Understanding and Utilizing Charity Navigator Ratings

Date May 20, 2024
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In the dynamic landscape of philanthropy, where countless nonprofits vie for support and resources, the importance of transparency and accountability cannot be overstated. One invaluable tool aiding both donors and nonprofits in this pursuit is Charity Navigator, a platform that assesses and rates the financial health and accountability of charitable organizations. Understanding the significance of Charity Navigator ratings is essential for both donors seeking impactful giving opportunities and nonprofits striving to build trust and credibility within the philanthropic sector.

Who is Charity Navigator?

Since 2001, Charity Navigator has provided free access to data, tools, and resources on more than 225,000 charities to guide philanthropic decision-making. The extensive ratings illustrate the cost-effectiveness and overall health of a charity’s programs, encompassing measures of stability, efficiency, and sustainability. The metrics inform donors of not just where their dollars are going but what their dollars are doing. Like the organizations rated, Charity Navigator is a 501(c)(3) nonprofit; there’s no charge to the charities, ensuring the objectivity of the evaluations and ratings.

What is the Charity Navigator rating system?

The Encompass Rating System assesses four domains or “beacons”:

  1. Accountability and Finance
  2. Leadership and Adaptability
  3. Culture and Community
  4. Impact and Results

These beacons are weighted differently based on how many have been earned and result in a numeric score of
between zero and 100 and a related 1- to 4-star rating.

Because it must ensure comparable and fair analysis, Charity Navigator only rates 501(c)(3) tax-exempt organizations that file a full Form 990 for three consecutive years. Those that do not have three years of financial history or those that file a 990-EZ, 990-N, or 990-PF are not eligible. The data used in compiling the ratings comes from three sources:

  • The IRS provides data via regular data transfer for organizations that electronically file.
  • Organizations provide their own information.
  • Data partners, such as Candid/GuideStar and Impact Genome, share data they have collected about organizations.

Charity Navigator updates its scores based on the most recent available information on the first day of each even month as well as prior to Giving Tuesday. Data not obtained from Form 990 is retained and applicable for use in determining ratings for three years.

Who uses Charity Navigator ratings?

Nonprofit organization leaders should understand the potential audiences for their ratings. The following groups can be expected to review them:

Individual donors to ensure they are giving
to an effective, impactful and trustworthy
organization

  • Foundations and grant makers, such as community foundations or family foundations of all sizes, to serve as initial due diligence
  • Institutional donor-advised funds when determining recommendations to high-net-worth philanthropists
  • Media for content for ongoing coverage as well as when a crisis occurs
  • Nonprofit professionals to help guide career decisions
  • Corporations to guide corporate social responsibility efforts
Is a Charity Navigator assessment worth the effort?

Without hesitation, the answer is “yes.” Donors are increasingly focused on ensuring their contributions have a tangible and positive impact. Charity Navigator’s ratings provide donors with a comprehensive understanding of how efficiently a nonprofit uses its funds to achieve its mission. Charity Navigator prioritizes in their search and curated lists organizations with 3- or 4-star ratings and with two or more beacons. Their internal analysis demonstrates that organizations receive additional donations for every beacon they complete and being on their curated lists translates to significant increases in giving.

Securing and upholding a positive rating from Charity Navigator goes beyond mere accolades; it becomes a strategic necessity. Elevated ratings not only draw in more donors but also elevate the standing of the organization, creating opportunities for partnerships and collaborations. Nonprofits can leverage the ratings to identify areas that require their focus and showcase their commitment to their responsibilities to stakeholders.

The Four Beacons
  • Accountability and Finance addresses the financial health, sustainability, and level of governance practices in place. It tells the audience the organization has the practices in place to ensure that fiduciary and governance best practices are followed and donation dollars are used wisely. The primary source of data is the previous three years of the organization’s Form 990. The metrics evaluated can be broken down into the two categories: accountability and financial.

Accountability includes the following metrics, some only applicable for larger organizations meeting certain revenue thresholds:

Leadership and Adaptability evaluates an organization’s leadership capability, strategic evolution, and capacity to adjust to both internal and external changes, ultimately enhancing its effectiveness in fulfilling its mission. When an organization has a focused mission, a clear strategic plan, and capable and adaptable leadership, it is more likely to solve the underlying issues addressed by its program.

Charity Navigator identified the following critical components that evidence suggests are necessary for nonprofit effectiveness:

  • Mission, vision and strategy statements
  • Investment in leadership development and external focus on mobilizing mission
  • Evidence of adaptability

Organizations can provide the necessary information by logging into the Charity Navigator Nonprofit Portal. Each question is assigned a set point value. Charity Navigator does not score the quality of the organization’s components, rather it scores solely on the presence or absence of them under the belief that an organization that demonstrates each of these components is likely to be more impactful and more effective than those without. The organization’s Leadership and Adaptability score reflects the sum of the points earned for each question answered.

Culture and Community provides insights into how organizations listen to their constituents, use the feedback they collect to foster impactful programs and services, and sustain a diverse, inclusive, and equitable workplace culture. This beacon can be segmented into two aspects:

  • Constituent feedback: Organizations with strong feedback practices are often more effective and provide higher quality programs. This metric assesses the extent to which the organization collects and uses feedback from its beneficiaries to improve program outcomes. Charity Navigator has partnered with GuideStar by Candid to survey organizations about their feedback practices. In order to receive full credit, organizations must fill out the “How We Listen” section of their Candid profile.
  • Commitment to equity: Strong equity and inclusion practices help foster a positive workplace culture and, in some research, have been found to enhance a nonprofit’s decision-making, staff motivation, innovation, and effectiveness. Charity Navigator has partnered with GuideStar by Candid to collect data on charity equity strategies and provide a score on the number of strategies an organization has adopted. Currently, scores are not negatively impacted if they do not provide data for this metric, or if they have not adopted any strategies. To receive credit, organizations must fill out the Equity Strategies Checklist in their Candid profile.

Impact and Results: Donors want to ensure their dollars are doing the most good when they support a charity. The Impact and Results beacon assesses whether an organization uses its resources efficiently to fulfill its mission.

Charity Navigator has created methodologies for 17 program areas as of this writing, and is working on expanding its methodologies to be inclusive of more types of organizations. The listing of types of eligible programs can be found on its website. The impact score is calculated based on organization-submitted data on program outcomes and program expenses. The cost-effectiveness of the program is then assessed as either highly cost-effective, cost-effective, or not cost-effective with resulting scores of 100, 80 and 65, respectively. Data is submitted via the Charity Navigator Nonprofit Portal. If you are eligible for an impact and results score, be sure to carefully review the data elements and their definitions
in the questionnaire before submitting your information.

Charity Navigator is currently pilot-testing a new short assessment of impact so organizations that do not fall in one of the current 17 program categories can tell their story. General release is expected in the first half of 2024; for updates, monitor the Charity Navigator website.

Steps to take right now
  • Review your organization’s profile on Charity Navigator.
  • Review your accountability and finance beacon score. If your organization is new to Charity Navigator, it is likely that the only score you
    have is based on your accountability and finance beacon score. Review that section to find areas where you can improve. Also, note the various data points from your Form 990 being evaluated by Charity Navigator, and carefully review them prior to filing your next Form 990.
  • Access or create your Charity Navigator Nonprofit Portal account and submit additional data. You can earn your leadership and adaptability beacon and, when eligible, your impact and results beacon.
  • Access or create your Candid profile. Earn your culture and community beacon by completing the “How We Listen” and “Equity Strategies Checklist” sections.

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