New Way To Rate Charities Sought

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By Megan Greenwell
Washington Post Staff Writer
Monday, November 24, 2008

An alliance of prominent philanthropists and entrepreneurs is developing a rating system that they hope will radically alter the way donors evaluate whether a charity is worth their money.

The Social Investing Rating Tool would assess not only how nonprofit groups spend their money but also whether their work is making a difference. The goal is to encourage donors to think more like investors -- to consider their charitable donations social investments, complete with risks and responsibilities.

"There are commonly accepted metrics to be able to say this is a good corporation or a good restaurant or a good movie, but there are none of those metrics for the nonprofit sector, and there have to be," said Robert Egger, president of D.C. Central Kitchen, who participated last week in the first meeting of the Working Group on Effective Social Investing.

Most people, when thinking of making donations, research charities on such Web sites as http://charitynavigator.org and http://charitywatch.org, if they check on them at all. But those sources limit ratings to financial considerations -- the percentage of donations spent on overhead costs is one key criteria -- which experts say fail to take into account the most important factor: whether the charity is doing any good.

Just 20 percent of wealthy donors think their donations have a significant impact on the organizations they support, according to a study conducted for Bank of America by the Center on Philanthropy at Indiana University.

"The fact is that we're in a massive financial crisis, so it's more important than ever that people are giving their money to organizations that are successful," said Sean Stannard-Stockton, a Working Group member who runs a capital management firm in California and writes a blog about philanthropy. "Donors have no good way to distinguish between an organization that does work they're interested in and a great organization that accomplishes results they're interested in."

Almost 40 percent of U.S. donors who give the most stopped giving to charities last year for reasons that included feeling disconnected from the organization and believing that the group did not have sound business practices, according to the Bank of America study, which is to be released today. Following up on initial research in 2006, the new data show that philanthropy is becoming a more integral part of families' financial planning and that donors have high expectations of the groups to which they give money.

"There is an opportunity for not-for-profits to help donors understand the impact they're having," said Cary S. Grace, institutional advisory executive with Bank of America's global wealth and investment management division. "It's not just about saying thank you but saying this is the tangible impact you will have."

Members of the Working Group include heads of two of the nation's largest philanthropic organizations -- Brian Gallagher, chief executive of United Way of America, and Paul Brest, president of the William and Flora Hewlett Foundation -- and leaders of direct-service organizations, academic institutions and corporations. All told, almost two dozen people from across the country met last week in Washington to begin discussing how to shape the new rating system.

The system's methodology grew out of work by David E.K. Hunter, a consultant in Hamden, Conn., who advises nonprofits and grantmakers, and Steve Butz, whose Baltimore company designs management software for nonprofit groups. Both have spent significant portions of their careers trying to make charities more accountable and more effective.

Butz, who left the nonprofit sector to found his software company, Social Solutions, said too many charities accept large contributions without any way to demonstrate to donors that the money will fund effective programs.

"The idea that you would rate a program strictly on overhead is absolutely not sufficient," Butz said. "You have no idea whether your money is going to fund anything of value or if it may be creating real harm."


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