The Worst (and Best) Way to Pick a Charity

Today is a very important moment for the charity evaluation movement. For years, I and many others have complained that Charity Navigator’s focus on overhead expense ratios in evaluating nonprofits was counter productive. Then in 2008, Charity Navigator hired a new CEO. At the time I called for a “cease fire” in criticisms of Charity Navigator until we saw what direction the new CEO would take. Since then, Ken Berger has emerged as an enlightened leader who is willing to undertake a major makeover of Charity Navigator’s rating methodology.

According to Ken, Charity Navigator will role out a new system starting in early 2010 that rates charities based on transparency, governance, financial strength and, importantly, outcomes achieved (full disclosure: I’ve recently joined an Charity Navigator advisory board that will help guide this effort).

Today, Ken has put his chips down big and made a huge bet that he’s going to pull this all off. Charity Navigator, Guidestar, Philanthropedia, GiveWell and GreatNonprofits have issued a press release calling overhead ratios “red herrings” in the charity evaluation process and calling for a focus on measuring effectiveness. In the press release, Ken states:

“There is a place for financial measures, but donors need a complete picture of a charity to make a smart choice. We believe that too many donors are paying too much attention to measures like overhead.”

This is like McDonald’s committing to change their focus to selling healthy food and telling people to not eat too much of their current junk food menu before the new, healthy options are for sale.

Why would he do this? Because it is the right thing to do.

In a sector designed to put the public interest ahead of private interests, Ken Berger just offered a shining example. Ken knows that his current offering is part of an appropriate approach to charity evaluation, but he also knows that used by itself Charity Navigator does not tell the whole story and can be counterproductive.

When I called for a cease fire in criticism of Charity Navigator last year, I never expected that I would be leading a standing ovation of the same organization. In all seriousness, if you care about the future of charity evaluation, leave Ken a congratulatory comment on the blog post he wrote explaining his decision. It is important that the Charity Navigator board understand just how daring and morally righteous their CEO is.

Click here to visit Ken’s post and leave him a comment.

The joint press release does something else. It puts a stamp of approval on Philanthropedia, GiveWell and GreatNonprofits from Guidestar and Charity Navigator. I’ve viewed these three small organizations as the leading examples of how the web enables new approaches to charity evaluation. I think today demonstrates they are best in class.

Congrats to all the orgs for pulling this together and speaking with a single voice. I do believe that the coming decade will be one where more and more money flows to effective nonprofits. Everyone behind this press release has a major opportunity to help that transition occur.

14 Comments

  1. Ken Berger says:

    Thank you so very much Sean.

  2. As another member of Charity Navigator’s advisory panel, I’ll just note my complete agreement. Well said, Sean.

  3. Well put, Sean!

    I’m particularly a fan of your McDonald’s analogy (which I also allude to in a blog on the same story – http://blog.myphilanthropedia.org/?p=25).

    More importantly, however, I agree with your assessment of the incredibly important shift that this signals regarding the alignment of the major players in the space of nonprofit evaluation and effective giving.

    The spotlight is on the import of impact more than ever before.

    Howard
    Chairman, Philanthropedia
    http://www.MyPhilanthropedia.org

  4. Aaron Stiner says:

    I just found this research: according to the conclusion in this article in Journal of Accounting and Public Policy, Charity Navigator ratings matter: “contributions are sensitive to a change in Charity Navigator ratings. Both the level of contributions and the change in contributions vary with the size and direction of changes.” http://ow.ly/HBrk

  5. This applause is both premature and misdirected.

    First of all, all Charity Navigator (and Ken) did was recognize something that was readily apparent to the rest of the world: that overhead is a piss poor indicator of non-profit success. Congratulations to them (I guess) for recognizing it, but its not exactly discovering the cure for cancer.

    Second, we should be more focused on the people at GiveWell, Philanthropedia and Great Non Profits for leading this charge, rather than Charity Navigator for hopping on it.

    Finally, how does this remotely make up for the thousands of donors and millions of dollars that were mislead?

    Daring and courageous? Give me a break. Like McDonald’s committing to change their menu? That’s foolish. More like the Pope admitting that the earth isn’t the center of the universe… in 1992.

  6. Rich Polt says:

    James — I would agree that for many informed individuals, the content of this announcement is not inherently groundbreaking. Nevertheless, I know many, many, many intelligent people who continue to ask “how much money goes to the cause?” as their litmus test for determining an effective nonprofit. As Aaron’s comment attests, Charity Navigator’s ratings do impact people’s decisions. Therefore, the fact that they have made this statement, I believe is significant.

    If McDonald’s changed its menu to all health food, it would impact the health of this nation. That’s a good thing — certainly better than the alternative. It would also not take away from the efforts of the many individuals and restaurants that were outspoken about eating healthily prior to Mickey D’s jumping on the bandwagon.

    Maybe this announcement does not make up for the millions of dollars lost due to misperceptions about what makes an organization effective, but it does promise to recoup some of those losses moving forward. I think it’s entirely appropriate to acknowledge today’s announcement for what it is … a strong symbolic step in the right direction.

  7. This is welcome news. Thanks Sean.

  8. Yeah, I mean feel free to recognize it, but did you read the post? The man was praised for more or less recognizing that water is wet.

    A “shining example”? “Daring and morally righteous”? Cut that out. Daring and morally righteous would’ve been to shut his site down until they had something that resembles a reasonable rating system.

    I’m all for trying harder and I’m sure Ken is a great and upstanding man, but Charity Navigator has set itself up to grade other non-profits and has taken a backwards and approach to it. So why should we cut them some slack when they promise to do better? Does that do anything for an effective organization that got a 1 star rating?

    So recognize him, if you must… but I’ll wait until I see some results.

  9. CN was founded in 2001 and Ken took over in 2008. The easy thing for him to do would have been to market the hell out of CN as he found it, promoting his own career in the process and raising a ton of money from clueless donors to perpetuate a deeply flawed system. Instead, he’s listened with his head and his heart to CN’s critics and decided to lead the difficult work of developing a much better system and leveraging CN’s market leadership to revolutionize charitable funding and accountability. If we get to the promised land of performance-based philanthropy where more effective nonprofits attract greater funding with less dog-and-pony show, and weaker nonprofits find it harder to stay afloat with unsubstantiated story-telling and schmoozing at fundraising events, we’ll have Ken to thank.

  10. James,
    Your take vs. my take is a pretty common debate. I think CN made a “daring and morally righteous” decision within the context of organizational decision making. Shut the site down? You know that’s not going to happen. Think about my McDonald’s comparison. If they announced they were moving to healthy foods, but it would take six months, would you advocate for them to shut down until they were ready? Doing so (for McD or CN) would kill the value of their platform and disable their ability to affect change.

    However, I agree with you about the other orgs leading the way. I blogged about that today.

  11. Hey Sean —

    I read the post today and thought it was well said (and though I’m new to posting, I read your blog as regularly as my schedule allows, so clearly I find your opinions thought provoking). I didn’t intend to go overboard yesterday.

    While I recognize that there was no way he’d shut the site down, that was kind of my point. He wasn’t making a bold, righteous move. He was acting to save CN’s brand against a group of new competitors.

    The bottom line is that CN risks becoming irrelevant if they continue to do what they’ve been doing. Yes, as Steve said, they could dig in their heels… but it doesn’t take a “Tactical Philanthropist” to see that overhead percentages don’t make a lick of sense in any case except perhaps for organizations that exist solely as fundraising arms (perhaps a foundation or the sort) and even then, it’s secondary to impact. Eventually the general public would recognize it and would move on.

    For those of us who care about impact, CN is the epitome of the problem: a brand name non-profit that soaks up donations while providing very little of actual value. Yet a new CEO promises to change, throws together an advisory board (and uses his groups influence to invite influential people to be a part of it), then signs on board with a press release and promises to change… and they’re celebrated without ever actually having to implement anything. Isn’t THAT exactly what we’re trying to change?

    I understand that it takes time to shift organizational direction (I’ve got a little bit of experience with it), but I’m going to wait until I see CN’s final product before I let them rest (especially after seeing Ken backpedal in the comments of his post).

    Looking forward to more dialogue,

    James

  12. James, you have this exactly backwards. Ken isn’t catching up to the parade; he’s leading it. And you are demonstrably wrong when you say, “Eventually the general public would recognize it and would move on.” Checkbook philanthropy hasn’t budged in 100 years and it won’t until an establishment player likes CN makes the enormous effort required.

    The other signatories on the press release influence about 5 cents worth of donations; CN influences billions. It has developed a massive database that represents years of hard work and infrastructure investment, and the only reason it only covers financial information is that no other information is available. Ken faces the same Catch-22 as everyone else: no one makes donations based on performance, so there’s no performance data to inform donations. The much smaller (and admirable) organizations who signed the press release with Ken aren’t going to move the needle one inch. Ken will.

  13. Steve —

    Everything you said can’t be true. If checkbook philanthropy hasn’t changed in the last 100 years, then CN has had no impact (unless they were operating covertly some 92 years before their 2001 founding) and presumably will have no impact in the future, no matter how much they change their system. If it has changed (and if CN has influenced that change), then presumably other organizations could gain the public’s trust by using smarter metrics than CN uses.

    Your faith in Ken is admirable, but as I said earlier… all he’s done so far is put out a press release. The same misguided rating system is still used all over CN’s site, while the press release is hardly visible (only a link on Ken’s blog). You’d have to be looking for it to find it. So let’s stop pretending that he just reinvented charitable giving.

    I wish you, Ken and the CN advisory board the best of luck in your efforts to solve the great “catch-22″ of charitable giving, but I’ll save my applause for when you can prove you solved it.

    On the upside, I’ll buy your book as soon as I can find it in paperback.

  14. Hear, hear. We should all support Ken Berger in his efforts. If he succeeds, more money really will go to high performing organizations.