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For-profit analysis of nonprofits

The Deal

December 16, 2004


by Matt Miller

At the end of the 1990s, Trent Stamp joined nonprofit Teach for America as a vice president. He found to his dismay that this large organization, which provides teachers to some of America's most needy schools, had little financial information to show donors, both current and prospective. Neither could it cite any benchmarks or metrics to show how effectively its programs were being run.

"We trotted out the same thing, letters from the kids, artwork," Stamp says. "That's the world it works in. That's the game as played."

What Stamp discovered is what nonprofit reform advocates have hammered on for years. The sector is huge: By 2000, nonprofits in America totaled $700 billion in revenues and $2 trillion in assets. But underlying indicators were paltry, performance standards almost nonexistent, finances opaque. Some organizations, such as Philanthropic Research Inc.'s GuideStar, offer some financial indicators. But no one was really comparing and disaggregating the numbers.

That makes charitable giving a bit of a crap shoot. It leaves donors at the mercy of mail solicitations and touching testimonials. What's lacking is comparative data on program efficiencies, administration costs and fundraising effectiveness.

To help remedy that deficiency, Stamp started Charity Navigator, his own nonprofit 501(c)(3). It was initially funded by the Dugan Foundation, which itself was burned by large donations it made to scandal-plagued Harlem children's center Hale House Center Inc.

Now 2 years old, Charity Navigator tracks and compares almost 3,500 nonprofits. Stamp hopes to hit 5,000 organizations in the next year or so, which he believes constitutes 90% of giving to nonprofits. Charity Navigator, based in Mahwah, N.J., employs a full-time staff of nine, mostly financial analysts.

Stamp likens his operation to the Consumer Reports of charities. A better analogy might be Morningstar Inc., which analyzes equities and mutual funds. Like Morningstar, the online service assigns star ratings. Charity Navigator emphasizes it doesn't rank charities, but it does compare them. More than 850 get the highest four-star ratings. They range from well-known names like the 92nd Street Y, Harvard University and the Los Angeles Philharmonic to relative unknowns such as The National Marfan Foundation, Borderland Food Bank and Actors and Others for Animals.

Fifty-six charities get zero stars, the lowest possible rating. They include the Foundation to Support Animal Protection, which spends a phenomenal 99.5% of its income on administrative expenses, and the American Deputy Sheriffs Association, which spends almost 90 cents on fundraising for every $1 raised.

Charity Navigator rates both organizational efficiency and capacity. Largely through Internal Revenue Service records, it tracks fundraising expenses, administration expenses, program expenses, program growth, revenue growth and working capital ratios, basically how much money a charity has in the bank.

A free service, Charity Navigator isn't free from controversy. Within the charity world and among many academics, there remains a widespread perception that nonprofits can't be held to the same standards as for-profits. Stamp represents a growing countervoice that demands discipline and accountability. "We get accused of treating charities like a stock market. If so, OK, we're guilty," Stamp says. "We're giving for-profit analysis for the nonprofit world."

Stamp maintains that just because nonprofits aren't bottom-line driven, they should not be able to escape financial scrutiny. "We need to move past this idea that you can't measure nonprofits; it's outdated," he says. "It's like saying you can't review a book."

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