for neutrality, she says, “I think the end result is very mixed.”

Ratings do not always explain what factors may have resulted in a lower rating for a previously well-rated organization, says Donna Sciarappa, senior managing director in the Cleveland office of American Express Tax and Business Services, who works with nonprofit clients.

“All charities have one-time events that cause positive or negative blips,” she says, citing capital campaigns — because a group may need to spend money to raise money — and stock-market fluctuations as examples of factors that can affect raters’ snapshots of an organization’s financial health.

Trent Stamp, Charity Navigator’s executive director, defends his organization’s role in deciphering financial information: “There’s no one I know that before they give to charity are going to download a 100-page 990 and sift through it.”

He concedes, though, that his organization doesn’t have a way to measure the quality of a charity’s services.”We can tell you how many sandwiches the food bank serves — we can’t tell you how good they taste,” he says. Among his organization’s plans for next year, he says, is developing a method for measuring how well charities are fulfilling their missions.

Watchdogs such as the Wise Giving Alliance and Charity Navigator update their ratings periodically, which allows the public to compare ratings from year to year. A nonprofit organization should tell its donors which charity watchdog it tries to obey, says Mr. Taylor of the Wise Giving Alliance. Because a group is likely to get competing and dissimilar evaluations from different watchdogs, he says, “there’s very little charities can do other than stick with the rating organization that they believe the public trusts most.”

Gold Stars

For a charity that gets top marks from an independent watchdog, it is easy to accept — and, in fact, embrace — the evaluator’s judgment.

After an evaluation from the BBB Wise Giving Alliance resulted in a seal of approval from the watchdog late last year, the American Indian College Fund began publicizing the honor in its fund-raising materials, says Jane Prancan, the Denver organization’s director of resource development and public education.

The fund, which provides scholarships and other aid to tribal colleges, has received calls from donors saying that the Wise Giving seal is one reason they opted to give, says Ms. Prancan. But the group has done no research to determine if the seal has resulted in more money for the charity.

“It’s hard to measure,” says Ms. Prancan, who notes that it would be tough to determine whether donations have risen because of the seal or other factors.

In addition, the fund’s ratings have been mixed. A donor recently asked the group why its Charity Navigator rating dipped from three stars to two.

“Clearly people are looking at those things,” Ms. Prancan says, though she notes that only the one donor has contacted the charity about the two-star evaluation. She attributed the downgraded rating to the fact that Charity Navigator averages three years of performance in making its judgments. “They selected the years that we were in a capital campaign,” she says. (By contrast, the group received an A rating from the American Institute of Philanthropy.)

The American Indian College Fund chose to promote its Wise Giving evaluation, says Ms. Prancan, because “for us, the stamp has always been associated with the Better Business Bureau. It’s the oldest and has the most standards associated with it.”

Instilling Confidence

When Aaron Seres and his wife moved recently to the Cleveland area, they wanted to make a donation to a local charity but didn’t know which one would use their money most efficiently. Mr. Seres, who works as a criminal investigator, decided to do a little detective work, exploring the Charity Navigator Web site for information about human-service groups in Cleveland. He soon narrowed his search to charities that had earned four-star ratings from the watchdog.

“The ones with four stars seemed like older organizations, with more money going to services,” he says. He finally settled on the Cleveland Foodbank, and made a pledge this summer to give $25 per month to the organization.

Fund raisers at the Cleveland Foodbank say they have had other such tangible results from their four-star Charity Navigator rating. With each grant proposal she sends out, Anne Goodman, the food bank’s executive director, includes a newspaper article about the rating. Such tactics have led to a number of gifts from grant makers and individuals. “If I’m a funder and I have 10 grant proposals, I’m just more confident with the charity that’s more efficient with my money,” she says.

That may be true, but grant makers don’t necessarily turn to watchdogs for that assurance, foundation officials say. Foundations — especially larger, more established ones — have their own exhaustive methods of examining a charity’s finances and operations.

“We have the same information that the rating would be based on, and generally do more extensive probing and legwork,” says Rick Moyers, program officer at the Eugene and Agnes E. Meyer Foundation, in Washington.

The Meyer Foundation’s program officers, he says, get information directly from a charity being considered for a grant, by talking to the group’s leaders and trustees, and by reviewing documents such as IRS Form 990s and audited financial statements.

“Rating systems are designed primarily for individual donors,” says Mr. Moyers, though he adds that whether other foundations use charity ratings for guidance might depend on the size of their staffs.

Charities cannot necessarily predict or control the elements that add up to a good or bad rating, nonprofit managers say. Like many charity leaders, Peter Donnelly, president of ArtsFund, which raises money for the arts in Seattle, keeps charity watchdogs in his peripheral vision.

“I pay attention to make sure they’re right,” he says.

About three years ago ArtsFund got what it considered to be an incorrect rating from Charity Navigator. The rater failed to evaluate the arts group’s fund-raising foundation alongside its operating organization, Mr. Donnelly says, and that made the fund’s annual expenses look far higher than its income.

“They didn’t know they had done it, and they could have found out if they’d called before publishing it to verify,” he says. A phone call to the watchdog group fixed the situation; the rating was adjusted upward. But the news about the low ranking had already appeared in Seattle’s Puget Sound Business Journal, and “once something is published, then you have to live with it,” Mr. Donnelly says. (However, notes Dwight Gee, ArtsFund’s vice president of community affairs, the rating and the coverage of it ultimately had no effect on the group’s fund-raising efforts.)

Because Mr. Donnelly does not have confidence that ratings are correct, “I don’t use them ever for fund-raising purposes,” he says. “I don’t think they’re at all useful. It doesn’t hurt you if the report is good, but it doesn’t help you particularly either.”

A Fuller Picture

Rather than sending prospective donors to an evaluator’s Web site, ArtsFund keeps the public informed about its financial health and its programs’ successes by sending major contributors an annual report and releasing its fund-raising-campaign results to the local news media.

Mr. Stamp endorses this approach, emphasizing that charities should find ways to measure their own effectiveness and put the results together along with raters’ conclusions about their efficiency. That way, he says, donors can get a fuller picture.

Both watchdog leaders and charity advocates say nonprofit groups should not expect raters to keep their best interests in mind.

“We can point out problems to a charity, but we’re not a service to charities,” says Daniel Borochoff, president of the American Institute of Philanthropy.

“Don’t assume a rater is going to help you learn and increase your ability to manage efficiently and effectively,” says Ms. Greeley of the National Council of Nonprofit Associations. “You want someone to say your management is valid and to go deeper and decide if the organization is meeting its mission.”

Ms. Greeley recommends that nonprofit managers consider why they want a rating, and to select an evaluator that helps reach that goal.

“If the goal is improving managing practices, then choose one with a learning component,” she says. “There are lots of best practices out there that aren’t related to accreditation systems.”

Many state or regional umbrella organizations distribute checklists of what are considered to be the best management approaches in the nonprofit world, she adds, and often those are available free.

Charities also can undergo an annual independent audit, make sure they have policies in place to avoid conflicts of interest, and even go through an accreditation process without paying for the final stamp of approval, she says.

“The more involved the charity is,” she says, “the more the charity can benefit and improve its own practices.”

What has been your charity’s experience with watchdog organizations, such as BBB Wise Giving Allance or Charity Navigator? Share your group’s story in the Charities in the News online forum.