Charity Navigator’s CEO and self-appointed / anointed charity know-it-all Ken Berger was recently interviewed by a local tabloid-type news station investigative reporter. (CN’s CEO’s seem to relish espousing their “expert” views on a wide variety of charity matters.) Playing to the news media’s bottom feeding frenzy on excessive executive compensation, Ken expressed his moral outrage concerning what were, in his and the reporter’s opinion, examples of excessive non-profit executive pay. With a pompous, self-righteousness, holier-than-thou performance for the camera, Ken bestowed his opinions, (seemingly as gospel), and derided one exec’s compensation totaling $500,000 which, the reader should be apprised, accounted for less than 1% of that charity’s revenues. Although the term “transparency” was peppered throughout the interview, what Ken failed to mention, and what the “investigative reporter” failed to report, was that in 2007 Charity Navigator’s CEO’s compensation was $153,898, which accounted for over 19% of his charity’s paltry $798,463 annual revenues! The FAQ’s page on CN’s website appears to condemn its own executive compensation practices stating that “…we encourage you to look at CEO compensation as a percentage of total expenses. A charity CEO compensation of $200,000 for an organization spending $20 million per year (1%) probably seems much more reasonable than the same salary for a $1 million organization (20% of expenses for one person).” It would seem that CN is clearly an advocate of the “do as I say, not as I do” philosophy. Coincidently, but certainly not surprising, Ken sighted a nonprofit CEO salary of $150,000 as “normal and reasonable”.
Due in large measure to CN’s own public reinforcement of, and reliance on, simplistic financial methodologies, the media, as well as the general public, would likely consider executive compensation levels of even 10% of a company’s revenues to be excessive and outrageous. On the other hand, without knowing CN’s particular circumstances, effectiveness, as well as what public benefit the organization has provided (it’s our opinion that CN does more harm than good, but is also rather ineffectual and therefore inconsequential), it is impossible to know whether or not CN’s executives are grossly overpaid or not.
Launched a few years ago in 2002, CN apparently has 12 employees that attempt the herculean task of evaluating over 5000 of America’s charities. Although it is obvious to the discerning that the organization has completely and utterly failed at this undertaking, CN’s creators have nonetheless indeed filled a niche. The majority of the mainstream media is no longer interested in performing any real and costly in-depth investigating and CN is always very available to espouse their self-professed charitable expertise based on their questionable and simplistic financial methodology. It is amazing and shameful how many news media reporters take the easy route and turn to this pathetic, insignificant, arm-chair-quarterback charity for expert opinion on charitable issues. CN has become the news media’s official “fast-food” resource center for charitable matters.
In an article titled “The Ratings Game” published in the Stanford Social Innovation Review, a prestigious group of non-profit experts evaluated the three self-proclaimed charity watchdog agencies. These experts concluded that Charity Navigator’s effectiveness is hampered by its exclusive focus on financial analysis derived from only one year of 990 data. “To rely exclusively on data from the 990s is ridiculous,” commented Bob Ottenhoff, president of GuideStar, “and it’s reckless..”
The article goes on to state;
Given these widespread concerns about the accuracy and reliability of 990 data, Charity Navigator’s ratios, particularly when carried out to the second decimal point, feel a bit arbitrary. Furthermore, generating ratios on resource efficiency, even with reliable numbers, only tells you about use of resources, not about the program effectiveness. It’s a bit like wine connoisseur Robert Parker giving that Oregon Pinot Noir a 93 not for its taste, but based on the number of grapes used to make the wine.
In his must read book titled Uncharitable, author Dan Pallotta writes; The question that is completely overlooked, of course, concerns the charity’s effectiveness in achieving its mission-in other words, how good is it at what it is suppose to be good at? With the money it has for the needy, how well does it serve them? How effective is its approach? The issue that is of paramount importance is the issue that is ignored. Charity Navigator’s website, for example, says, “At this time, evaluating the effectiveness of a charity’s program is out of our scope.” Judging a charity by its overhead percentage alone is like concluding that someone who is 6 feet tall and weighs 250 pounds is fat without ever meeting him. He might be fat. But on the other hand, he might be a Hercules with a 0 percent body fat. The weight might be all muscle. No one can tell by only looking at numbers.
Pallotta continues; The Ford, Charles Stuart Mott, David and Lucille Packard Foundation, along with the Atlantic Philanthropies, funded a research initiative titled Nonprofit Overhead Cost Project. The study was conducted in three phases, including an analysis of IRS Form 990 tax returns of 250,000 charities, survey results from 1,500 of those, and in-depth case studies of 9 of those. An August 2004 brief concluded;
Absent good, comparative information about program or mission effectiveness, donors and charity watchdogs often place excessive reliance on financial indicators. Of particular concern to us is the use of overhead cost and fundraising cost ratios as stand-ins for measures of program effectiveness. No organization in our study was an extravagant spender on fundraising and administration. Yet contrary to the popular idea that spending less in those areas is a virtue, our cases suggest that nonprofits that spend too little on infrastructure have more limited effectiveness than those that spend more reasonably.
According to Paul Nelson the General Accounting Office agrees; “The GAO also urges caution about relying too heavily on ratios and spending efficiency; it adds that how well a charity accomplishes its mission is an important aspect of its worthiness.” Pallotta comments, “That’s an understatement, but at least it’s stated.”
And finally a reference to Charity Navigator found in Wikipedia: This methodology was criticized in an article in the Stanford Social Innovation Review for taking into account only a single year's IRS Form 990. This can lead to significant fluctuation in the ranking of a charity from year to year. Also, the focus on the IRS Form 990 has itself been criticized, as the accuracy and reliability of IRS Form 990 data is questionable. Particularly relevant to Charity Navigator's methodology is that 59% of the 58,000 charities receiving public donations in 1999 failed to report any fundraising expenditures, illustrating a potential problem with relying upon IRS Form 990 figures alone when analyzing an organization.
Although Charity Navigator refuses to employ its questionable methodology to evaluate itself and publicly disclose the results, we would venture a guess that it would be quite an embarrassment for the self-righteous charity. It will also be interesting to note what changes CN makes to its ratings methodology since it may very well be shamed into rating itself publicly for the first time this coming year. Based on actual public benefit CN has provided thus far, Charity Evaluator would be kind and rate Charity Navigator 0 stars.
In closing we would remind our self appointed / anointed charity watchdog groups of a wise old saying, “People living in glass houses shouldn't throw stones.”
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