An Open Letter to Charity Navigator

Subject: An Open Letter to Charity Navigator
From: Jan Masaoka
Date: 18 Jul 2015

Dear Mr. John Dugan, Chair, and Members of the Board of Directors of Charity Navigator:

As you know, Charity Navigator has become an important institution influencing donors, nonprofits and the public at large. As a result, the direction and work of Charity Navigator is of material interest to many stakeholders, perhaps especially nonprofit organizations. With 9,400 nonprofits who are members, we at the California Association of Nonprofits -- CalNonprofits -- would like to take this opportunity to share some thoughts as you define Charity Navigator's next steps and renewed vision, and select a new CEO.

First, we applaud the new direction you have taken towards multi-dimensional ratings of nonprofits with your planned Results Reporting to be launched in 2016. In particular, we welcome more attention given to constituent voice. We encourage you to find ways to report results for nonprofits that have longer term, less quantifiable results. For example, a nonprofit working to strengthen laws for food safety may not get legislation passed for years, and prevention organizations are hard-pressed to demonstrate, for example, how many kidnappings they prevented last month.

In the for-profit world, one type of institution rates a company for credit worthiness or investment opportunity, while a different type of institution rates the products that a company produces. Standard & Poor's may rate a stock for prospective investors, while Consumer Reports rates the quality of the refrigerator. When donors think about charities, they want to understand both sides of this equation. Donors want to know that the products and services being provided are quality products and services.

We understand your decision to limit Charity Navigator ratings to nonprofits with $1 million or more in annual revenue. You are fully aware of the thousands of important nonprofits — often representing innovative ideas and marginalized communities — that are not included. We suggest that you find ways to remind readers that such nonprofits — more than 90% of nonprofits — are also legitimate and appropriate partners for donors and volunteers.

We also appreciate the statements you have made helping to educate the public that overhead rates are just one minor metric to consider in making donations. As you continue to refine financial metrics, we hope that you consider three suggestions:

· “Joint costs” is an accounting term developed to make sense of a newsletter, for example, that may have seven pages about autism, and one page announcing an upcoming fundraiser. The IRS recognizes that the newsletter has both educational and fundraising components, and allows for allocation of joint costs, in this example, by an accepted method such as percentage of text lines. We understand from your website that Charity Navigator reallocates all joint costs into fundraising, thus making fundraising expenses appear higher than they really are.

· A factory that under-invests in overhead will soon find its roof is leaking, its electrical systems failing, without adequate insurance, and without the investments in staff compensation and training that are key to success. As you continue to educate about nonprofit overhead, we encourage you to talk about the twin problems of overspending and under-investing in shared operational expenses -- with under-investing the far more common situation.

· Volunteer time represents billions of dollars in contributions to communities through nonprofits, yet data on volunteer time is not collected on Form 990. Following guidelines approved by the American Institute of Certified Accountants (AICPA), volunteer time can be included in audited statements. A nonprofit that provides most of its services through volunteers can look as if it does almost nothing if only services that are expenses are counted. We encourage you to allow for volunteer time to be included in financial metrics.

Ironically, the long-established credit rating agencies -- such as Moody's and Standard & Poor's -- not only got it wrong in the early 2000's with securities and companies, but by doing so contributed substantially to the global financial crisis of 2007-2008. The unintentional harm done by rating agencies in the for-profit sector is a cautionary tale for all of us.

Finally, we urge you to find a new CEO with experience not only with technology, but with the wide range of nonprofit work and an appreciation for nonprofits as central vehicles through which people take care of one another, develop and protect shared values, and serve as the "marketplace of ideas." In order to rate a municipal bond, for example, a bond rating agency will need to understand the role that debt plays in municipal finance, trends in the type of activity to be funded by the bond, and what goes into and results from, say, building a parking garage or a reservoir.

And to take just one more step in this direction, we urge you to add individuals with nonprofit backgrounds to your board of directors.

We have been pleased to have Ken Berger speak at our events in California, and we appreciate continued opportunities for conversation and sharing of views. Thank you for listening.

Jan Masaoka
CEO, CalNonprofits