Rating Those Who Rate You

There are several charity rating, or watchdog, organizations in existence today. Some of them operate independently, choosing the charities they wish to evaluate, while others will review your organization on request. The question is: How valuable are ratings to potential donors, and what criteria do these organizations use to formulate them? Here is a list of the top 5 charity review agencies so you can rate them yourself:

CharityWatch, the longest in existence at 20 years, has 5 employees who closely scrutinize the annual reports, tax forms, and financial documents of 600 national nonprofits per year, paying particular attention to any notes that are appended to audited financial statements. Its findings are published as grades A to F, along with articles about how the grade was determined, in a thrice-yearly newsletter format. Although the newsletter is only available through membership ($40/year), if CharityWatch’s top dog, Daniel Borochoff, finds something he doesn’t like, he is not shy about going to the media. Case in point: his appearance on “60 Minutes” with Three Cups of Tea author, Jon Krakauer, who accused Central Asia Institute’s co-founder Greg Mortenson of inventing portions of the book. (The resulting investigation led to Mr. Mortenson’s having to pay back $1 million to the charity.) Red flags: any organization that spends under 60% of its budget on programs, and charities that have three or more years of operating expenses in reserves.

GuideStar (18 years) solicits feedback, both positive and negative, from people who have independent, first-hand knowledge of an organization: either as a beneficiary of its services, a volunteer, a board member, or a donor. Positive reviews are posted to the nonprofit’s GuideStar profile and on its GreatNonprofits website. Negative reviews are shared with the organization so that it can address the issue. Nonprofit membership dues for GuideStar are $250/year.

Charity Navigator, 10 years old, employs an entirely different methodology. The organization reviews 5,500 charities annually, with primary emphasis on 990 tax documents; however, governance was recently added to its review criteria which include whether at least five outside members sit on the charity’s board, and if it has a whistleblower policy. Charity Navigator will not approve a nonprofit that spends less than one third of its budget on program expenses. Unlike CharityWatch, whose ratings are more subjective, Charity Navigator uses performance metrics and a Financial Ratings Table to determine its ratings.

GiveWell (5 years) is a nonprofit that researches and makes site visits, primarily to nonprofits operating overseas, in an attempt to inform donors about charities where their money will make the most significant impact. Based upon this research, charity recommendations are posted to the GiveWell website and blog. GiveWell tracks donations made through its website to the recommended charities, as well as through donor reports. Reports are also posted quarterly on the GiveWell blog and the Impact page of their website.

The Better Business Bureau’s (BBB) Wise Giving Alliance (5 years) produces reports on over 1,200 nationally soliciting charitable organizations. The Alliance does not rank charities but rather seeks to assist donors in making informed judgments by providing objective evaluations based on 20 strict standards. If a national charity meets the Standards for Charity Accountability and has completed two full fiscal years of operations, it has the option to apply for a National Charity Seal. Seal applicants pay a fee, based on the level of total contributions received over the past fiscal year. The Wise Giving Guide, published three times a year, summarizes the Alliance’s charity evaluations and features a cover story on issues of interest to donors. With the watchdog organizations listed above, as well as the IRS, unless a funder specifically requires the BBB seal, one might question if the $1,000 annual fee (minimum) is a wise use of donor funding, especially for small nonprofits.

Despite all of these options, a study released in late 2011 found that only 20% of donors use charity watchdog or ranking websites when making decisions about their giving; however, those who do use them, tend to make larger donations. “The vast majority of social investors and charitable givers really make their decisions predominantly on personal connections and emotional ties and things of that nature,” said Ken Berger, president and CEO of Charity Navigator, for an article in the Stanford Social Innovation Review. “The whole movement toward using independent data is still in its infancy.”