Why Charity Navigator Isn’t One-Size-Fits-All, Especially for Social Enterprises

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Part of the Complexity Series

Why Charity Navigator Doesn’t Work for Small Nonprofits

Charity Navigator advertises itself as the authoritative source on responsible nonprofits. By combing financial data and assigning a score for things like fundraising, administrative, and marketing costs, along with transparency standards, it ranks nonprofits in order of best to worst.

This sounds really good on its surface, and it is a useful way to compare the efficacy of large scale nonprofits. After all, if you’re donating your hard earned money to a charity, you want to know that it’s going to programs that support the stated goals of that charity, not to CEOs and fancy business cards.

But there’s a big problem with the way that Charity Navigator calculates financial health, and it perpetuates a damaging misconception about charities at large: nonprofits receive a better score the less they spend on management, labor, and advertising costs.

While differences in industry are accounted for (food banks, for example, are thought to require less overhead than nonprofit radio, and the 1-10 scale accounts for this to some extent), you will always receive a higher score if you have less overhead than competing nonprofits.

And while this makes sense if you’re comparing apples and apples (two food banks with similar outputs but drastically different overhead costs, for instance), it gets weird when you, a site user not familiar with the inner working of nonprofits in general, peruses nonprofits across categories or clicks through one of Charity Navigator’s multi-category lists.

How Charity Navigator Penalizes Small Nonprofits

When the primary metric ingrained in your head is “lowest possible administrative costs,” you’re simply not going to see the big picture.

One reason is that, if the nonprofit in question is small enough, it’s very likely that they’ll be penalized by Charity Navigator for having “high” overhead costs even if they’re only paying a modest salary for a single employee. I’ll use myself as an example. My salary makes up almost half of annual sales at the thrift shop where I work, and this isn’t because I’m making bank. In fact, I make at least $5,000 less than the average, lowest paid nonprofit worker in my area, according to a recent report by the Center for Nonprofit Excellence in Charlottesville.

Now, it might be a fair assessment that our charity model is, holistically, not healthy. But in many ways, we’re more like a food bank – dealing in goods more than monetary funds – than a big nonprofit like the ACLU. So every dollar we bring in after expenses is donated to local agencies and we’re able to completely support ourselves without outside funds. We also give away thousands of dollars in goods to low income families each quarter. According to Charity Navigator’s assessment, we should be running with administrative costs making up only 3% of our budget in order to receive a perfect score. This would mean that we’d need to be almost 100% volunteer-managed, and that would be ok in the short term, but it gets really hard to create a consistent environment running on multiple, overworked volunteers.

“Administrative Costs” are People

You might be thinking, “Yeah, Leah, but your nonprofit isn’t going to be listed on Charity Navigator, so why does this matter?”

It matters because this mindset that administrative and marketing costs are bad affects all nonprofits, big and small, and potentially gets in the way of raising more funds and effecting more change. 

According to an article published in 2016, changes to overtime pay requirements under the Obama administration left nonprofits scrambling because it meant they were no longer able to pressure their salaried employees into working long hours without pay. The reason? Due to oversight agencies like Charity Navigator and larger individual and corporate donors, nonprofits can’t simply put more funds into overhead, and this means they actually had to reduce staff, rather than hire more employees, to make ends meet. If you’re a Republican, you may be shaking your fist and saying, “Thanks Obama,” but if you’re at all interested in fair trade standards, you’ll recognize this as a travesty. Nonprofit employees should not have been working for free in the first place.

A few years ago, I read a blog post written by a nonprofit employee about another barrier to fair pay in nonprofits (the whole site is a great resource). The author said that donors, across the board, don’t want to hear that their funds are going to hire staff. Instead, they want to hear that it’s benefiting a special project or going “directly to [insert person in need here].” But you can’t run an organization without competent, knowledgeable, engaged staff. Not to mention that the organization is significantly more likely to mishandle funds or even fail if it has high turnover or incompetent employees.

This is all to say that an “administrative costs” line item on a transparency report is really just code for people, the people who make things happen, sign your donor letters, and write effective advertising. Insisting on the lowest possible cost puts all nonprofits at risk of grossly underpaying their employees, and that goes directly against fair trade principles.

To their credit, Charity Navigator is aware of the issue. In collaboration with GuideStar and BBB Wise Giving Alliance, the organization wrote an open letter on the “Overhead Myth” in 2014, but the public bias against overhead costs persists.

“We Don’t Advertise Because We’re a Nonprofit”

I hear this all the time from well-meaning fair trade agencies and social enterprises looking for some coverage on my blog. They’ve been convinced by the predominant rhetoric around charity – further legitimized by sites like Charity Navigator – that it would be irresponsible to monetarily promote their goods or services.

Charity Navigator penalizes organizations that dedicate a large part of their budget to advertising when, in fact, advertising is really the sole vehicle by which funds and other donations are generated.

Whether that advertising is word-of-mouth, slapped on a flyer, or paid for in a marketing campaign, it all counts. Again, comparing apples and apples, the organization that can most effectively garner funds without major advertising costs is more responsible. But it’s easy, if you’re not considering scale, to think that 1 million dollars, for example, is too much advertising even if the dividends are double or triple that.

Especially when you’re growing a nonprofit, you need to invest heavily in both advertising and labor. As the structure stabilizes, hopefully you’ll be able to build more efficiencies into the system so that your actual programs receive a higher and higher proportion of donated funds.

Nonprofit social enterprises need to understand that part of running a healthy organization is strategically investing in skilled labor and appropriate advertising mediums to ensure that the organization can thrive. That means that it’s not always important to meet rigid budgeting criteria. Instead, nonprofits should be measured both individually and in comparison only to similar size, similar mission organizations. When internal structures and goals differ, as they do across every well-meaning organization, it’s hard to build a one-size-fits-all assessment system.

Takeaways

Ultimately, this post is not meant to deter people from using Charity Navigator when deciding to whom they should donate. Because the site primarily compares large, multi-national NGOs and nonprofits that have the resources to ensure sustainability in their financial goals and budgets, the standards are, in most cases, fair.

But it would be a mistake to hold every organization to the same rigid metrics, especially if that comes at a cost to providing living wage jobs to overworked nonprofit workers or using advertising dollars to achieve exponential growth.

  • Potential donors should consider the holistic story of the organization before taking the easy way out, and remember that the long term viability of any business or nonprofit has to do with taking on the right investments, never sacrificing worker welfare for the sake of an impressive financial report.
  • Nonprofits and social enterprises who create and/or sell physical goods should consider that they’re a hybrid business-charity and thus their business model must be adapted to compete in a crowded retail marketplace. Without investing in advertising, they won’t be able to sustain the business for the benefit of their artisan partners. And there are few things worse than promising a marginalized community you can change their lives and then not following through.

I’m curious to hear from other nonprofit workers or social enterprise owners on this topic. Anything you would add?

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