Assistant professor of economics at the University of Missouri-Columbia, Jennifer Mayo, recently expressed concerns over Charity Navigator’s rating system.
“Contributions can rise 6 to 12 percent for nonprofits that climb to three or four stars, but they sometimes alter their spending patterns for better ratings – or change the way they classify expenses,” she said in an article jointly published by The Conversation and The Chronicle of Philanthropy. “Earning a top-notch rating has become so important that some organizations may be trying to manipulate their financial data to achieve it,” she continued.
CharityWatch recently published a list of nonprofits that receive F ratings for low program spending and/or high overhead. Many of these same organizations receive 3-Star or 4-Star ratings from Charity Navigator, as illustrated in the chart below.
The above chart contains select examples of charities to which CharityWatch (CW) has assigned “F” grades as of 5/19/2023. See Our Process for more information about how CharityWatch’s grades are calculated. Charity Navigator’s (CN) ratings and Candid’s seals were retrieved from those websites between 2/26/2023 and 3/21/2023 and reflect each charity’s current rating or transparency seal as of the date retrieved. Visit charitywatch.org, charitynavigator.org and guidestar.org to view the most current ratings and profiles published on each website.
CharityWatch has long warned donors that online charity rating databases that rely heavily on crowdsourcing and/or automation to publish ratings on hundreds of thousands of charities function more like nonprofit trade associations, not charity watchdogs. In practice they exist primarily to help charities amplify their fundraising and marketing materials by circulating unaudited financial data, governance information, and program “impact” reports that are rarely independently analyzed for accuracy, consistency, comparability, or completeness.
Program “Impact”
In 2021 CharityWatch Executive Director, Laurie Styron, was invited by the Reuters Taxation of Exempts Journal to discuss issues surrounding the nonprofit sector’s shift away from judging charities based on their ability to maximize program spending and keep overhead costs low.
“While an individual charity might possess the high level of expertise and other resources necessary to invest in a substantive, ongoing review of its own impact results, no third-party charity rater or trade association has the expertise or resources necessary to verify the self-reported impact claims of even a small fraction of the hundreds of thousands of public charities registered with the IRS today,” Styron said in her article, 'Busting the Myths of ‘The Overhead Myth.'" Styron also pointed out the flawed logic of nonprofit fundraisers who argue against public scrutiny of charity fundraising expenses, saying, “A charity’s ability to maintain reasonable overhead spending is an important variable that affects the balance of resources it has available to spend on maximizing its program impact. Financial efficiency may not guarantee any specific outcome for any individual charity, but neither does financial inefficiency. Of the two, investing the majority of the $450 billion in annual giving in program activities and encouraging charities to keep their overhead spending reasonable certainly makes achieving outcome goals more likely.”
In her article, Assistant professor Mayo expressed her concern that charities may distort their program impact claims in order to game charity rating systems.
“While leadership and culture should be harder to game, I believe it’s possible that charities will see measuring impact as another opportunity to distort their activities toward things that are easier to measure or that will help improve their rating,” said Mayo.
“There’s Never Been a Better Time to Be a Scammy Nonprofit”
In an August 2022 article published in The New Republic, investigative journalist, Jasper Craven, presented a case study in how the government's deteriorating oversight of the nonprofit sector and questionable charity ratings used in nonprofits' marketing efforts threaten to destroy the donating public's trust in charities.
"There's a slew of private charity raters, such as BBB Wise Giving Alliance, Charity Navigator, and Guidestar. These groups confer a sheen of credibility on nonprofits through numerical ratings and gold stars. And yet a large number of problematic nonprofits enjoy high ratings on these sites…These ratings are routinely called out by CharityWatch, the only real aggressive watchdog. The organization helps journalists interpret IRS nonprofit disclosures while revealing how the documents themselves can be easily gamed to understate executive compensation and overstate impact. 'The whole system is propped up on false assumptions and flawed automated methods,' said Laurie Styron, CharityWatch's leader."
Charities using their online ratings, in part, to gain or maintain credibility and boost donations is not new. A number of charities to which CharityWatch assigns "D" or "F" ratings boast of the high ratings they receive on various nonprofit trade association websites. For example, Mutts With a Mission, which received an "F" rating from CharityWatch based on an analysis of its fiscal year ended 12/31/2019 audited financial statements and IRS Form 990, states the following on its website: "We are proud to be an ADI accredited organization and to have maintained a 100% rating on Charity Navigator. You can be confident that your donations make a difference!"
According to the Mutts With a Mission audit of December 31, 2019 (Note 4, Related Party Transaction, Transactions Affiliated with Board Members):
"Beginning in 2015 and continuing to the present, the Organization's direct mail program is directed by ForthRight Strategy, a professional fundraising consultant. One of the Organization's Trustees is employed by Forthright Strategy and serves as the Senior Account Executive over the Organization's direct mail program. The Organization pays Forthright Strategy a fee based upon pieces of mail produced in the direct mail campaign, and is not contingent upon revenue generated..."
According to the Mutts With A Mission audit of December 31, 2019 (Note 2, Concentration of Risk, Concentration of Support):
"Over 90% of the Organization's support is from the direct mail campaigns directed by one professional fundraising consulting firm, ForthRight Strategy..."
CharityWatch assigned Mutts With a Mission an "F" rating based on its 2019 fiscal year when our in-depth analysis revealed that it spent only 9% of its cash budget that year on programs that did not include fundraising solicitations, and that it cost the charity $84 to raise each $100 in cash support.
A Trade Association Is Not a Watchdog
Ratings that are largely a reflection of what charities report about themselves lack the independence necessary to root out bad actors and poorly performing charities. Also at issue is how such trade associations are funded, which can create conflicts of interest. For example, Bridgespan Group, a firm that earns revenue from nonprofits by providing them with a variety of consulting services, advised philanthropist MacKenzie Scott on billions of dollars’ worth of charitable grants, according to a November 15, 2021 article in The New York Times. One grant recipient was Charity Navigator and another was Bridgespan Group itself, according to The Times article.
A consulting firm that earns revenue by providing services to nonprofits may not be inclined to recommend grants to watchdog organizations like CharityWatch that may criticize its paying clients. Recommending grants to charity trade associations, on the other hand, may better serve its interests since it is easy for charities, including its paying clients, to achieve high ratings on these sites.
Conclusion
Every dollar contributed to a poorly performing charity is a dollar that could have been better utilized by a high impact charity that uses its resources efficiently and responsibly. Charity trade associations ultimately do the public a disservice by not sufficiently warning donors about the limitations of the ratings they are providing. Donors may interpret a star rating as meaning that a charity’s financial reporting or program impact claims have been adequately analyzed and independently verified, when this is almost never the case. As a result, those who take pains to research a charity before donating may end up directing their contributions to the very charities they were trying to avoid.
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