Written by Jonathan Goodman
Charity Navigator is a nonprofit organization that uses a four-star rating system for nonprofit organizations to help individuals make informed decisions about which ones they want to donate money to (Finch 2014). The organization became a 501(c)3 public charity in 2012 after functioning for 11 years as a different type of nonprofit organization known as a “private foundation,” which means it will meet its own criteria to qualify for a rating for the first time in 2019 (Charity Navigator1).
Charity Navigator operates a website that allows its users both to view rating information for a specific charity and to search through its database for all charities that match the user’s specified criteria. With listings for every one of the 1.57 million nonprofit organizations in the United States and ratings for over 8,000, Charity Navigator is the largest independent evaluator of charities in the world (Charity Navigator5). Such evaluating agencies may also be referred to as “charity watchdogs” (Ferraro 2008). Charities that are rated by Charity Navigator have the option of displaying an official ratings seal on their own websites to alert their users to their rating (Finch 2014).
Star ratings are a simple metric to let Charity Navigator users know whether a charity is deemed “Excellent,” (4 stars) “Good,” (3 stars) “Needs Improvement,” (2 stars) or “Poor” (1 star). Charity Navigator uses the information from the websites and most recent 990s of qualifying charities to generate scores for their “Financial Health” and “Accountability & Transparency.” These two scores are averaged together for an overall score between 0 and 100 and a corresponding star rating. According to its website, Charity Navigator began in 2013 the process of incorporating a third score for “Results Reporting” into its rating system (Charity Navigator7). In order to receive a rating from Charity Navigator, a charity must be a U.S.-based organization of the type known as a 501(c)3 and must complete a tax return known as a 990 every year. It must also meet several other criteria related to the size of its annual revenue, how long it has been incorporated as a 501(c)3, how much “public support” it gets and the percentage of its expenses that go to fundraising and administration (Charity Navigator6).
In addition to listings and ratings, the Charity Navigator website features a wide range of “Top Ten Lists,” “Hot Topics” and “Tips for Donors,” along with several detailed articles about Charity Navigator’s history, mission, methodology and future plans (Charity Navigator0).
Charity Navigator was founded in New York 2001 by Pat Dugan, owner of a pharmaceutical sales business that had recently gone public and rendered him much wealthier than he had ever been. After Dugan’s business first went public in 1998, he wanted to use his newfound wealth to expand his charitable giving. However, three years later, a charity called Hale House to which Dugan had already been giving became embroiled in a high-profile scandal involving embezzlement, mismanagement of donor funds and maltreatment of children (Barlament 2013). This was not an isolated incident, but one of several highly publicized scandals involving charities that occurred throughout the 1990s (Gibelman 2004). Dugan created Charity Navigator in response to these scandals as a fact-based resource for donors to evaluate a charity’s worthiness before supporting it financially.
When Charity Navigator’s website went live in 2001, it featured ratings for only 1,100 charities and based its ratings solely on financial information from the charities’ publicly available 990s. Many of the charities which received ratings on the website felt that the rating system unfairly “reduced a charity’s work to its financial statements” (Barlament 2013) and criticized Charity Navigator for tarnishing their reputations by issuing poor ratings based on this “unfair measure.” In 2008, the United States government modified the 990 to collect information about the accountability and transparency practices of public charities (Ferraro 2008). As a result, Charity Navigator was able to begin basing its ratings on more than financial information alone (Charity Navigator5). Nevertheless, the website continued to be received skeptically by charities who saw its rating system as an unfair and incomplete evaluation of their work.
Since January 2013, Charity Navigator has undertaken a five-phase effort to add a third component to its star rating system. This project responds to common criticisms of Charity Navigator by incorporating information about how effectively charities perform work related to their mission. The eventual completion of the project will mark the launch of the 3.0 version of the Charity Navigator website (Charity Navigator7).
Since its launch in 2001, Charity Navigator has become a popular resource for individuals considering donations to the nonprofits that it ranks. In 2015, over 7 million users visited the site. The importance of the service provided by Charity Navigator and other watchdog groups is exemplified by a 2016 survey of randomly selected charitable donors. In response to the survey, 55% of donors reported sometimes or always checking the website of a charity for a ratings seal before donating and 93% reported a negative impact on their likelihood of donating to a charity when its website lacks a ratings seal (Finch 2014). Furthermore, a 2015 study found an additional effect whereby Charity Navigator’s ratings create a “collective reputation” among charities with similar missions and locations, leading to increased or decreased donations to individual charities when their peer organizations’ star ratings go up or down. (Grant & Potowski, 2015).
The Charity Navigator website has a demonstrated role as an important destination for information-seekers when high-profile news stories break about specific charities and causes. For example, in 2014, when a fundraising campaign to support research into cures for the disease known as ALS went viral, Charity Navigator received over 90,000 visits in a single day, driven largely by donors researching ALS charities. Two years earlier in 2012, more than 284,000 visits were made to the website following the release of a controversial documentary by the charity Invisible Children (Charity Navigator5).
Ties to the Philanthropic Sector
The importance of Charity Navigator as a resource for donors, as discussed above, necessitates a close relationship between the service and the philanthropic sector at large. Charities rated well by Charity Navigator frequently display the official ratings seal on their websites and advertise their ratings in marketing and fundraising materials. For these organizations, the service can be a powerful tool for increasing their donations. Other charities which may be rated poorly risk being disqualified from consideration for giving from donors whose decision-making is strongly impacted by Charity Navigator’s ratings (Barker 2004). Those which do not qualify to be rated at all run the same risk. As a result, feelings about Charity Navigator among charities themselves are not universally positive and the service remains controversial.
Despite differences in perspective, Charity Navigator and charitable organizations within the philanthropic sector have worked in tandem to improve the ratings system, making it both fairer to charities and more informative for donors (The Overhead Myth). For example, in 2011, Charity Navigator responded to criticism that its ratings were based only on charities’ financial performance by adding a second score for “Accountability & Transparency” into its formula for generating star ratings (Charity Navigator5). More recently in 2013, Charity Navigator began its multi-phase effort to make its ratings system reflect the effectiveness with which charities assess the impact of their programs (“results reporting”). By “consulting industry leaders, academics, charity representatives, donors and others,” the organization hopes to ensure that the improved system is satisfactory to all who will be affected by it (Charity Navigator7).
Key Related Ideas
The “overhead myth”: a popular conception that the percentage of a charity’s revenue spent on fundraising and administrative activities, collectively known as “overhead,” can be used as the “sole indicator of nonprofit performance” (The Overhead Myth). Critics of Charity Navigator charge that it has perpetuated this belief by publicly penalizing charities for spending what its ratings system deems too much on these types of expenses. However, under current leadership, Charity Navigator has publicly disavowed the overhead myth and called on donors and charities to help them dispel it.
Executive compensation: the topic of what should be considered an appropriate salary for a high-level executive at a public charity is a matter of great debate among donors. Some believe it is acceptable for charity executives, like business executives, to be paid any amount as long as the benefit they provide outweighs their cost (Pallotta 2008). Others feel that it is immoral to allow donated funds to be used for large executive salaries rather than mission-related activities. Charity Navigator uses data from over 4,500 charities to publish an annual report on statistically normal practices for compensating executives (Charity Navigator2).
Results reporting: many charities gather detailed data about their work, in part for the purpose of demonstrating their successes to donors and the public. This process may also be referred to as “impact assessment” or “outcome reporting.” The quality of results reporting performed by charities is the next category of information that Charity Navigator plans to incorporate into its ratings system when it launches the third generation of its website (Charity Navigator6).
Important People Related to the Topic
Pat Dugan founded Charity Navigator in 2001 with a $1.5 million gift and continued to provide much of its funding until 2007. He created the website as a way to help donors find factual, unbiased information about charities after a series of high-profile scandals involving charities had eroded much of the public trust in the philanthropic sector. Dugan remained on Charity Navigator’s Board of Directors until June 2016, when he retired at the age of 80 (Stiffman 2016).
Michael Thatcher is the current and third CEO of Charity Navigator as of August 2015. Thatcher is a former Microsoft executive whose experience with technology represents a shift for Charity Navigator. According to the website’s founder, Charity Navigator hopes Thatcher will oversee a successful expansion of its ratings system while increasing the number of donors who utilize the service. Thatcher is expected to preside over a doubling in the number of charities rated by the end of 2016 and an even larger increase in revenue growth (Hrywna 2015). Thatcher will also continue the work of his predecessor to improve Charity Navigator’s ratings system for all stakeholders.
Dan Pallotta is a leading critic of charity watchdog groups and the “overhead myth.” Pallotta is a consultant who helped transform the Avon Walk to End Breast Cancer and other similar events into massive-scale fundraisers grossing tens of millions of dollars annually. However, a television expose accusing his company of spending too much on “overhead” (see “Key Related Ideas”) eventually led him to close the company (Pallotta 2008). Since 2008, Pallotta has written two books (Uncharitable  and Charity Case ), given a TED Talk and founded an organization called the Charity Defense Council, all with a shared mission of challenging public perceptions about what is appropriate behavior for charities.
Related Nonprofit Organizations
GuideStar is a peer organization to Charity Navigator, aggregating and displaying information about charities to be accessed for free by potential donors or other interested parties. Though GuideStar also issues a ratings seal, it is neither a charity evaluator nor a watchdog, but a public service dedicated to sharing information in an accessible manner. GuideStar, like Charity Navigator, is free to both charities and users, but allows charities to update their own “profiles” and focuses on integrating and sharing data with other online services such as AmazonSmile and Blackbaud (GuideStar).
BBB Wise Giving Alliance is a charity evaluator that rates charities based on a wide range of criteria including their governance, oversight, mission effectiveness, finances and fundraising practices. Currently, BBB WGA’s website (give.org) reports on approximately 1,300 nationally soliciting charities, while local chapters of the associated Better Business Bureau report on an additional 10,000 locally soliciting charities (BBB Wise Giving Alliance). The service charges charities an annual fee anywhere between $1,000 and $15,000 to display its seal on their website. In a study surveying randomly selected donors, BBB WGA’s ratings seal was the most likely to influence a donor’s giving decision when displayed on a charity’s website. Charity Navigator’s ratings seal was the sixth most influential and GuideStar’s ranked seven (Finch 2014).
National Committee for Responsive Philanthropy (NCRP) is an independent nonprofit that specifically monitors grantmaking foundations rather than all charities. Unlike other prominent watchdog groups, it does not aggregate and share information on individual organizations, nor does it rate them. Instead, NCRP “philanthropic practices and carefully and systematically researches potential areas for reform.” NCRP advocates for changes in public and private policy that it believes will improve the “accountability and responsiveness” of foundations whose primary function is to fund charities. Since its founding in 1976, NCRP boasts several advocacy accomplishments, including influencing community foundations to increase their giving to low-income communities (National Committee for Responsive Philanthropy).
Reflection Questions - How do services like Charity Navigator influence the behavior of donors to public charities? Would you consult an organization such as Charity Navigator before you donate to a charity?
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This paper was developed by students taking a Philanthropic Studies course taught at the Lilly Family School of Philanthropy at Indiana University in 2017. It is offered by Learning To Give and the Center on Philanthropy at Indiana University.