Charity Navigator - Evaluation Methodology

Evaluation Methodology

Using publicly available tax returns (IRS Form 990) filed with the Internal Revenue Service, and information posted by charities on their web sites, the Charity Navigator rating system bases its evaluations in two broad areas — financial health and accountability/transparency. Based on how the charity rates in each of the two areas, it is assigned an overall rating, ranging from zero to four stars. To help donors avoid becoming victims of mailing-list appeals, each assessment of a charity's performance is accompanied by a review of its commitment to keeping donors' personal information confidential.

This methodology was criticized in an article in the Stanford Social Innovation Review for taking into account only a single year's IRS Form 990. This can lead to significant fluctuation in the ranking of a charity from year to year. Also, the focus on the IRS Form 990 has itself been criticized, as the accuracy and reliability of IRS Form 990 data is questionable. Form 990 categorizes a charity's expenditures into three broad categories that are open to accounting manipulation. The nonprofit sector does not have the strict financial regulation and transparency required from public corporations (under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Sarbanes-Oxley Act, among others), creating limitations on how accurately a charity's efficiency can be graded based on a tax return. Particularly relevant to Charity Navigator's methodology is that 59% of the 58,000 charities receiving public donations in 1999 failed to report any fundraising expenditures, illustrating a potential problem with relying on Form 990 figures alone when analyzing an organization.

However, Charity Navigator never included charities that claim to have no fundraising expenditures. Furthermore, it only rates the 6% of charity organizations in the US that have over $1 million in annual revenue (these 6% get 94% of the revenues that come into the nonprofit sector each year), and argues these charities have better expertise for reporting to the IRS, are under greater public scrutiny and therefore their reporting tends to be more accurate.

As of December 2007, Charity Navigator would recommend donors support concerns that meet six criteria:

1. Able to communicate who they are and what they do
2. Defined short-term and long-term goals
3. Able to state the progress it has made (or is making) toward its goal
4. Programs make sense to the donor
5. Trustworthy
6. Programs that the donor feels they can make a long-term commitment to

In December 2008, the President and CEO, Ken Berger, announced on his blog that the organization intends to expand its rating system to include measures of the outcomes of the work of charities it evaluates. This was described in further detail in a podcast for The Chronicle of Philanthropy in September 2009. The article explained that plans for a revised rating system will also include measures of accountability (including transparency, governance and management practices) as well as outcomes (the results of the work of the charity).

In July 2010, Charity Navigator announced the first major revamping of its rating system. This revamping begins what the organization states is the process to move toward CN 3.0 which is a three dimensional rating system that will include what they consider the critical elements to consider in making a wise charitable investment - (1) financial health (CN evaluated this from its inception), (2) accountability and transparency (begun in July 2010) and (3) results reporting (slated to begin rating this dimension in July 2012). After collecting data for more than a year, in September 2011, Charity Navigator launched CN 2.0 which is a two dimensional rating system that rates charity's (1) financial health and (2) accountability and transparency.

In recent years, Charity Navigator has become outspoken against what it calls high CEO compensation. At the same time, they note that nonprofit CEO's should be paid what the market demands. They complete a CEO compensation study each year. In the study they have consistently argued that a low six figure salary for a CEO of a mid-to-large sized nonprofit is the norm and should be acceptable to donors. They further argue that these are complex multi-million dollar operations that require a high level of expertise. They are however, outspoken again the phenomena of million dollar plus compensation, which they do not believe is justified for a tax exempt public charity.