Getting the Best Return on Charitable Giving
When investors buy shares of company stock, they expect that company to use their money to generate returns by using the money wisely. A good investor will do a lot of research, including looking at the company’s past financial statements, free cash flow, return on equity, and other factors, to be confident that their money will be put to good use and generate a suitable return. Giving money to charity is similar – the returns are just in a different form. Instead of using your money to make more money, you expect the charity to fund AIDS research, find missing children, feed the hungry, etc. Some charities are better at this than others, and just like buying company stock, it’s a good idea to do some research before handing over your money. There are some organizations out there that research and rate charities in order to help you get the biggest bang for your charity buck, but how helpful are these ratings really?
One such organization is Charity Navigator. They review the financial data charities provide on their IRS Forms 990, and then use that data to rate charities on a scale of one to four stars. They also show how much a charity spends to raise each dollar it makes. The web site is very easy to use and has a good FAQ. The various top 10 lists on their front page are particularly interesting, such as “10 inefficient fundraisers”. Charity Navigator’s president, Trent Stamp, also keeps an active blog all about various issues surrounding charities.
Another popular charity rating organization is the BBB Wise Giving Alliance. Their ratings are a simple pass-or-fail, and are based on their 20 Standards for Charity Accountability. The nice thing about this system is that it goes beyond financial data, including standards on governance, truthfulness, and willingness to disclose information to the public. Their web site isn’t as friendly or interesting as Charity Navigator, but their rating process seems very thorough.
The third big charity rater is the American Institute of Philanthropy. Unfortunately, the ratings are not available on their web site. You can send them a check for $3 for a sample ratings guide, or become a member by donating $40 so you can get the guide three times a year. In any case, they rate charities on a scale from A+ to F based on audited financial statements (as opposed to Forms 990). Obviously, the web site isn’t very functional, since the ratings aren’t available there anyway. It would be nice if they at least had an online ratings database for paying members.
Another ratings site I stumbled across is GuideStar.org. Free registration on this site gives you the Forms 990 for thousands of charities in PDF format. GuideStar also features analyst reports based on the financial data, but these cost you. A GuideStar subscription for a single day costs a whopping $79, but you can view as many analyst reports as you like during that time. A monthly subscription is $150, and an annual one is $1500.
Despite the availability of all these charity ratings, though, I still find it difficult to distinguish between many charities. The Standford Social Innovation Review highlighted the weaknesses of these ratings in their report called The Ratings Game. Regarding the BBB Wise Giving Alliance:
The drawbacks, however, are that the time-intensive analysis has limited the number of organizations they rate (though they aim to grow to 3,000 by 2007), and that the tool is only useful in weeding out unethical, deceptive, or poorly managed organizations, not in helping make distinctions among the majority of nonprofits that “meet standards.”
Regarding Charity Navigator:
[Due to] widespread concerns about the accuracy and reliability of 990 data, Charity Navigator’s ratios, particularly when carried out to the second decimal point, feel a bit arbitrary (see sidebar, p. 43). Furthermore, generating ratios on resource efficiency, even with reliable numbers, only tells you about use of resources, not about the program effectiveness.
As for the American Institute of Philanthropy:
It is difficult for a donor to understand what specific adjustments AIP made to a given nonprofit’s ratings and why. (The printed report shares the adjusted ratio, but not details of the analysis.) Their full report is available by mail (a curious business practice in the age of the Internet), and provides additional, but still incomplete, insight into the specifics of the analysis on any given organization.
The study did not include GuideStar, and I’m not about to pay $79 to see their reports, so I’m not sure how it would hold up to the same analysis.
While the current popular ratings systems do have their drawbacks, they may still be better than flying totally blind, especially if one is aware of the caveats of each ratings system and keeps them in mind when making a decision on charitable giving. The study includes some suggestions on how we might come up with a better ratings system for charities, so hopefully a ratings system based on those suggestions will be established at some point.
I’d be curious to know from our readers – do you use any of the ratings I mentioned here or some others that I missed? How useful do you find them to be? And does anyone really pay that much for GuideStar?
I work as a consultant for non-profits. I can see that many are becoming aware of the increasing scrutiny of their (potential) donors in the wake of a number of public issues some organizations have had. Many welcome and encourage it. If you are considering giving to a local organization, ask them if you can stop by their office or facilities for a tour. Even if you’re not prepared to give anything “significant” many development offices see it as a way to deepen their relationships with their community. A good many major and planned giving donors start off as those who are only able to give a little at first. Those are so impressed in the “return” they see on even that little investment end up increasing it as their wealth grows.
One interesting thing I have found is that even if an organization doesn’t identify themselves as specifically GLBT, may of them do have services for the community. A local women’s domestic abuse shelter I work with, though primarily focuses on victims from traditional relationships, does have clients who are from same-sex relationships and are actively working to ensure their specific situations are understood and their needs are met.
I follow some of Charity Navigator’s instructions on how to look up a non-profit’s filing. Then I can see the numbers myself and get a good feel for it. That’s more for when I want to form a “relationship” giving to the charity. If it’s a one-time deal I might just check them out on these sites and go for it if they don’t look too shady.
I also enjoy Trent Stamp’s blog. It’s interesting to hear all the stories.
Bill: This is a useful post. Before you mentioned it, I hadn’t heard of Charity Navigator. I ran a quick test using the L.A. Gay & Lesbian Center, an organization that I sponsor, and found the information presented in a clear, concise and useful format. Sure, I can hop around to each charity’s web site and likely download its annual report for the same information, but Charity Navigator provides this through one access point and in a standardized format for comparison and convenience… kind of like bill pay at my online bank. How handy is that?