Are you prepared for Charity Navigator’s Results Reporting evaluation?
Most nonprofit organizations limit the reporting of objective mission-related results to a small audience, one that includes management and perhaps a few individual funders. To the extent that results are shared on websites and in fundraising literature, the data is likely to be positive only. It is very unusual to share negative information, unless there is a need to respond to media reports. In an effort to promote greater transparency, Charity Navigator – the best known provider of ratings of nonprofit charities – is enhancing its evaluation criteria. Starting in 2016, the organization will evaluate how well these charities report the results of their work.
While evaluations by Charity Navigator are not new – the organization has been rating charities on a number of criteria since 2001 – this new evaluation of results reporting may take some nonprofits by surprise. Because Charity Navigator can be so influential with potential donors, charities should be prepared to be evaluated on this new category of performance.
Uses of evaluations and ratings
For a variety of reasons, nonprofits have recently come under greater scrutiny by philanthropists, foundation donors and government entities. Informed donors can choose from a wide variety of charities to direct funds, so they employ a number of tools and best practices to help guide them in their choices. The star-rating system employed by Charity Navigator provides a simple method of comparison.
Before choosing a charity to sponsor, donors are encouraged to seek out the information they need – which is often obtained directly from the charities themselves. Savvy donors do not respond to just any call for donations, but perform the due diligence necessary to ensure they are supporting effective, well-run organizations. Donors may look into the tax-exempt status, financial health, activity impact and other areas related to the administration and mission of a charity.
For donors, ratings can provide the comprehensive information they need to compare charities and make their donation decisions. For the charities, ratings can also help showcase charitable work in what is often a competitive market. Even if a charity’s mission is not unique, good ratings can help distinguish it from its peers and influence the flow of donations.
How Charity Navigator works
To meet the need for objective, reliable information to guide charitable contributions, Charity Navigator ratings currently evaluate two areas of performance:
- Financial health – Evaluators scrutinize information from tax returns or IRS Form 990. The evaluations analyze various performance metrics, including expenses for programs, administration and fundraising, as well as efficiency and growth.
- Accountability and transparency – Evaluations examine an organization’s governance and ethics, as well as its willingness to make critical data available to donors.
The types of charities evaluated by Charity Navigator include well-established, tax-exempt organizations (granted under 501(c)(3) of the IRS code) that file Form 990 and depend on support from individual donors. Evaluations are not performed on private foundations, religious organizations and the like.
New focus on results reporting
It is important to note that Charity Navigator will be evaluating how well a charity reports on its results – not on the results themselves, which may be affected by a variety of factors that are not within a charity’s control. According to its website, the purpose is to appraise how the charity comes to “know, use and share their results with stakeholders.” Reporting should include “demonstrably important measures,” and how the organization learns and improves as a result.
Five rating elements will be used to examine results reporting:
- Alignment of mission, solicitations and resources – Evaluators will determine if a charity’s fundraising materials on its website and in its published financial reports are consistent with the program expense breakdown in the most recent Form 990. Charity Navigator has concluded that this new element will actually fit better within the accountability and transparency criteria, so it will become part of that evaluation factor sooner than the other four new elements below.
- Results logic and measures – Evaluators will determine whether the results reported appear to be plausible and logical as well as whether the charity has a plan to collect data based on specific measures. Charities will need to present a clear connection between their planned activities and the likely results, and the process they will follow to collect the data to know what results they have actually achieved.
- Validators – Charity Navigator recognizes there may be other organizations that evaluate and assess the charities. Many charities belong to national organizations that require them to meet certain standards and that evaluate or accredit them against those standards. Evaluators will consider the extent to which charities make public the results of evaluations or analyses from such validator organizations.
- Constituent voices – Evaluators will examine how well a charity gathers and publishes feedback from its primary constituents. They will look at the quality of data collected from the direct recipients of the program services provided by the charity.
- Published evaluation reports – Charity Navigator will assess whether a charity publishes, at least every five years, evaluation reports that cover a majority of its programs. Evaluators will assess the quality of these reports and how the charity is explaining what, if anything, it is changing as a result of such evaluations.
As Charity Navigator notes on its website, it will not rate charities on this information until the organization has gathered data for every charity in its database. Charity Navigator expects to complete this process by 2016.
Steps to take now
As Charity Navigator is already gathering information on results reporting, charities should take the following steps now, if they have not done so already:
Review funding solicitation materials
Are the charity’s funding solicitation materials in alignment with the allocation of resources listed in Form 990?
Review strategic activities statements
Are the reported results – people fed or sheltered, roads built, for example – the likely, direct result of the charity’s activities? Are projected outcomes based on reasonable evidence and logic? What are the specific measures (and the plans to get them) to support the reported outcomes?
Plan to publish objective reviews and evaluation reports
Demonstrate the organization’s good standing with its primary constituents by publishing their honest and candid feedback, success stories and the charity’s on-going dialogue with them.
Benchmark against other charitable organizations
Measure your organization against best practices and assess your organization’s progress.
Establish regular evaluation cycles and publish the reports; show what the organization has learned and the actions it is taking in response to the findings.
Websites have been utilized as more than simple marketing tools for some time. For nonprofits, populating their sites with significant performance measures is more important than ever and critical to the lifeblood – that is, the donation stream – of these organizations.
Charity Navigator is promoting an honest method for sharing this information with the public, similar to what any public company must do for its shareholders. This process means nonprofits may be publishing negative or less-than-flattering information about their organizations, so they need to be prepared to respond.
This is an important step for nonprofits; the challenge will be finding a cost-effective method for meeting it. To that end, it may be helpful for charities to get objective support to ensure they are meeting the evaluation criteria using the most efficient approach available to them.
For further information , please contact Ian Benjamin, Partner, RSM US LLP.