US model has pros and cons for Australian NFPs

BRR quote Feb 19The government may need to plug several shortfalls if it adopts a model based on Charity Navigator in the US to evaluate Australia’s charities. 

At a recent Australian Institute of Company Directors lunch in Melbourne, Minister for Social Services, Kevin Andrews, said the government was considering a range of models to evaluate charities, including one based on the US-based not-for-profit (NFP) group Charity Navigator. At the same time, he confirmed plans to abolish the Australian Charities and Not-for-profits Commission (ACNC).

He said he was attracted to the Charity Navigator model, a voluntary model that is operated by the private sector and works via moral persuasion rather than government intervention.

Founded in 2001, it has become the US's largest and most-utilised evaluator of charities with its website attracting almost five million visits by donors last year.

It accepts no funding from the more than 7,000 charities it evaluates and does not charge its users either.

Aimed at helping US philanthropists to make informed giving and social investment decisions, Charity Navigator has developed a numbers-based rating system which examines two broad areas of a charity's performance: its financial health and its accountability and transparency.

Andrew Thomas, general manager of philanthropy at Perpetual, says both are good measures and should be encouraged in the sector. “The first will capture some information on the efficiency of the organisation and the second will look to the governance of the organisation.”

However, he adds: “Neither address the effectiveness of the outcomes of the organisation - which is the key issue. Who will be better off, how will they be better off and when will they be better off? How does the community really benefit?

“Now overlay a long term societal issue, such as addressing education in a disadvantaged community, or addressing homelessness, or finding a vaccine. These things don't happen in a single year and don't happen simply due to strong financial health or good governance alone.

“There may be people that think that deep rooted community issues can be solved according to a rating, but where is the rating of organisational leadership or a rating of the organisation's appetite to take risks to address these issues?

How does the organisation's approach solve the issue in a sustainable manner?

“Neither Charity Navigator nor the ACNC Annual Information Statements will necessarily provide the key information to understand how your donation will lead to long-term community outcomes. Both provide some good assistance, but let’s not simplify the challenges of the sector to such a binary level. To think that one rating scale can do so across the breadth of medical research, education, arts, environment, health, social welfare, and international development is far too simplistic.

“The relevant question might be whether the use of Charity Navigator or another ratings tool would replace the public reporting being proposed by ACNC. Ultimately both would provide a step forward, but neither is truly a full solution.

The other relevant question is: how much would each cost and is there a better use of that money?”

Anne Robinson, principal of Prolegis Lawyers, says the Charity Navigator model has several positive features, including:

  • It is independent and not funded by government.
  • It increases the information about charities that is available to the public, so that the public may make informed donor choices.
  • It provides opinion pieces (articles and two blog sites), donation tips and top-10 and bottom-10 lists that rank efficient and inefficient organisations in a number of categories.
  • The service is free and the site is navigable by charity name, location or type of activity. The site has received considerable positive feedback for its user-friendliness.

But Robinson also points out some negatives:

  • There are real questions regarding whether it is able to provide meaningful guidance to donors – see The Ratings Game: Evaluating the three groups that rate the charities, published by Stanford Social Innovation Review (2005)
  • It is a league table system, which establishes lists of charities and reports that make judgements about which charities are operated efficiently and effectively and which are not. These are made at a superficial level, do not consider the context in which charities operate and make the judgements based on its definition of what is efficient and effective.
  • The analysis is based exclusively on financial analysis derived from only one year of financial data (Form 990). One year’s data can materially change a charity’s rating. This may lead charities to try to manage reputational risk in meeting the Charity Navigator’s financial criteria, rather than focusing on their purposes.
  • There are concerns about the accuracy and reliability of Form 990 data and financial data is vulnerable to manipulation.
  • The ratings system is overly simplistic (five stars system) and does not provide any information about program effectiveness.
  • It overly focuses on “overheads” rather than effectiveness.
  • It depends on the collection of data and significant analysis of data (especially as it tries to move towards evaluating the effectiveness of charities) – it will not reduce red tape.
  • It does not evaluate all charities – for example, it does not evaluate private foundations or many religious organisations exempt under the Internal Revenue Code from filing Form 990 returns as it does not have sufficient data to evaluate their financial health.
  • Because its goal is to help individual givers, it only evaluates those charities that depend on support from individual givers. Specifically, it requires public support to be more than $500,000 and total revenue to be over $1 million in the most recent fiscal year. It excludes charities that report $0 in fundraising expenses, as it is interested only in charities that actively solicit donations from the general public. It does not review charities that receive most of their funding from government grants or from the fees they charge for their programs and services.
  • It requires seven years of Form 990 data to complete an evaluation.
  • While it uses categories of causes, difficulties remain in comparing charities and ensuring that it is comparing like with like. 

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