How Do Charity Assessors Actually Work?
Rating a nonprofit is no simple task, and there are many elements to it. Naturally, organizations may wonder how exactly a rating is determined. Here are a few insights to help demystify the process.
Online nonprofit assessors such as GuideStar and Charity Navigator seem straightforward: They share publicly available information on 501(c)(3) nonprofits in a digestible way to help donors direct their dollars.
But what goes into assessment? What’s the impact of a high rating, or a low one, on donations? And how do you make sure your organization has the best rating it can?
Some—not all—of your potential donors will note your rating, said Michael Wyland, owner and partner of Sumption & Wyland, a nonprofit governance consulting firm.
“There are always some donors who ask, ‘How good is this charity? How trustworthy?’” he said. “I think the donors that pay the most attention are in the middle to the lower end of the donation scale. Your major donors tend to already have a strong relationship with the charity.”
Consider Wyland’s insights on what goes into an assessment and what you can do to ensure a fair rating.
How Assessors Gather Your Information
Sites like Charity Navigator obtain information through the IRS by acquiring an organization’s IRS Form 990, a publicly available document that groups file every year to maintain tax-exempt status. It provides an overview of financials, including revenue, expenses, and salaries for senior executives and board members. The form also includes information on what the organization does, including its key activities.
How to Rate Charities
Charity assessments can be extremely complex, and how assessors come up with a rating varies by site. Some sites stick to evaluating 990s and financial forms, while others will take into account additional elements such as a charity’s impact and transparency. Plus, some sites may only rate organizations that fit certain criteria.
Those looking for how to get rated on Charity Navigator, for example, would need to generate at least $1 million in revenue for two consecutive years and have at least 1 percent of expenses allocated to fundraising for three consecutive years, among other criteria. That said, there are key components of a nonprofit that all assessors look at, including:
- Financial performance: The 990 form gives assessors enough information to measure overall performance and efficiency based on certain metrics, including overhead percentage (though this has been disputed as a valid metric), percent of total expenses spent on programs, and percent spent on administrative expenses.
- Transparency: An assessor may downgrade a charity if information isn’t public. GiveWell, for example, said an important part of its rating process is a charity’s willingness to share information with the public.
- Accountability: Assessors evaluate a charity’s willingness to explain its actions to its stakeholders and provide information on its mission, activities, finances, and governance.
Where charity assessors differ comes down to the rubrics and calculations they apply to their evaluations. Assessors such as Charity Navigator, GiveWell, and CharityWatch usually provide more about their methodologies on their websites.
Transparency Can Help Your Rating
Don’t make assessors hunt down vital information; the easier information is to miss, the more likely it is to slip by evaluators. Wyland recommends putting key documents—such as your 990—on your website for all to see. If your organization is regularly audited, you can put those audit reports on your site as well. You can post your bylaws and IRS determination letter, which shows that an organization’s tax exempt status has been approved.
In the about section of your site, disclose your senior leadership and current board members, and provide a brief statement of your key programs and overall mission.
“It sounds elementary, but there are a lot of charities that don’t do this,” Wyland said. “If you want to err on the side of disclosure and accountability, those are key ways to do it.”
Take Full Advantage of Your 990 Form
Another bugaboo for assessors: incomplete information. Wyland said it’s not uncommon for organizations to leave questions on the 990 form blank because of a misunderstanding of the form’s rules. For example, some believe that if an executive’s salary is low enough, it doesn’t need to be reported on the 990 form. Not true, said Wyland.
“If they’re the CEO or the CFO, you have to report regardless of the amount,” he said. “Disclosing anybody else’s salary is dependent on compensation.”
Despite past pushes to roll back the 990 form, organizations are advised to provide the information to show that the group is trustworthy. The IRS provides tools and resources to help you fill out the form correctly.
Numbers don’t lie, but they don’t always tell the whole story. That’s why Wyland recommends taking advantage of Schedule O of the 990, the supplemental section, a space for detailed responses to specific questions and explanations of how and why your organization operates the way it does.
Here, you can provide context about operations that may seem anomalous or inefficient, such as a high percentage of excess revenue going toward administrative expenses, or significant changes in spending year over year. Wyland argues that such decisions should be viewed in context and can actually be positive.
“What about charities actually taking some of their excess revenue over expenses and reinvesting it in growth? That often is a good thing because they’re able to take care of more people and provide more services than a charity that’s taking money and spending it all in the same year,” Wyland said.
Of course, the underlying—and most important—rule here is to tell the truth. This section is to provide relevant context, not to embellish or spin a tale that makes your organization look a certain way.
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