Charity Under Scrutiny

More and more organizations are evaluating nonprofit groups

Tim D. Johnson, who works at the Federal Reserve Bank of New York, contributes about $2,500 to

charity each year. In the past, he casually gave to causes he heard about from friends and family, but now reports of charity scandals have prompted him to do research before he makes a gift. He has started using the Web site of one of the newest charity watchdog services, Charity Navigator, to look up financial details and see how the organizations he’s interested in are rated.

Mr. Johnson says the information Charity Navigator provided on the American Heart Association, for example, prompted him to select that organization over other heart-disease research groups for a $500 gift.

“There’s no perfect way to pick a charity,” says Mr. Johnson, “but it helped me sleep a little better at night.”

In the past few years, the number of charity watchdog groups has proliferated, each with its own approach and mission, giving donors like Mr. Johnson several options for help.

As donors prepare to make their year-end gifts, they have a wide range of options when they conduct research. In addition to Charity Navigator, an Internet-based evaluation service called Ministry Watch, which rates some 500 Christian organizations, was created in 2000. Those groups join the ranks of the venerable Council of Better Business Bureaus’ Wise Giving Alliance and the outspoken and often controversial American Institute of Philanthropy as the four leading charity evaluators.

In addition to those free services, several efforts have emerged to provide customized research for donors willing to pay for it. For donors who pay a $1,000 fee, the Philanthropy Group, a Chicago company started last year, conducts site visits and prepares in-depth reports similar to ones stock investors use. Guidestar, the nonprofit group that posts basic financial information on charities for free on its Web site, is also considering expanding its fee-based service to provide more in-depth comparisons of charities based on their missions, geography, size, and history.

Many of the new evaluation efforts grow out of a desire to apply business models to philanthropy. “Our idea is that there should be a marketplace, just like there is a marketplace of investment advisers,” says Christopher J. Hempe, president of Wall Watchers, the organization that runs Ministry Watch. Howard Leonard, an investment fund manager, started the service with a $500,000 gift.

Charity Navigator has a similar origin. The group, in Mahwah, N.J., was started by John P. Dugan, another business executive, who also wanted more investment-like analysis of charities for low- and middle-income donors. “We like to consider ourselves people who are democratizing and demystifying the charitable sector,” says Trent Stamp, Charity Navigator’s executive director.

As the same time as these efforts are taking off, the best-known evaluation group, the BBB Wise Giving Alliance — which grew out of the merger of Better Business Bureaus’ charity arm and the National Charities Information Bureau — is in the process of revising its standards with an eye toward becoming a better charity watchdog.

Yet despite the emergence of new players overseeing charities and new standards, some observers say the public’s desire for good information on the quality and finances of charitable organizations is still not being met.

“We need to take the bull by the horns and that means finding the resources for our own mechanisms of accountability,” says Gary D. Bass, executive director of OMB Watch, in Washington. “What we currently have is not enough.”

High Demand

One sign that public demand for third-party information on charities is high: The Web sites of the four major private examiners of charities — AIP, the BBB Wise Giving Alliance, Charity Navigator, and Ministry Watch — attract more than 1.6 million visitors a year. In addition, about 20,000 donors pay a small fee to the BBB Wise Giving Alliance or the American Institute of Philanthropy to receive printed reports of charity evaluations.

While such numbers represent only a small portion of the 93 million households that give to charity, watchdog groups say they have influence that extends beyond direct inquiries from donors.

The United Way in Dayton, Ohio, for example, makes donations only to charities that meet the BBB Wise Giving Alliance’s standards. In addition, charity evaluators often help shape public opinion about the nonprofit world through comments to news reporters and through testimony before Congress during hearings on nonprofit accountability.

Many charity executives say that, even though they are unsure how many of their donors consult the watchdog ratings, they work hard to try to win positive evaluations.

“We take very seriously those ratings,” says Deborah Gangloff, executive director of American Forests, in Washington. She says the environmental group’s board is not satisfied with less-than-exemplary evaluations, such as the organization’s B+ grade from the American Institute of Philanthropy. “Of course my board asks how can I make that an A?” Ms. Gangloff says.

Some charity leaders worry that with the proliferation of charity evaluators has come potential confusion for donors, particularly when the watchdog groups disagree in their analysis of a given charity.

American Forests, for example, receives high marks from Charity Navigator — three stars out of four — but fails two standards of the BBB Wise Giving Alliance: Its board doesn’t meet three times a year and it doesn’t provide enough information about how it spends donations.

More than 30 national groups draw contradictory ratings from two or more of the watchdogs. American Leprosy Missions, a nondenominational Christian organization, in Greenville, S.C., meets all 23 standards set by the BBB Wise Giving Alliance, but it gets just one out of five stars from Ministry Watch because it spends the highest percentage of its budget on fund raising of any of the relief and development organizations that the Web site reviews. The charity also receives a C+ from the American Institute of Philanthropy because its percentage spent on fund-raising and administrative costs, which AIP calculates as 36 percent, is higher than the watchdog group would like.

“That’s the core of the whole problem,” says Christopher J. Doyle, the charity’s executive director. “Everybody measures something different.”

Mr. Doyle’s biggest fear is that people who see a one-star rating may believe it indicates something about the quality of American Leprosy’s programs, instead of its finances — despite the disclaimers the charity evaluators use. “Once you put that star up there, it’s just like a hotel,” says Mr. Doyle. “Where would you rather stay? A five-star hotel or a one-star hotel? Donors are going to read into those stars and draw conclusions no matter what type of information you provide.”

Charity Reserves

One of the most controversial differences between the various watchdog rating systems is their view on whether charities should have large or small reserves.

The American Institute of Philanthropy, for example, gives the Christian Children’s Fund, an international relief group in Richmond, Va., an A- , in part because the charity holds no more than twice its annual budget in reserve. The BBB Wise Giving Alliance has a similar standard that encourages only limited accumulation of assets. Both groups say as much money should be put to work right away as possible.

But Charity Navigator gives Christian Children’s Fund only two stars, in part because its reserves are so small. Trent Stamp, Charity Navigator’s executive director, says other watchdogs subscribe to an “antiquated theory of dollar in, dollar out.”

While some charity leaders may be frustrated by their inability to please all of the watchdog groups on such issues as cash reserves, Mr. Stamp does not see a problem. “A movie comes out on Friday; there are 50 reviewers in the country that would give it 50 different reviews. Is that a bad thing?” he asks. “The key is finding someone that you trust, someone whose ideology you subscribe to. The more lights shining on this sector, the more people who are inclined to help the giver, the better.”

National groups aren’t the only ones coming under scrutiny. Reviewers of state and local charities include 32 local Better Business Bureaus and the Minnesota Charities Review Council, in St. Paul.

The key struggle for most watchdog organizations has been over how to balance breadth against depth. Charity Navigator and Wall Watchers emphasize quantity so that donors can find information on a vast selection of organizations. Charity Navigator alone plans to rate about 10,000 charities in a few years based primarily on organizations’ financial statements. But observers say these materials are not always consistent or accurate and could lead to false conclusions.

By comparison, the Better Business Bureau’s Wise Giving Alliance prepares a detailed report on how the charity measures up against 23 standards based on a wide range of charity materials. But its reviews cover only 559 groups.

Even the BBB’s more extensive reviews have been criticized for doing too little to dig into a charity’s effectiveness, in addition to its finances and management. In response to such concerns and its recent merger, the BBB Wise Giving Alliance is now rewriting its standards, due out next month.

The revised standards, which were drafted over two years with advice from nonprofit groups and grant makers, will attempt to delve into such issues as honoring a donor’s wishes and measuring program successes and failures, says H. Art Taylor, president of the alliance.

Frederick S. Lane, a former board member of the now-defunct National Charities Information Bureau, says the alliance has made progress toward becoming a stronger watchdog. But while the BBB may have newfound teeth, he says, it remains to be seen if it has a bite.

“When push comes to shove, it’s the application of the standards we’ll be watching carefully,” says Mr. Lane, who teaches nonprofit management at Baruch College, in New York.

Even with the flaws and limitations, many donors say the current charity watchdogs provide a valuable service.

Adds Mr. Johnson, the donor who relies on Charity Navigator: “There’s no perfect way to pick a stock, either.”