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Klein & Roth Consulting E-Newsletter
September 2012  

Dear Friend,

As fall fundraising, election year activities, and the usual busy-ness of our nonprofit lives escalates, we hope you’ll take a few minutes out of your day to enjoy our current e-newsletter.  Let us know if there’s something you’d like us to write about in future issues. 

In this issue:


Tools and Tips

Just as raising more money is not the only way to build a stronger social justice movement, buying products is not the only way to change the world. This is what Annie Leonard describes in her brilliant new video, ‘The Story of Change’, which outlines why being an active citizen in our democracy---rather than just consuming goods that claim to help make the world a better place---is what you need to do to build a more sustainable and just society.

From Demos, check out this new interactive graphic that is part of their Tracking Poverty and Poverty project. You can see how American poverty has changed by clicking on different years, view statistics about poverty in relation to factors such as race, gender and educational level. This graphic can serve a useful tool for educating your funders and donors how poverty in the U.S. is a very real problem that affects various groups and communities in different ways.
 
Check out this interview with Kim Klein about her upcoming Partner for Nonprofit Management (PANO) webinar: “Building Successful Relationships with Funders (Funders are people too!)” on Thursday, Nov. 8.

 

Four Stars or Bust: The Dangers of Non-Profit Rating Web Sites

by Nancy Otto, Senior Consultant, Klein and Roth Consulting

Have you ever looked for your non-profit's ratings on third-party evaluation sites, like Charity Navigator, GiveWell or Charity Watch?  Should we care what these sites have to say about our organizations, and if so, how much attention should we give them?

Donors do seem to be using these sites more than ever before.  In 2009, a study by the University of Wisconsin-Milwaukee found that changes in a nonprofit's Charity Navigator rating had a "very robust" correlation with a change in contributions.  When a rating went up, the organization's contributions went up.  When the rating went down, so did the money.

 

And between 2010 and 2012, the number of donors checking an organization’s performance, whether on a third-party evaluation site or at the organization’s own website, increased dramatically.

Evaluators Only Evaluate Large Nonprofits

If your donors are looking for your organization on a third-party evaluation site to get information about whether donations are used wisely, it’s important to know that sites like Charity Navigator, GiveWell, and Charity Watch cover only a very small number of existing charities. For example, Charity Navigator, which claims to be the largest site and the one most used by donors, only evaluates 5,500 nonprofits out of a total 1.5 million in the United States—a number that equates to fewer than 1% of all nonprofits.

Adding in the other third-party evaluation sites, including GiveWell, which examines the websites of “hundreds” of organizations, or Charity Watch which evaluates 600 nonprofits, or the Better Business Bureau Wise Giving Alliance, which lists approximately 500 nonprofits, all of these sites combined still look at fewer than 1% of all nonprofits.  Despite their small portfolios, these third-party evaluation sites get a lot of media coverage. They are cited by major news outlets as the experts to turn to when considering which nonprofits donors should give to.

Consider this excerpt from a recent blog by Ken Berger, president and CEO of Charity Navigator: “Another humbling experience occurred at our office door in follow-up to my appearance on Anderson Cooper. A couple came to the office… [to] seek our advice face-to-face. The couple was particularly interested in supporting the best homeless service charities throughout the nation. After we gave them the advice they were looking for, I said, “You know Charity Navigator is also a charity and largely relies on the voluntary contributions of our users….” To our amazement, they pulled out their checkbook and gave us a sizable donation.”

I find it extraordinary that a third-party evaluation site claims to know which nonprofits are “the best throughout the nation” in any area when they “know” fewer than 1% of them.

Another problem arises when looking at how these sites conduct their ratings. Although I do not attempt to critique here all of the ways these sites carry out their business, the following examples from Charity Navigator raises questions about their practices. If at one point an organization’s budget was larger than $1 million and had a shining 4-star rating on Charity Navigator but then had to scale down because of the economic downturn, it will be penalized for that shrinkage.

If an organization does not undergo a full audit each year it will also be penalized by Charity Navigator. This is unfortunate: not only does the federal government not require nonprofits with budgets of less than $2 million to have a full audit, but many organizations feel it is fiscally more prudent to choose an independent financial review instead of the far more expensive full audit. That decision will cost an organization a whole star at Charity Navigator.

What Should a Small Nonprofit Do?

As we can see, third-party evaluation sites are not going to help smaller nonprofits. Donors generally won’t find organizations with budgets of less than $1 million on these sites—and far and away the majority of nonprofits fit this description. If your donors are wondering why you’re not on one of these sites, you can explain the small number of organizations such sites do evaluate and, more important, you can let them know how they can develop confidence in their giving to you in other ways. Here are some suggestions:

1) The best way to look honest and transparent is to be honest and transparent: publish your budget and profit and loss statements on your website and include a narrative explanation.

2) If you have had an audit, publish it on your website. (It’s good to have an audit every few years to build confidence in your own systems and to be able to share that confidence with donors.)

3) If you are big enough to be on one of the third-party evaluation sites, see what they’re saying about you and be prepared to explain any negative assessments to your donors.

The Most Important Site for Most Nonprofits: GuideStar

Unlike the sites discussed in this article so far, GuideStar.org is an important site for all nonprofits. Every nonprofit that files a form 990 with the IRS will be listed on the GuideStar website. Although GuideStar doesn’t “rank” organizations, it does provide a checklist of basic criteria based on the following questions: Is it committed to transparency (and therefore entitled to the GuideStar “Seal”)? Is it registered with the IRS and provide legitimate information? Does it provide annual financial data? Are its Forms 990 filed with the IRS? Is the mission statement available? Is an “impact statement” available?  Check your listing in GuideStar from time to time and make sure that it’s accurate.

If you have a story to tell about your experiences with third-party evaluation sites, please share it with us. The more we know about the challenges nonprofits face with these sites the better we can educate donors about which of their research inputs to value so that all nonprofits, big and small, get a fair review.


Upcoming Workshops & Trainings

Check out the “What We’re Up To” section on the Klein and Roth Consulting home page to find out about our public workshops, speaking engagements and webinars.

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All the best, 

Klein & Roth Consulting

 

 

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