Charity Navigator 2.0

(Disclaimer: I’m a member of the advisory board to Charity Navigator on their effort to overhaul their rating system)

Charity Navigator is the 800lb gorilla in the charity rating space. The website gets over 4 million annual visitors. Between Thanksgiving and New Year’s, the site is mentioned by the mainstream press multiple times a day. Studies have shown that changes in Charity Navigator ratings have a direct impact on a nonprofit’s fundraising success.

Charity Navigator is also largely responsible for the popularization of the overhead expense ratio as THE metric that donors care about.

However, to the great credit of Charity Navigator CEO Ken Berger, the organization is undertaking a radical overhaul of their rating system. The final version will move the rating system from considering overhead and other financial metrics as the only input to counting towards only 33% of a nonprofit’s rating. The nonprofit’s effectiveness and results will account for 50% of the new rating.

The final version of the Charity Navigator 2.0 rating system will not go into effect for two years. But at the Social Capital Markets conference, Charity Navigator presented a sneak peak at the new system. You’ll find the slides below:

The potential impact of this shift was illustrated well when Berger got to the slide showing the questions that would be asked of nonprofits. When he clicked on to the next slide, a shout went up from the SoCap crowd from the nonprofit employees who were frantically taking notes. The presentation ground to a halt as Berger clicked back to allow everyone time to copy down the new metrics by which they would be judged.

The new system breaks down like this:

• 50% Effectiveness/Results: Based on 3rd party reviews centered around six questions developed by Keystone Accountability and New Philanthropy Capital (see below).
• 33% Financial: 10% based on the 3 year moving average overhead ratio and 23% based on working capital levels (cash on hand) and the current ratio (a ratio of liabilities to assets).
• 17% Accountability/Transparency: Based on an analysis of the nonprofit’s website and their 990s.

The six questions, which are at the heart of the new system and form the core of the new expectations for nonprofits are:

• What is the charity’s commitment to reporting results?
• How does the charity demonstrate the demand for its services?
• Does the charity report its outputs (what it does)?
• Does the charity report its outcomes (defined as the identifiable differences that it makes through its work)?
• What is the quality of evidence for reported results?
• Does the charity adjust and improve in light of its results?

These questions are similar to the five questions every donor should ask before making a donation that I offered in a recent Chronicle of Philanthropy column. While people may quibble with specific questions or suggest new ones, there is no doubt that Charity Navigator is moving from an efficiency-centric rating system to an effectiveness-centric system.

Does it matter? While there are many critics of Charity Navigator (and I was a vocal one until Ken Berger was hired), no one has ever criticized their ability to market their system and gain mainstream attention. In the rare instances when TV news anchors talk about nonprofit ratings or about “how good” a nonprofit is, the focus is always on how much they spend on overhead. Charity Navigator has been a major reason for why this question is asked.

Imagine a world where Oprah or Bill O’Reilly or CNBC or your local news anchor runs a story on a nonprofit and when it is time for the hard hitting question, the host doesn’t ask about overhead, but instead begins asking questions about the nonprofit’s results.

That’s the world I want to live in. That’s the world the Smart Giving movement is working towards.

That’s the world that’s coming.