12/1/2009

Today was a big day. If anyone ever writes a book about modern philanthropic reform, December 1st, 2009 will be the day the story begins.

Philanthropic actors issued a joint press release today urging people not to donate based on a charity's financial overhead, but on its effectiveness. This critique is nothing new, but the release is important because Charity Navigator,  a major charity evaluation site that ranks charities solely on overhead costs, was one of the co-signers. Essentially, Charity Navigator conceded that its method is wrong and joined the other major charity evaluator (GuideStar) and three other alternative evaluation sites (GiveWell, Great Nonprofits and Philanthropedia) in calling for a better system of evaluation based on effectiveness and accountability.

GuideStar and Charity Navigator endorsing the work of the alternative evaluators would warrant a post by itself, but Charity Navigator stepped up this call to action with some actual action. In conjunction with the joint press release, Charity Navigator announced a complete overhaul of their ranking system, set to go up by Spring of 2011. They will not change their four star system, but instead expand their analysis to include three criteria:

1. Financial health – Is the nonprofit sustainable? Does it have robust financial strength to survive in good times and bad? Is the overhead not at the extreme end of the continuum?
   
2. Accountability – Does the organization have ethical practices, good governance and transparency? Is it accountable to its constituents?
   
3. Outcomes – Can the nonprofit supply information about meaningful and lasting change in the communities and lives of the people it serves? Can they show evidence that these changes are as a result of their efforts? Do they have systems and processes in place to effectively manage their performance?

Ken Berger, CEO of Charity Navigator, said that the new definition of the four star rating will relate to the level of risk of investing in a nonprofit: "[A] zero star nonprofit would be a very high risk social investment and a four star would be low risk."

The evaluation alternatives of GiveWell, Great Nonprofits and Philanthropedia are good starts towards a better evaluation system, but they are not perfect (as GiveWell notes). I take issue with their methods: GiveWell seems to punish the lack of accountability rather than encourage (more on this later), Great Nonprofits seems to be nothing more than a place where people tell each other about how great their nonprofit is, and I am not sure if Philanthropedia's model has much room for expansion (also more on this later).

Charity Navigator's methodology probably has its flaws, just like the other evaluators, and Berger does not lay out a lot of details. (Mostly because they don't have any. With the help of its team of advisers, Charity Navigator hopes to have a first draft of the methodology done in Spring 2010.) But Charity Navigator's (and Berger's) commitment to evaluating based on accountability and effectiveness, combined with the company's resources and scope (the site gets 3 million unique users each year, according to Berger's post) could be the start of far-reaching reform.

Berger says that this is the "battle for the soul" of the nonprofit industry. I agree with him. Regardless of Charity Navigator's eventual methodology, the battle can't be won unless individual donors use evaluation resources and think critically to make the smart decisions for better social returns. Start as soon as you can.