Nonprofit Ratings, Accountability & Transparency
Note: This article was written a few years ago but still holds true today.
Like many community-engaged citizens during the last few days of December, I thinking about end-of-year giving to nonprofit organizations (okay it is not all altruistic, I’m also thinking a little about taxes). During the rest of the year, I work formally and informally with many nonprofits helping them think strategically about capacity, strategy and resource planning. This post occurs at the intersection of my dual roles of engaged citizen and nonprofit consultant and is spurred by two articles that I read recently. The first article was a simple list of Oregon’s 20 Worst Charities – 2010 operating in Oregon that was published by the Oregon Attorney General’s Office. In the list of charities (none of which are Oregon-based), the ratio of program costs to administrative costs was the single measure used to determine effectiveness. The article referenced the Better Business Bureau’s charity standard in support the idea that effective nonprofit budget must divide with no more (and preferably much less) than 35% administrative costs with the balance of 65% or more devoted to program costs. In a follow-up to the report, the Willamette Week used the “single ratio” concept and banged out an article titled Flabby Charities. In short, the article profiled ten local charities failed the ratio test and quoting someone from another nonprofit rating firm Charity Navigator implied, that the ten nonprofits are “underperforming according to industry standards.” Is it really that black and white? Now don’t get me wrong, a nonprofit that only devotes 3%, 6% or 10% of its revenues to programs and the rest to administrative costs is likely a predatory agency that is well deserving of the attribution of “worst.” In all fairness to the Better Business Bureau and Charity Navigator, neither of their rating models are based on a single ratio as represented in the simplified writings of the articles. Indeed, there is a growing chorus of voices that question the wisdom of basing an assessment of a nonprofit on a narrow fiscal criterion. Such an over simplistic view of nonprofit effectiveness borders on mythology that is disingenuous and does a disservice to both the public and nonprofit agencies.
The reality is that while finances are important evaluation criteria for nonprofit effectiveness, the impact of the agency on the social need and the organization’s strategy matters much more when judging the relative worthiness of nonprofit agencies. Indeed, it is puzzling to me that the Charity Navigator expert quoted in the Willamette Week article would perpetuate the mythology of the “program to administrative cost ratio” when just this year, Charity Navigator began a revamping process to its rating system where the new rating weights include Effectiveness and Results as 50% of the score, Financial indicators as 33% of the score (overhead 10% and working capital 23%) and Accountability/ Transparency as the remaining 17% (source: external link). Further, judging the relative merit of a nonprofit solely on quantifiable data removes the “nonprofit narrative” from the assessment process. The human story is part of organizational effectiveness. On this latter point, a relatively new organization, Great Nonprofits, is building a rating system based on the narrative of crowds telling the story of nonprofits. Putting these pieces together, the point becomes clear. It is a terrible oversimplification that says a “program to administrative cost ratio” determines the merit of a nonprofit.
So, the question that remains is if nonprofit worth is not about a single ratio then what contributes to building an unassailable reputation and rating? I would like to suggest several components that nonprofits might pursue to pass the highest scrutiny of a due diligence process.
1. Build on the Existing tools: I encourage nonprofits to create a strong Guidestar profile, which might take 6-8 hours to complete. In addition, the companion site, Great Nonprofits, presents a very intriguing community building potential as an augment to your GuideStar profile. The Better Business Bureau’s charity standards, Charity Navigator and GiveWell offer additional transparency tools to explore.
2. Build a Strategic Budget: While nonprofits need to create an annual operating budget within the constraints of projected revenues, it is also important that a nonprofit also builds a strategic budget that recognizes the true cost of operations and capacity. I outlined the concept of strategic budgets in more detail in another post (here) so I will simply reiterate that a clear understanding of true operating and administrative costs is an essential strategy for resource development.
3. Build a Strategic Budget and Strategic Plan Context: I assert that the cost of operations and capacity is only relevant in the context of strategy. What many fail to understand is that some operating and administrative costs are relatively fixed. For example, hiring an experienced executive director to grow a small nonprofit or hiring a development director to develop a comprehensive fundraising strategy come at market rate and there are limited degrees of freedom in developing salary ranges. A smaller nonprofit making such an expensive hire will see, in the short-term, their administrative and operating costs spike beyond 35% of total revenue. But if the investment in such a hire can be placed in the context of a 3-5 year strategic plan that doubles the size of the agency then the high administrative and operating cost become understandable and proportionally will decrease over time. In short, cost in context matters.
4. Build Fearless Transparency and Accountability as a Cultural Value: When in doubt, make it public. I believe that nonprofits benefit when they put out as much data in the open as they can. At minimum a nonprofit agency needs to be public about: its strategic plan; who is on its board of directors and advisory committees; its IRS Form 990s & IRS Letter of Determination (they are available online already); its audits or fiscal reviews; its annual report; and its program evaluation data. Other steps that can enhance transparency might include a monthly blog by an agency’s executive director; and periodic summaries of board activity and major board decision (maybe as part of blog posts). In an age of increasing accountability a nonprofit’s transparency matters.
5. Build an Honest Profile of Program Impact: While arguably the hardest component to do well; having compelling data and story about your agency’s impact is perhaps your best defense for the criticism that you spend too much money on administrative costs and overhead. Many agencies track services delivered yet fail to communicate this data on a routine basis. Far fewer are the agencies that communicate clear and demonstrative program outcome data. At the end of the day, the worthiness of a nonprofit agency needs to be judged on outcome data supported by the story. Increasingly donors will ask that nonprofits demonstrate that they are meeting its mission and, as a foundation representative I was talking to recently, succinctly stated it, “no data – no confidence.”
While I believe that the two articles I referenced at the opening of this post were simplified stories to a much larger and more complex reality, they serve as a wake-up call, not only to the agencies named in the stories but are a wake-up call to all nonprofits. Are we documenting our story in a way that is open and transparent enough to endure scrutiny and oversimplified accusations? Can we readily point media, donors, and citizens to internal or external rating systems that help the public have confidence enough to support us? Nonprofits that invest resources and work proactively to be on the leading edge of demonstrating effectiveness, transparency, and accountability will be able to answer yes to these questions. For the rest, what are you waiting for?
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