Among the hottest of the hot topics in the philanthropy world these days is nonprofit evaluation, and all eyes are on Charity Navigator in particular as they move from a narrow focus on financial measures to a much broader assessment of organizational effectiveness. This is good news for the sector, no doubt. We’ve long believed that a narrow focus on metrics like overhead ratios and program expenditures (core elements of Charity Navigator’s methodology) is not only misguided but really damaging, encouraging nonprofits to focus on how their expenditures look to external eyes rather than on how much they get actually do with those dollars, and creating huge disincentives for nonprofits to make critical capacity investments. Even worse, those metrics probably don’t tell us anything consistent about an organization’s actual impact or effectiveness.
As Tactical Philanthropy noted in a nice write-up earlier this week, “Charity Navigator is the 800lb in the charity rating space,” so watching them lay out a path for major changes in their rating system over the next couple of years really is a big deal. Charity Navigator, ironically, probably gets more credit than anyone else for making overhead ratios so important, but under new leadership and increasingly sophisticated thinking in the philanthropic world about evaluating nonprofit performance, they will play a large role in shifting the paradigm.
As they reported at the SOCAP10 conference last month, their new system will consider overhead ratios, working capital (cash on hand), and a liabilities-to-assets ratio but will also focus heavily on third party reviews of organizational effectiveness. Accountability and transparency will also figure in the rating system.
There’s plenty of opportunity for missteps, but watching an industry giant like Charity Navigator lead this critical cultural change in the philanthropy community is a welcome sight.