Rival Organizations Bicker Over the Best Way to Evaluate Nonprofit Groups for Donors

Few questions vex the nonprofit world more than how donors should decide which charities to support. A proliferation of charity-ratings services has popped up in recent years, including GreatNonprofits, which asks the public to review charities like they would a consumer product, and GiveWell, which performs in-depth studies on a small number of groups to see how effective they are.

Two groups that have been around for a while—Charity Navigator and CharityWatch—have for years rated charities strictly on their financial performance, marking them down if they spend a large percentage of their expenses on fundraising and administration rather than on charitable programs.

And each is celebrating an anniversary this year—Charity Navigator turned 10, CharityWatch 20. But there the similarity ends.

In fact, talking to one group about the other is a bit like talking to a Hatfield about a McCoy.

Daniel Borochoff, founder of CharityWatch, calls Charity Navigator’s evaluations “robo ratings” because they are based mostly on information provided by 5,500 charities on their Form 990 tax documents, which he says do not tell the whole story. He contends that Charity Navigator cannot possibly do a substantive job examining so many groups.

Ken Berger, Charity Navigator’s executive director, retorts that Charity Watch bases its ratings on subjective criteria that amount to “smoke and mirrors” and is shortchanging donors by focusing solely on financial criteria—something his group is moving away from.

He also criticizes Mr. Borochoff for being “rude and insulting” and unwilling to cooperate with other charity-ratings groups.

Charities’ Advice

At the root of the conflict are competing philosophies about the best way to serve donors. Mr. Borochoff is a bit of a lone ranger, prizing his independence from foundations, charities, and advertisers. His group gets most of its money from members who pay $40 a year to get information about roughly 600 charities.

Charity Navigator is more willing to collaborate with the nonprofit establishment, seeking money from foundations and advice from charities.

For example, a committee that includes representatives of charities like Feeding America and Word Vision is advising it on ways to improve its financial-measurement system.

And the organization is looking to grow.

It agreed last year to add new criteria for evaluating groups beyond finances, a response to critics who say that considering only how much a charity spends on programs does not tell donors whether those programs are any good.

Charity Navigator now also examines whether a charity has good governance and is open about its operations—for example, whether its board has at least five independent members, whether it has a whistle-blower policy, and whether it posts certain information on its Web site.

Mr. Berger says about a third of the groups that it rates have made changes to such policies since Charity Navigator introduced the new system last September.

The organization is now laying plans to expand both the number of charities it rates and the criteria it uses to evaluate them. It is finalizing a business plan that calls for it to evaluate 10,000 charities by 2016.

And in an effort it dubs “CN 3.0,” it is working with a panel of nonprofit leaders on an effort to further refine its four-star rating system to give points to charities that can show results.

Mr. Berger says he is hoping to get seed money from foundations to help finance the expansion but that contributions from users and other individual supporters are growing rapidly—now representing almost half of its $1-million budget.

That, he says, is “a real testament” that users support the path it is taking.

Charity Navigator was until recently financed primarily by its founders, John and Marion Dugan, but now gets about 20 percent of its revenue from foundations, including $100,000 this year from the Hewlett Foundation. Other money comes from advertising, board members, and the sale of data.

In response to Mr. Borochoff’s criticism about “robo ratings,” Mr. Berger acknowledges that “self-reporting” by charities on their tax forms has its limitations but says his group is “continuously striving to improve.” For example, last year it adopted a system of “donor advisories” that can replace a rating when media coverage or regulatory activity signals potential problems with a charity.

It used an advisory for the first time after “60 Minutes” aired a program raising questions about the finances of the Central Asia Institute, a charity that builds schools in Afghanistan and Pakistan. Among those interviewed: Mr. Borochoff, who expressed concerns about the charity’s relationship with Greg Mortenson, its co-founder and the co-author of the highly acclaimed Three Cups of Tea. Charity Navigator had previously awarded the Central Asia Institute four stars, its top rating.

The ‘Sweet Spot’

Mr. Berger says his group struggles constantly with how to find the “sweet spot” between evaluating charities in depth and assessing as many of them as possible, noting that even when it expands to 10,000 it will be covering only a tiny percentage of the more than 1 million charities nationwide.

Mr. Berger says Charity Navigator plans to expand its staff from nine to 15 within the coming year and is about to unveil a new Web application that will allow other organizations to embed its ratings on their Web sites, paying fees for premium versions.

Meanwhile, in response to Mr. Berger’s “smoke and mirrors” criticism, Mr. Borochoff says CharityWatch is always willing to explain to anyone how it decided on an organization’s grade.

He says it will be able to provide more details about each charity it rates when it unveils a new Web site by the end of the year. It will also offer more information free to the public.

As far as being “rude and insulting,” he says his job is to be a watchdog, even of other ratings groups (and Charity Navigator is not alone in drawing his barbs).

“It’s not a personal insult or slight,” he says. “When somebody puts out bad information, we’re going to criticize it.”