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This	
   paper	
   was	   prepared	
   for	   the	   course	
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   Responsibility	
   taught	
   by	
  Professor	
  Peter	
  Gourevitch	
  in	
  the	
  winter	  quarter	
  2011	
  at	
  the	
  School	
  of	
  International	
  Relations	
   and	   Pacific	
   Studies	
   of	
   the	   University	
   of	
   California	
   San	
   Diego	
   (UCSD).	
   The	  papers	   have	
   not	   been	
   edited	
   after	
   having	
   been	
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   to	
   the	   course.	
   They	   are	  posted	  here	  to	
  provided	
  others	
  with	  information	  and	
  ideas	
  about	
  CSR,	
  NGO's	
  and	  the	  private	  sector.	
  	
  
The	
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  You Get What You Pay For

Independent Study-Final Project
Advisor: Professor Gourevitch

Natalie Nelson
PID A50051039
June 10, 2011

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  Table	  of	
  Contents	
  Introduction ................................................................................................................................................. 1	  Background ................................................................................................................................................ 2	
  Charity Navigator.................................................................................................................................... 4	
  WGA ........................................................................................................................................................ 4	
  AIP........................................................................................................................................................... 5	  Maryland Standards ................................................................................................................................ 5	
  Evaluation Metrics .................................................................................................................................... 6	
  Charity Navigator.................................................................................................................................... 6	
  Wise Giving Alliance ............................................................................................................................. 10	
  Charity Seal Program............................................................................................................................ 11	
  AIP......................................................................................................................................................... 12	  Maryland Standards of Excellence ........................................................................................................ 13	
  Costs.......................................................................................................................................................... 14	
  Charity Navigator.................................................................................................................................. 15	
  WGA ...................................................................................................................................................... 15	
  AIP......................................................................................................................................................... 16	
  Maryland Standards .............................................................................................................................. 17	
  Staff Size ................................................................................................................................................... 19	
  Charity Navigator.................................................................................................................................. 19	
  WGA ...................................................................................................................................................... 20	
  AIP......................................................................................................................................................... 20	  Maryland Standards .............................................................................................................................. 21	
  Recommendations.................................................................................................................................... 23	
  Conclusion ................................................................................................................................................ 24	
  Appendix 2 Maryland Nonprofit Standards of Excellence Tiered Approach ........................................ 26	
  Appendix 3 Suggested Final Check Ups Before Submitting Your Application (Maryland Standards). 28	
  Works Cited ............................................................................................................................................. 29	
  
	
  

	
  
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Introduction
With the 2008 Financial Crisis and the Haiti Earthquake, more and more donors
demanded more accountability and transparency of charities. They looked to organizations
known as ‘Charity Watchdogs’ to help evaluate these charities before making a donation. But,
given the increasing number of these watchdogs, the question remains as to how they evaluate
nonprofits and whether they are they doing a good job. More recently, the need foraccountability was seen in the fallout after Greg Mortenson, author of Thee Cups of Tea, wasaccused of mismanagement of his Central Asia Institute and fabricating events in his memoirs.
In response to this crisis of trust, Good Morning America brought in analysts from the American
Institute of Philanthropy (AIP) to discuss this development and to illustrate Central Asia
Institute’s gross lack of transparency given that it had not filed income tax in 13 years. To makematters worse, two state legislators in Montana have sued Mr. Mortenson calling for therevenues and donations from Three Cups of Tea be seized and placed in a trust for schools to beconstructed in Pakistan and Afghanistan (Murphy). Why did Good Morning America choose
evaluating experts at AIP over Charity Navigator or another rating organization? How do AIP’s
evaluations achieve the goals of the donors? And, what are these goals?
What is the donor really looking for when they choose a certain charity watchdog?
Legitimacy, proof of results, transparency, financial stability, or a rubber-stamp? The donor’s
goals determine what kind of evaluation that they are willing to invest in and the subsequentquality of the evaluation. What kind of information does the donor want and more importantly,
how much are they willing to pay for it? There seems to be a correlation between a low
information cost and low quality. Charity Navigator, the American Institute of Philanthropy

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  (AIP), the Better Business Bureau’s Wise Giving Alliance (WGA) and the Maryland Nonprofit
Standards of Excellence illustrate how the value of a charity watchdog evaluation depends on theits invested cost. This paper will compare the different metrics used by each Charity watchdog to
examine the varying quality of evaluations.

Background
While Charity evaluators may appear to be a recent phenomenon, the actual history goesback nearly one-hundred years. The first charity evaluator was the National Charities
Information Bureau (NCIB) that was established in 1918 in New York in response to purported
abuses in war relief fundraising (Gordon, 12). In 1945 the Better Business Bureau’s Philanthropy
Advisory Service (PAS) started formally rating charities and PAS and NCIB merged to form the
BBB’s Wise Giving Alliance in 2001.
The question then arises, what has led to the influx of charity watchdog groups in the late
20th century? In the 1990’s Congressional Legislation helped tighten the regulations surrounding
nonprofits as an influx of money led to the growth of the voluntary sector (Worth, 116).
However, the increase in fraudulent charity drives as argued by Prakash and Gugerty were due tothe low barriers of entry and an influx of income from government, private and foundational
funds that increased the probability of less than ethical nonprofits to entry the market (Prakash,2). However, reports of abuses became widespread as illustrated by the United Way andAmerican Red Cross scandals (Worth, 116). One study even reported that $40 billion is lost
every year due to fraud loss in the nonprofit sector, nearly 13% of the total donations to
nonprofits in a year (Greenlee, 684). The push towards more accountability was given a shove inCopyright	
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  the wake of Hurricane Katrina when the FBI reports stated that they discovered 2,000 fraudulent
websites that sought funds for disaster victims (Greenlee et all, 678).
Presently, individual giving comprises 75% of private donations in the United States,
bringing in a staggering $307.65 billion in 2008 (Givewell, 1). With 1.2 billion charities in the
United States trying to discern information about which charity to donate to can be daunting to
say the least (Williams, 1). While the internet has allowed for more information to bedisseminated and democratized, it can cause information overload. With the increasing numberof charities in the United States and the emerging number of charity watchdog evaluatororganization, the market is becoming saturated. There is increasing competition between various
watchdog organizations with new ones appears seemingly overnight. The lack of acomprehensive comparison between the four most well-known charity evaluators was theinspiration for this research. As demonstrated by the chart in Appendix 1, the different charity
watchdogs are not clones of each other, but are rather different. These differences reflect a
difference in value. While some of the criteria are self explanatory, target audience, metrics andthe costs help reveal the true differences in quality of these charity evaluators.

Target Audience
Perhaps one of the best ways to ascertain the quality of the different charity evaluators is
to posit about what are the goals of the person willing to donate to the different watchdogs. The
type of person distracts us away from the goals of the person as the evaluation offers the productto the consumer who wants the evaluation. It is important that the prospective donor understandthe differences between the charity watchdogs and examining the target audience is a way toclearly show the varying quality of the organizations. What are his/her goals? What will they pay

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  for? And, how do the goals and price/payment interact? What does the consumer want and at
what cost? What are the goals of the prospective donor as an evaluation consumer that would be
best served by the information that the charity watchdog monitor provides?

Charity Navigator
The person who would be satisfied with the information Charity Navigator provides
would be a prospective donor whose goals include examining the financial health at a low
persona cost and comparing a bunch of different organizations. They may lack the time and or
resources needed to evaluate and analyze myriad of charities. For this person, a quick financial
ratio and the 4-star rating would be enough to convince them to donate to a particular charity.
Charity Navigator is arguably, the easiest to access and understand, so it appeals to a broad rangeof clients and it provides a direct link to donate for each charity listed. Moreover, compared tothe other three charity evaluators, Charity Navigator evaluates by far, more charities, so someone
who is interested in comparing a couple different nonprofits would be well served by Charity
Navigator. Since Charity Navigator only evaluates large national charities, the prospective client
would most likely be motivated to gain some sort of recognition for their donation.

WGA
In contrast, a person whose aim is to obtain more information than just financial ratios
would be pleased with the BBB’s Wise Giving Alliance evaluation. Also, they would not careabout the actual rating or number of stars, but would desire to see if the charity meets thestandard or not. They would be satisfied by this more well-rounded approach that takes into how
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  representations, the willingness to disclose basic information. Perhaps, these criteria line up withhis/her giving goals that might be to choose a charity rater that is well established and they gain
confidence from the Better Business Bureau’s long history of helping the consumer fight fraud
and by extension, place the same amount of trust into the WGA. Thus, the BBB’s WGA has anevaluation of achievement that the donor may be willing to pay for.

AIP
The goals of a typical satisfied AIP user would most likely be a wealthy donor who cares
about how financially responsible is the charity and its effectiveness to raise money as evidenceby their willingness to pay a $40 membership fee to obtain the ratings. But, their main concern ismaking sure that the charity uses its money responsibly effectively. Ultimately, they areconcerned with how their money is going to be spent and they appreciate the newsletter that AIP
sends out three times per year. It could be said that they are attracted to the grading system andfeel confident that a letter grade of an A would denote a more reputable charity than a charity
who received an F. They would also be concerned with excessive executive compensation andnational charities.

Maryland Standards
An executive director or staff member of a nonprofit with aspirations of achieving
legitimacy and recognition would be happy with the Maryland Standards. Given the small
number of charities evaluated and the costs (both financial and time), it is very unlikely that an
average donor would know about these standards. Instead, the Maryland Standards are very
helpful to a struggling nonprofit executive director who is trying to prove the accountability andCopyright	
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  transparency of their organization. Thus, the prospective user (mostly likely a staff member of anonprofit) must be willing and able to spend a good amount of time and money on qualifying forthese standards which demonstrate their goals.

Evaluation Metrics
The different measurements that each of the charity watchdog organizations employ
clearly demonstrate that the intrinsic value depends on its cost; the more simple the metric theless valuable it is. In other words, the less cost (of time) to perform the evaluation translates intoa lower value of the information produced.

Charity Navigator
By examining the financial health of America’s top charities, Charity Navigator hopes toprovide to the prospective donor to, “guide intelligent giving. We help charitable givers makeintelligent giving decisions by providing information on over five thousand charities and by
evaluating the financial health of each of these charities. We ensure our evaluations are widelyused by making them easy to understand and available to the public free of charge. By guiding
intelligent giving, we aim to advance a more efficient and responsive philanthropic marketplace,in which givers and the charities they support work in tandem to overcome our nation's most
persistent challenges” (“Charity Navigator-Mission”).
To achieve their mission, Charity Navigator examines two metrics: financial health andaccountability and transparency. Analysts examine the IRS 990 form (three years worth) to
determine the financial health: organizational efficiency through program expenses,
administrative expenses, fundraising expenses and fundraising efficiency and the organizational

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  capacity as seen by scoring the primary revenue growth & program expense growth and working
capital ratio. Next, the charity the charity is compared with other similar charities and assigned ascore of 0 to 10 (10 being the highest) in all seven performance categories as well as threeaggregate ratings for organizational efficiency, organizational capacity and total financial health.
Finally, based on the total number of points they receive, the nonprofit is assigned zero to fourstars (“Charity Navigator-How Do We Rate Charities”). However, Charity Navigator does nottake the charities life-stage into consideration. For instance, a start-up nonprofit may need to
speed a good amount on fundraising or PR costs just to get their name out there and to berecognized by the public before any of their programs start. But, while Charity Navigatorcompares organizations by category type, environmental charities and educational charities,
within each category is a variety of organizations with different histories.

Figure 1 (“Charity Navigator-Our Ratings Table”)

Figure 2 (“Charity Navigator-What Do Our Ratings Mean”)

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  Before explaining how Charity Navigator measures accountability and transparency, it
helps to identity their definitions:“Accountability is an obligation or willingness by a charity to explain its actions to its
stakeholders, including government, donors, beneficiaries, and the public at large.
Transparency is an obligation or willingness by a charity to publish and make available critical
data about the organization, such as its finances, governance and effectiveness.” (“Charity
Navigator-How Do We Measure Accountability and Transparency?”)

To evaluate accountability and transparency, Charity Navigator examines the website of thecharity to see if the following is easily accessible: listing of board members, key staff, audited
financials, Form 990 and privacy policy. Then, the IRS Form 990 is examined to ascertain foraccountability and transparency by examining the following items: loan(s) to related parties,
material diversion of assets, documents board meeting minutes, provided copy of Form 990 toorganization’s governing body, conflict of interest policy, whistleblower policy, records

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  retention policy, CEO listed with salary, process for determining CEO compensation,compensates board, audited financials prepared by independent accountant and existence of anaudit committee. While this information is important, it is not factored into the scoring process,nor is it independently evaluated (“Charity Navigator-How Do We Measure Accountability andTransparency”). Finally, although they do not affect the aggregate ratings, Charity Navigatoralso provides information on the following categories: CEO pay, income statement, mission anddonating online.

Plans for Improvement-To be Implemented July 2011
In response to criticism that it relies too heavily on financial ratios, Charity Navigatorplans to ‘update’ to C.N. 2.0 to include a more holistic approach through evaluating ‘results.’
According to the website, they will accomplish this by implementing a constituency voice and a
web platform. To earn points under the constituency voice measurement, nonprofits that publish
feedback from their clients will get many points. Charity Navigator will form a partnership withan organization called Great Nonprofits that specializes in channeling of feedback through an
open system and Keystone which uses systematic data collection to produce benchmarked data
sets (“Great Nonprofits”) (“Keystone-Analysis”). The web platform will enable Charity
Navigator to, “train, certify, and guide an army of volunteer Charity Navigator raters” (“Charity
Navigator-Where We Are Headed”). However, the website does not mention how thesevolunteers will be trained and for how long.
There may be a potential conflict of interest given that the Hewlett Foundation will
provide Charity Navigator with a grant for $75,000 to develop test using undergraduate andgraduate students to assist with the ratings (“Charity Navigator-Hewlett Foundation”). The

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Foundation”). More disconcerting is that Robert Penna, a consultant for Charity Navigator since2009, is the author of The Nonprofit Outcomes Toolbox which is a, “Hewlett Foundationsponsored outcomes workbook for the nonprofit field, which has been endorsed by Charity
Navigator” (“Charity Navigator-Board and Staff”). Given this close relationship between Charity
Navigator and the Hewlett Foundation one may question if Charity Navigator is able to rate
charities that have connections with the Hewlett Foundation without bias compared to otherorganizations that do not have a Hewlett connection.

Wise Giving Alliance
Compared with Charity Navigator, the Wise Giving Alliance provides a morecomprehensive metric for evaluating the nonprofit. Using 20 metrics that focus how they govern
their organization, the ways they spend their money, the truthfulness of their representations andtheir willingness to disclose basic information to the public. These wholesome metrics aim to, “helps donors make informed giving decisions and advances high standards of conduct amongorganizations that solicit contributions from the public” (“About BBB Wise Giving Alliance
Donor Assistance”). The metrics were developed through a consortium of actors including
members of small and large charitable organizations, grant making foundations, accounting
industry, corporate contribution officers, regulatory agencies, research organizations and the
BBBs. More interesting is that the WGA, “commissioned significant independent research on
donor expectations to ensure that the views of the general public were reflected in the standards”

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  (“Standards for Charitable Accountability”). The results of the evaluation which is conducted ofmany documents such as financial documents, board member roster and bylaws. If the nonprofit
meets all 20 standards, they are awarded the following “meets the standard” logo or if they fail tomeet all of the standards they are awarded an ominous looking logo (Please see figure 3 and 4).
Figure 3

Figure 4

Charity Seal Program
Starting in 2003, the Wise Giving Alliance Program offers a seal certification program
for those charities that pass all 20 standards have the option of applying for the national charity
seal that can be used in promotional material and online. To obtain the seal the charity must sign
a licensing agreement, have completed two full fiscal years of operations and pay a fee based ona sliding scale. Based on the last fiscal year’s total charitable contributions received, the range ofthis annual fee is $1,000 to $15,000 (“Charitable Seal Program Fee Schedule-U.S.BBB”). While
this may seem like an expensive cost, due to the BBB’s long standing policy of not allowing
outside organizations to use the BBB name, large nonprofits who respect the BBB brand may
find value in paying for a seal to be used on their websites.

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  AIP
The metrics that AIP uses are very basic and illustrate the low quality of information thatsome of these charity evaluators produce. The mission statement clearly reflects AIP’s emphasis:“To maximize the effectiveness of every dollar contributed to charity by providing donors with
the information they need to make more informed giving decisions” (Charity Rating Guide &Watchdog Report, 2). Relying solely on two financial ratios: the percentage spent on charitablepurposes and the cost to raise $100 the charity is graded from A+ to F which is drawn frominformation culled from the IRS 990 form and the audited financials. According to their website,
an A rating denotes the charity as excellent, the B rating means good, C illustrates a satisfactory
nonprofit, D equals unsatisfactory, F means poor and finally, an organization with insufficient
information would get a “?” rating (“How American Institute of Philanthropy Rates Charities”).
(Please see Figure 5 for an illustration)
Figure 5

The ratings are published three times per year and are only available to members and not foundonline. Regarding the percentage spent on charitable purposes, 60% would earn a satisfactory or
C rating while a higher number like 75% would be demonstrated in the most efficient charities.
For the cost to raise $100, the lower the amount the better as AIP believes that $35 or less isreasonable (“How the American Institute of Philanthropy Rates Charities”).
While financial ratios are important to understanding how the organization is operating,they do not tell the whole story. With these trivial letter grades, there is a danger that theCopyright	
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achieves its mission statements and gets results. Another issue is that this rating system does nottake into account the situation of the charity; whether it is a fledgling or veteran organization
impacts how much is spent and on what. Currently the AIP evaluation system only scores thefinancial health of an organization, it is not indicative of the success of a nonprofit as it relates to
its program results.

Maryland Standards of ExcellenceWith 8 principles and 55 standards, the Maryland Nonprofit Standards of Excellence isthe most stringent evaluator as the metrics range from financials to outreach activity. These
tough standards help to achieve their mission to, “strengthen and support nonprofits’ ability toserve the public, while promoting the highest standards of ethics and accountability in nonprofit
governance and management” (“Earn the Standards for Excellence Seal”). The Standards weredeveloped by about 60 nonprofit executives, staff and board members over the course of a year.
A unique feature is that they provide resources, classes and technical support to help with theapplication and certification process. The 8 guiding principles are: mission and program;
governing body; conflict of interest; human resources; financial and legal; openness; fundraising;and public affairs and public policy.
To achieve the seal they must pass a rigorous certification program through a three-tiered
process: essentials enhanced and certified. (Please see Appendix 2) The benefits of this approach
are that an organization can start on level one or level three based on their needs and goals and it
is easy to navigate. Level One is the most basic and expensive level and offers, “formallyrecognizes the achievement of Essentials Tier and your organization’s progressive toward full

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  Standards of Excellence code implementation” (“Tiered Approach”). On the next tier, an annual
report and a program evaluation (or at least 40% of total organization effort, whichever isgreater) are among the benefits. Finally, Level Three provides the seal of excellence andorganizations can state that they are, “ “Certified Under the Maryland Nonprofits’ Standards for
Excellence”, “Awarded Maryland Nonprofits’ Standards for Excellence Seal”, or “Approved
Under Maryland Nonprofits’ Standards for Excellence” or “is a Standards for Excellence®
Accredited Organization.” After three years, the organization must apply for re-certification.
(Please see Figure 6).
Figure 6 (Goodwill Industries of the Chesapeake, Inc)

Costs
Another important area where the charity watchdogs diverged was in the associated costs
to get the ratings and to be rated. These costs are important since they demonstrate how lower
quality information tends to be cheaper than higher quality information. For the prospective
donor, it is vital to understand those organizations that require little investment in time and/or
money often result in shoddy quality evaluations.

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  Charity Navigator
For prospective donors who visit the site, access is completely free. The ‘membership’requires a quick registration that involves disclosing an email address and name. Members areable to view three years of financial data for the charities, can save a list of their favorite
nonprofits and can write a review about an individual charity (“Charity Navigator-My Charities
Login”). For the charities that are evaluated by Charity Navigator, there is no financial cost andno time or documents that need to be submitted. In fact, a charity cannot request to be evaluated(“Charity Navigator-FAQ for Charities”). This asymmetrical evaluation may not be of thehighest quality as it goes ahead and rates the charities without permission their or input. An
example of the confusion this system can create was seen through an organization that was soconcerned about getting a bad rating from Charity Navigator that they were hesitant to spendmoney to ensure an international aid workers’ safety abroad due to the high administrative costs(Preston). Thus, the ramifications of doing one-sided cheap evaluations have a high cost indeed.
In the push to get as many shiny stars as possible, nonprofit leaders are faced with a perverse
incentive to cut administrative costs in any way possible, even at the risk of a staff member’s life
as shown through this example. The yellow journalism of the top-ten lists does not fairly or
thoroughly evaluate the charities-thus giving the prospective donor a false sense of security andultimately influencing donations to the detriment to other organizations that may have been
doing a better job in achieving their missions and goals.

WGA
The Wise Giving Alliance provides free access to its charity reports for anyone online.
Compared to AIP where a customer has to pay for bare-bones financial health information, theCopyright	
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  information provided on WGA’s site is helpful. For example, in the case of Shiloh International
Ministries which did not meet the standard, the website lists the evaluation conclusions that give
specific reasons why it did not meet the standard. It concludes:
Standard 4: Compensated Board Members - Not more than one or 10% (whichever isgreater) directly or indirectly compensated person(s) serving as voting member(s) of theboard. Compensated members shall not serve as the board's chair or treasurer.
SIM does not meet this Standard because:• 4 members out of the 5 member board of directors are paid staff including the board's chair
and treasurer (“Charity Review of Shiloh International Ministries”).
This information is very useful; perhaps more than a simple financial ratio or letter grade as it
gives the specific reason why the organization is in the wrong.
However, there is a monetary cost associated with being in the optional Charity Seals
program ranging from $1,000 to $15,000 depending on the size of the organization (“Charity
Seal Program-U.S. BBB”). The credibility of the BBB helps sell charities on the value ofinvesting in this seal program. It may influence potential donors when they see it listed on the
BBB’s website or on the individual charity’s website. In this case, it is clearly demonstrated how
a high cost leads to good, higher quality information. Investment of the charity into obtaining the
WGA evaluation and the Charity Seals Program sends a signal of the quality of the evaluation
itself which is that good information is not cheap, but requires an executive director to sponsor
and approve it. This Seal may help build recognition among various nonprofit websites andlegitimacy, although the quality given that the charity is not consulted with during the evaluation
is somewhat suspect.

AIP
AIP is by far the most expensive for the prospective donor as it requires paying amembership due of $40 to even see the breakdown of the ratings ($200 for a corporateCopyright	
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only information provided is the letter grade of the top-rated charities (B+ to A+). The Charity
Rating Guide & Watchdog Report published three times a year, provides the ratings and theratings breakdowns of the charities. The ratings (including A+ to F) are clearly explained andpresented in an easy to read chart that also lists the charity’s top salaries. Although this grading
system only covers two metrics for evaluation, it may be sufficient for some donors dependingon their goals for the evaluation. In addition, the report also contains articles of interest to theprospective philanthropist. In the April/May 2011 edition featured articles such as, “Taxpayers
Pay for Televangelists’ Lavish Lifestyles,” F Rated Charity and Its Fundraiser Should be Put ona Leash,” “’100% to Program’ Claims Confuse Donors” and “USA Ranks 5th in World Giving
Survey” (AIP Charity Rating Guide & Watchdog Report). This high investment cost produces anice shiny report, but still only gives information about two financial ratios of a charity; thepercentage spent of program services and the cost to raise $100. While financial health isimportant, it is not the whole picture of the organization. Also, for $3 AIP will send a sample of
one copy of the Charity Rating Guide & Watchdog Report. In the author’s experience, it took
about a month to receive a copy of the report and it was not the most recent report (it was the
December 2010 edition). For the nonprofit, the cost to be evaluated is zero and they cannot
request to be rated either (“AIP FAQ-Giving Wisely to Charity”).

Maryland Standards
For the consumer, the Maryland Standards evaluations are free to view online, but the
information it provides is minimal-just a short synopsis of the organization and its leadership.
However, for the charity who wants to be evaluated, there is a high cost involved. Depending onCopyright	
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  the type of certification, Level One, Two or Three that they choose, the application fee can range
from $600 to $2300 for members while for nonmembers it ranges from $1800 to $6900
depending on the organizational budget. Furthermore, the licensing fee (which must be paid
during the second and third year of the licensing period) for members is $200 to $650 and fornonmembers it is $600 to $3250 ("Earn the Standards for Excellence Seal - Standards for
Excellence Application Starter Kit Request"). Also, there is an extreme time cost needed tocomplete the certification process that may require additional staff members or even take current
employees away from their daily job responsibilities in order to apply for certification.
Membership dues are annual and depend upon the type of membership (nonprofit,
emerging nonprofit or associate membership). For nonprofit organizations the prices range from$100 to $3,000 depending on the operating income. For new nonprofits, a small $100 fee isrequired until they have obtained their 501c status then their dues are based on their operating
income (“Become a Member”). While being a nonprofit member allows a nonprofit to savemoney when going through the certification process it offers other benefits such asorganizational development (free technical assistance, newsletters, annual conference and peerto-peer networking), operational support (discount rates on insurance and business services),
professional development (including discount on classroom training) and advocacy support(“Save on Insurance and Services”).
The associate membership includes benefits such as full website access, businessdiscounts and invites to special events (“Associate Membership”). Besides a financial cost, to go
through the certification process, the charity must complete an extensive application, submit
multiple documents and send not one but five copies of the application by predetermined thrice
yearly deadlines. The application itself is very time consuming and requires the cooperation ofCopyright	
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  the board of directors and possibly outside help to help comply with the strict MarylandStandards. (For more details please see Appendix 3)

Staff Size
The differences in staff including the size and composition of the rating organization help
the donor to differentiate between the varying qualities of charity watchdog evaluators. The key
questions that need to be examined include: is there an appropriate ratio between the number ofstaff who does the evaluations and the amount of charities evaluated? Who does the evaluations
and what are their qualifications? Do they outsource any of the monitoring?

Charity Navigator
Compared to the nearly 5,500 charities that they evaluate, Charity Navigator has a small
staff size of 12 people. Of these 12 employees, only four are program analysts who are in chargeof evaluating the large number of charities. Charity Navigator does not disclose the training it
gives their analysts or any safeguard to make sure that each analyst is holding the charities up to
the same rubrics. What is more worrisome is that under the C.N. 2.0 expansion plans, thisorganization hopes to drastically increase the number of charities monitored to 20,000 (which
accounts for nearly 85% of the revenue in the nonprofit sector per year) (“Charity NavigatorWhere We Are Headed").
To achieve this, Charity Navigator intends to enlist the help of an army of undergraduate
and graduate student volunteers to assist with the process. In the Fall of 2010, the first pilot batchof volunteers was trained made up of students from six institutions and the second testing started
in March 2011 and involved over 100 students from eight universities (“Charity Navigator-

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  President & CEO’s Report for May 2011”). While this is a cost effective method of scalling up
one’s operations, will the quality of the ratings suffer? Do prospective donors using Charity
Navigator care if 18-year olds without a background in economics, finance or accounting areconducting financial ratios? It appears that Charity Navigator is attempting to valuing quantity
over quality. This is in stark contrast to other watchdog organziations that have a more extentsive
training system and hire professionals to perform the evaluations.

WGA
The WGA has a small staff size of ten employees, but they evaluate over a fourth lesscharities than Charity Navigator. Of the staff of ten, four are research coordinators (“Wise
Giving Alliance Staff”).Unlike the Charity Navigator website that gives biographical information
about its employees that includes professional experience and education, WGA only gives theirnames. Some donors may wonder: who are these people who evaluate the charities and how are
they trained? Are there any potential conflicts of interest among employees?

AIP
AIP has a very small staff of five people and only one is an analyst. AIP does not explain
how the analyst is trained nor her professional experience or education. At AIP there are two
staff members who are program assistant and one who is a program associate (Charity Rating
Guide & Watchdog Report, 2). However one looks at it, that is a small number of people tohandle five-hundred evaluations. Unlike some of the other charity watchdogs, AIP does notprovide a bio about the staff which may be useful to prospective donors who are curious about
the qualifications of those who are doing the ratings for the 500 plus charity organizations.

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  Maryland Standards
Unlike Charity Navigator that tries to get more and more bang for its buck, the MarylandStandards has the most rigorous training program and largest staff. The staff of 22 people
includes a Standards for Excellence Certification Manager, development manager and a program
director. Moreover, there is an educational programs coordinator who coordinators theorganization’s training programs (“Contact Maryland Nonprofits”). Also, compared to AIP and
WGA that do not give such information, the Maryland Standards provides a descriptive
biography for each employee that includes job responsibilities, professional experience andeducational history. By far, they have the most developed and organized staff. In addition,
trained volunteers are utilized as peer reviewers that evaluate a charity’s observance with theStandards for Excellence:“Peer reviewers restrict their opinions to documents, activities, policies and processes
that are covered by the Standards for Excellence. This ensures that all organizations are being
treated alike, and that any potential biases of Peer Reviewers are avoided. Peer reviewers
always have the opportunity to make suggestions to the Ethics Standards Committee for addition,
deletion or revision of the existing standards” (“Learn About Maryland Nonprofits”). While thisdoes not safeguard against bias, that fact that the Maryland Standards posts this explanation on
its website demonstrates its understanding of the possible problems that may arise byoutsourcing its monitoring to peer reviewers.

In addition to peer reviewers, the Maryland Standards also employs licensed consultants
that provide support, training and consulting for the Standards for Excellence: An Ethics andAccountability Code for the Nonprofit Sector®. Currently, there are 28 licensed consultants.

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  During the three day license certification seminar, applicants learn about the Standards, gain
access to training tools, two year membership to the Standards for Excellence Institute® andmost importantly obtain a two year license to provide consultation on the Standards for
Excellence® including the, “ability to mentor an organization through the process ofincorporating the Standards for Excellence® to improve internal management and/or applying
for certification to be awarded the Seal of Excellence” (“Licensed Consultant”). To be eligible
for and to maintain the license, the candidate must attend the certification seminar, commit toevaluation and program reporting standards, achieve acceptable program evaluation ratings, andsend periodic reports on relating training and consulting engagements. Please see Appendix 4 formore details regarding the licensing process.
This hands-on and supportive process indicates the strength in the evaluation system of
the Maryland Standards. The other charity watchdog organizations do not offer any comparable
technical assistance and they tend to work without the cooperation (and sometimes evenknowledge) of the charity being evaluated. The dialogue between the nonprofit staff and thelicensed consultant helps build a stronger charity and helps the consultant properly judge thecharity instead of just computing financial ratios. While this process requires an investment inboth time and money, the rewards appear to be worth taking as the charity emerges a stronger
organization both financially and programmatically while for the prospective donor who happens
to peruse the Maryland Standards website, he/she can be assured that the 77 certified charities
have passed this rigorous evaluation.

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  Recommendations
Given the great variety in quality in charity watchdogs, prospective donors should
consider and adhere to the following guidelines:

1. In general, the less the cost (financial and documentation) needed for a nonprofit to beevaluated the poorer quality of the actual evaluation.
2. When looking for a charity watchdog, consider what is important to you and your organization:
financial responsibility, mission statement, transparency, effectiveness in its programs etc
3. Charity Navigator and AIP base their assessments on purely financial information that may
not accurately reflect how well the actual programs are being run in terms of effectiveness.
4. Understand that a charity watchdog is not a substitute for a throughout evaluation of a charityand may not reflect its current state or take into consideration special circumstances such as
different financial needs depending on the life cycle of the nonprofit.
5. A large number of charities evaluated is not a good thing especially when done by anorganization with a small staff. This means that quality may be shirked for quantity. Can a staff
of 12 properly evaluate nearly 5,4000 charities? How much time do they spend evaluating eachindividual charity?
6. Some charity watchdogs work with the nonprofit while others do not while they conduct theirevaluation. If information is one-sided, what prevents the charity evaluator from making a totallyerroneous claim about the charity? What incentive does the charity watchdog have to listen to thepleas of unfair ratings of the charity that it has just evaluated?

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  7. What is the cost of free ratings information? What is the value of information provided byeach watchdog organization? Given that there are no perfect ratings systems, what flaws are themost important to you as a donor?

Conclusion
Charity Navigator, the Wise Giving Alliance, AIP and the Maryland Standards provide
differing quality of charity evaluations. The goals of the prospective donors help determine
which watchdog organization that they employ. Charity Navigator and AIP provide a quick anddirty snapshot of the financial information of nonprofits, but fail to offer any comprehensive
evaluation of how the organization is functioning or if it is even close to achieving its goals
found in the mission statement. The Wise Giving Alliance with its more involved metrics looks
at more than just the financial health, thus providing a better quality evaluation. Finally, theMaryland Standards demonstrate how high quality evaluation require a financial and time
investment as they provide the most stringent and well-rounded evaluations by far.
Information is not cheap, nor should it be if the prospective donor really desires to gethigh quality evaluations of nonprofits. While this may seem fairly obvious, with the rise inpopularity of lower quality watchdogs such as Charity Navigator and AIP, it seems thatprospective donors are not seriously concerned about accountability and instead want a quick
external validation that they have done the ‘research’ before deciding which nonprofit to donate
money. As long as prospective donors are not genuine about demands higher quality evaluation
system, the watchdog organizations will have little incentive to change or reform their metrics.
This is bad for the consumers as they are flooded with information about the financials of acharity and may be mistakenly convinced of the quality of that information.

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  Appendix
Appendix 1 Charity Watchdog Comparison Matrix
Criteria

Charity Navigator

BBB’s Wise Giving
Alliance

American Instituteof Philanthropy

MarylandStandards of
Excellence

Established
Target Audience

2001
Ave Am looking to
donate lacks time
and/or resources toevaluate & analyze
myriad of charities

2001
People want more thanfinan metrics

1992
Wealthy donors whocare about ratings

1992
Exe/staff of np whoare looking for
legitimacy &recognition

Usage

3.3 m visitors/yr ;Influence approx$10b charitable
donations

N/A

N/A

Ave	
  300,000	
  web	
  hits	  per	  month,	
  2,576	
  requests	
  for	
  tech	  assist	  # of orgs reviewed
Staff
Metrics

5,500
12Org. capacity &efficiency;transparency &account

1,200
10
20 metrics; how they
govern their org, ways
spend their money,
truthfulness of theirrepresentations,
willingness to disclose
basic info to public

Almost 550
5% spent on
charitable purpose;cost to raise $100

77 certified

Evaluation System

0-4 Stars based onorg cap & efficiency
score (higher isbetter)IRS 990

Meets/Does not Meet
Standard

A+ to F

Only lists those
who meetcertification

IRS 990, fin statements,
bylaws, budget etc

IRS 990; audited
finan docs

Finan, website,
990, bylaws etc

Offers Certification
for Org.?

No

No

Seal

Membership for
DonorsYes, can savecharities & write
reviews of orgs; getup to 3 years offinan. data
Apply, nationwide;
3 yrs old

Charity Seal program;sliding scale $1K-15K;
279 issued
No

No

Yes

	
  

Docs needed forevaluation

How does charity
get rated?

Costs for charity
Costs forprospective donor

Free
Free

22
8 principles; 55
standards

	  Apply, nationwide, or
get complaint; 2 yrs old

Lg charities thatreceive $1 million ormore of public support
annually & are ofinterest to donors
nationally; cannot
request eval

55 standards

Free
Free

No
Full access toreports $40
membership fee; $3
for sample

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  Appendix 2 Maryland Nonprofit Standards of Excellence Tiered Approach
Demonstrate	  Your	  Commitment	  to	
  the	
  Highest	  Standards	
  of	
  Ethics	
  and	
  Accountability	  	  Start	
  Right	  Where	
  You	  Are	  -­	
  Journey	  Toward	
  Excellence	
  and	  Be	
  Recognized	
  as	
  You	  Achieve!	
  Easier	  to	
  navigate,	
  
Go	
  at	
  your	  own	
  pace,	  Start	  at	  level	  one	  or	
  three,	  Each	
  tier	  builds	
  on	
  the	  previous!	
  	
  Tier One: The Essentials
Benefits• Ease your way into the Standards for Excellence program• Lower Cost
• Responsive to limited time and resources• Formally recognizes achievement of Essentials Tier and your organization’s progression
towards full Standards for Excellence code implementation.
• Informal recommendations from program staff for future improvement and application to nexttier.
Application process• Submission of the Tier One application package and checklist and application fee.
• Completion of a free online self-assessment and orientation is also required.
Program staff will complete the formal review of the application.
Organizations can remain at this tier for a term of three years at which point they can re-submit
certain documentation and remain at this tier for an additional term (fee applies). There is nolimit to the amount of time an organization may remain in the first tier of the program.
Examples of what’s included• Plan to begin basic data collection strategies for program evaluation, and describe theintroduction of this plan in one program.
• Board approved financial policy governing internal controls.
• All employees have position descriptions, if applicable.
• Template solicitation and acknowledgement documents, including all required disclosure
documents.
• Conflict of interest policy approved by board.
Tier Two: Enhanced
Benefits

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  • Discounts for quickly moving through the tiers.
• Ability to state completion of the Standards for Excellence Enhanced Tier.
• Additional informal recommendations from program staff for future improvement andapplication to next tier.
Application Process• Prior completion of Tier One.
• Submission of the Tier Two application package and checklist and application fee.
• Completion of the free online self-assessment.
Program staff will complete the formal review process, with final approval by Maryland
Nonprofits’ Ethics Standards Committee.
Organizations can remain at this tier for a term of three years at which point they can re-submit
documentation and remain at this tier for an additional term (fee applies). There is no limit to theamount of time an organization may remain in this tier of the program.
Examples of what’s included• Comprehensive program evaluation in place for one program or at least 40% of totalorganization effort, whichever is greater.
• Board approved financial polices governing internal controls and purchasing.
• Orientation process for all staff, volunteers, and board members.
• Annual Report, on website and/or in print, with all required information.
• Completion annually of conflict of interest statements by all staff, board members, andvolunteers with significant authority.
Tier Three: Excellence
Benefits• Earn and display the Seal of Excellence• State that their organization is “Certified Under the Maryland Nonprofits’ Standards for
Excellence”, “Awarded Maryland Nonprofits’ Standards for Excellence Seal”, or “Approved
Under Maryland Nonprofits’ Standards for Excellence” or “is a Standards for Excellence®
Accredited Organization.”
Application Process• Can apply directly for Tier Three, or previously complete both Tiers One and Two.
• Submission of the application package and checklist and application fee.
Review Process• Program staff will first review the application.
• Anonymous peer reviews will evaluate the application second.
• Lastly, the Ethics Standards Committee must approve the staff and peer reviewers’
recommendation for certification.
The Standards for Excellence logo will be awarded for three years. After the first three-year
period, the organization must apply for re-certification.
Once the first re-certification is awarded, the organization must re-apply only every five years.
All 55 Standards for Excellence are included in the third tier.

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  Appendix 3 Suggested Final Check Ups Before Submitting Your Application (MarylandStandards)

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