9 Questions Answered About The Value Of Nonprofit Watchdog Groups

By eleventy marketing group

Excerpts from the Fundraising Success Q&A on the value and purpose of nonprofit watchdog groupsRecently eleventy vice president of strategy and development Angie Moore hosted the opening keynote at the FundRaising Success Virtual Conference & Expo 2013. The session titled “The Great Charity Ratings Debate” was a no-holds-barred Q&A with a prominent nonprofit executive and the president of the nonprofit arm of the Better Business Bureau.

The session offered a really interesting discussion of charity watchdog ratings. Angie didn’t shy away from asking difficult questions, and both speakers offered great insights from different perspectives. We suggest everyone check out the full session (by registering here, you can access all sessions from the conference on demand).

In the meantime, here are some insightful excerpts from “The Great Charity Ratings Debate” on the purpose and value of nonprofit watchdog groups.

Questions and Answers About Nonprofit Watchdogs

Angie Moore directed questions at H. Art Taylor, President and CEO of the Better Business Bureau (BBB) Wise Giving Alliance, and Angel Aloma, Executive Director of Food for the Poor. Here are a handful of the questions Angie asked the speakers, and portions of their answers:

Why do we need multiple watchdog agencies?

H. Art Taylor: “…I don’t think we’re ever going to get to a point where we’re all consolidated because we’re philosophically different. We for instance believe in standards; other organizations believe in letter grades. We would never grade a charity. We believe that charities should be evaluated based on a broad metric; others don’t see it that way. They think it should be more based on financial issues. We believe that it’s important to interact with charities in completing our evaluations; others believe that you should just take the publicly available information. So there are philosophical differences that keep us from working together, and that’s OK. But I think it’s going to be incumbent upon charities to understand what each watchdog does and work with the ones that they really feel are important to what they’re trying to do.”

How do we manage to be better when “better” is defined differently from one agency to the next?

Angel Aloma: “… We got four stars from Charity Navigator 11 years in a row, and then the year of the earthquake in Haiti we decided we wanted to do less in-kind to help and more in projects because housing and clean water were priorities with the cholera outbreak. And, basically, we got punished for that with three stars. And it’s incredible because we have donors writing and saying we will not give to you until you have four stars. So we took off Charity Navigator, and this year we will probably get four, but we will not use them again until they have a less arbitrary way of judgment. That’s how I feel, we do have to communicate that by taking that step.”

How did “overhead” become so significant in measuring the effectiveness of a nonprofit?

Art: “It’s really difficult to know where this measurement came from. But my sense is that it is a reflection of the values that people have created over the years when they think of nonprofits. For whatever reason when we think of nonprofits maybe we think of hard work, dedication, sacrifice and other types of qualities that we want to exist in these organizations. And when it feels like money is not going directly to programs but going to other things then those values don’t feel like they’re present. Now I know that may be hard to swallow for some people, but I think that’s where this whole notion of looking at organizations based on overhead comes from.

But I think overall we’ve done a really poor job of explaining what we mean by overhead. As I said early on in this session, there are things charities do which people will ascribe to as being overhead which really aren’t overhead at all. And I think it’s really important for charitable organizations to begin to explain what’s going on and what real overhead is—and, by the way, to say, you can’t run an organization without overhead. So there are two things we’ve got to do: One, we’ve got to say organizations need real overhead in order to succeed; and, secondly, a lot of things people think of as overhead really aren’t overhead. So those are two things I think we can do.”

The BBB, along with others, wrote the Overhead Myth letter that says donors should not dwell on the overhead ratio, as it is a poor measure of a charity’s performance. At the same time, two of BBB’s accountability standards relate to the percentages of fundraising and program expenses. Do they plan to change these standards?

Art: “… I think it’s just wrong to evaluate a charity simply based on how much money they’re putting into overhead. You have to look at a broad cross-section of things to really understand if a charity is accountable. How about if they are truthful in their solicitations? This is something that we exclusively do in our evaluations. We try to make sure that charities are being truthful in their solicitations, in their appeals. If a charity is lying, do we really care that they’re only spending 2 cents on overhead? I would think that we’re more concerned that charities tell the truth. I think the point of this myth letter was to open a dialogue about this and I think it’s really done that. We’ve gotten a lot of feedback on this letter. And I hope charities are doing a lot with this as well.

… We’re not going to do away with the ration for a couple reasons. First of all, of all the charities we evaluate only about 40 percent of them fail to meet one or more of our standards. Only about 10-12 percent fail to meet standards because of a financial ratio issue. So only a very small segment of the charities we evaluate have problems with the financial issues. So we think the measurements that we’re using are actually reasonable. We think it’s reasonable that charities spend at least 65 percent of its budget on programs, that they spend no more than 35 cents to raise a dollar. We think those are reasonable numbers and the data sort of bears that out when you look at how few actually fail to meet those ratios.”

Is there a rule of thumb for an accepted overhead/total expense rate that nonprofits should target?

Angel: “I think the BBB 35 percent is not unreasonable. The DMA says anything below 50 percent then more should be spent on programs. Most charities do go below the 35 percent, like for example, in 1997, Physicians for Human Rights had $1.3 million in revenue and 58 percent went to programs. For every single watchdog out there, for every single evaluator, they would have failed. But not so for the Nobel Prize committee—because they got the Nobel Prize for Peace that year. So it’s difficult to think they would have been given a bad grade by some evaluators. You have to focus on the impact of what you’re doing.

I feel we should be judged on five questions:

  1. Is your organization doing the work for which money is donated?
  2. Is it growing?
  3. Is more being spent on programs than on overhead? If not, then find out why.
  4. Is it investing enough in strong leadership, management and marketing to ensure future growth?
  5. Is it highly ethical? And that’s a very important question especially in today’s world. Is there a board of directors that exercises governance? Are there ethical guidelines for management and staff? Is there easy public access to annual reports, IRS and audit financial statements?

Those are the things that we should be concentrating on and not on an exact number or ratio. We happen to have a strong in-kind program so we have a tremendous advantage. But if you are doing a charity that does not have in-kind, you’re going to struggle—particularly if you are in the beginning where you have to make some investments to acquire donors and things like that. And I think all those things should be taken into consideration by watchdogs.”

Should a charity work with just one watchdog agency or try to manage working with multiple agencies risking that the same data could result in different ratings depending on the standards used by the watchdogs? What do donors prefer?

Angel: “Undoubtedly, the Better Business Bureau has the name in the industry. They are very old historically and they have a sterling reputation. When something happens, they do something about it. If they get a letter from one of our donors, they pass it on to us to repair the situation if it’s our fault or to explain it if it’s not. By and large, if you mention the Better Business Bureau, 99 percent of Americans know what we’re talking about. Charity Navigator is a toss up; Charity Watch even less so. I do think if you had to go with one, the best one is Better Business Bureau Wise Giving Alliance because of the breadth that they judge you from.”

It’s important for the watchdog agencies to avoid celebrating nonprofits that keep their workers on a bread-and-water diet. Is this really the world we want to live in?

Angel: “People have this mentality that you have to get the best bang for your buck; that we have to hire the cheapest person. And I see it in the industry: People being hired right out of college and the more experienced people being put out to pasture. That’s a huge mistake. Shopping at Macy’s is great if you want to get the best bang for your buck. But if you’re investing, I bet you don’t want a person who is paid a lot less running your investment portfolio. That’s the mindset they have to get on. That we are investing here both in doing good and also in creating more cash eventually.”

What are charity watchdogs doing to reprimand nonprofits that are unethical?

Art: “I view the world in thirds. There are one third of charities out there that meet all of our standards. There’s probably another third or so that don’t meet one or more of our standards. And then there are a third of them that refuse to provide any information for us to do an evaluation. I think that group is the worst group—the group that will not even give us information to do an evaluation. You’ll go to our website and you’ll see those charity reports listed in red. I personally would rather support a charity that didn’t meet standards than one that refused to provide any information.

… Those groups we try to do as much as we can to expose. We don’t do a whole lot other than put the reports up for groups that don’t meet one or more of our standards because we don’t think that’s the end of the world that a group doesn’t meet standards. We just think that there’s reasons the group didn’t meet it and it’s up to the donors now to make an informed decision about whether they should support that group even though one or more standards may not be met.”

Why do you think these scam nonprofits are not more publicly shamed by credible nonprofits?

Angel: “It is our role collectively to do so. I don’t like to see charities speaking bad about each other. I don’t even like to see the watchdogs do it to each other. Like one watchdog criticizes another for charging for their seal, yet that watchdog charges for reports. It’s horrible when people start doing that and cannibalizing each other. But I think associations like DMA have an obligation to call them out and we haven’t been doing it enough. I know for the DMA, where I’m chairman for the advisory council, that we are definitely getting to the point where we are calling out both the nonprofits that are not doing their job and also the watchdogs that are doing crazy stuff.”

Key Takeaway: More Transparency and Communication Needed on Both Sides

The discussion from this session really points out the need to better educate donors about the function and purpose of both nonprofit organizations and watchdog groups. It’s up to both nonprofits and watchdogs to be more transparent about what they do and how they relate to one another—and you have to communicate that information to your audience.

If you find a watchdog groups judgment process to be arbitrary, you should clearly express that to your donors. If you find another organization to be more trustworthy, tell people why. Without proper understanding of how watchdogs work, and how nonprofits perceive them, the general public will be more likely to continue to misunderstand and misinterpret watchdog ratings.

Register now (it’s free) for the FundRaising Success Virtual Conference & Expo 2013 to access content on demand and listen to “The Great Charity Ratings Debate” in its entirety.