One of the best known charity rating evaluators, Charity Navigator, has made significant changes to its ratings process to incorporate governance and transparency in its analysis. Its ratings previously focused primarily on financial health and efficiency of an organization, emphasizing what percentage of a charity’s revenues were used for administration rather than programs. As a result of the changes, fewer charities (a 20 percent drop) now receive the top four-star rating and 2,569 charities (about 50 percent of total) have new ratings.

Charity Navigator currently rates approximately 5,500 charities and assigns one to four stars. Charity Navigator only evaluates 501(c)(3) organizations that file Form 990s. Thus, it does not rate smaller organizations that file Form 990-EZ, religious organizations that are not required to file Form 990s, or private foundations. Charity Navigator not only assigns stars, but also alerts donors to problems such as highly paid CEOs at low-rated charities, inefficient fundraisers, those in deep financial trouble, etc.

Financial Metrics

Charity Navigator evaluates financial metrics, including program expenses, administrative expenses, fundraising expenses, fundraising efficiency (fundraising expenses divided by total contributions raised), primary revenue growth, program expense growth, and working capital ratio.

Charity Navigator then analyzes these numbers in scales listed in its financial ratings. They focus on each of program expenses, administration expenses and fundraising expenses as a percentage of total functional expenses.

New Accountability and Transparency Standards

The new focus on accountability and transparency parallels the governance disclosure changes the IRS recently made to Form 990. Charity Navigator reviews the Form 990 for 12 items and then reviews the organization’s website for how well the organization discloses certain additional information.

The new standards include whether a charity has a board of at least five members, a majority of which are independent, whether there has been a material diversion of assets, audited financial statements by independent public accountants, a board audit oversight committee, loans to related parties, documentation of board minutes, provision of Form 990 to governing body in advance of meeting, conflict of interest, whistleblower and record retention and donor privacy policies, CEO listed with required compensation information, existence of a documented policy to determine CEO compensation, and whether its board is compensated.

The charity’s website is reviewed to see if board members and key staff are listed, and whether audited financials and Form 990 are available on the site.

It is interesting to note the diversity is not rated and Charity Navigator’s 10-member board has only one female. Even its 26-member advisory panel only has six women.

Key Take Aways

  • Charities should check their “star status” on charitynavigator.org and review whether the information is correct. If it has fewer stars than the charity “wants,” it should review the methodology and see if the board and staff feel changes can be made to improve the rating or if the ratings reflect the correct information on the charity. Staff should review the website to see if the information desired is disclosed and easy to locate.
  • Be aware that donors can contribute directly on Charity Navigator’s website to the charities it evaluates.
  • The boards of rated charities should be made aware of the rating, regardless of whether the organization feels it is of value.
  • Stay tuned because more changes in Charity Navigator’s rating system are expected to be announced in 2012, focusing on a third dimension – results.