Since the advent of Charity Navigator and other websites that rate charities, there has been an increasing push for charities to meet their arbitrary standards. Voices critical of charity ratings rarely reach a national audience. But now a prominent critic has reached a national forum thanks to The Huffington Post.
In a recent editorial, Founder and CEO of Public, Inc., Philip Haid, voiced his concern that charity ratings kill innovation. In the editorial, he wrote that charity ratings cause charities to focus “on expense ratios and not enough on impact.” Thus, “charities are reluctant (some are even scared) to spend money on innovating the way they engage the public.”
This reflects what we have seen among nonprofits, including some of our clients. My experience is that a focus on ratings can distort the spending, and thus activity, of nonprofits. Instead of spending to further their exempt purposes, this focus may divert funds from where they are needed in order to maximize the ratios considered by the raters. We also have seen expenses misclassified in order to jigger results. Whatever the impact, the effect can be insidious as charity managers and directors try to achieve strong ratings, often to the harm of their missions and achieving good results where it really counts.
Prior to Mr. Haid’s editorial, Charity Navigator, for one, announced that it is revamping its rating criteria to include “results” along with financial health, transparency and accountability. Let’s hope the new criteria are such that the focus will move away from meeting financial ratios and return to achieving great results, as it should.