Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Financial Planning > Charitable Giving > Donor Advised Funds

Nonprofits Can Be Hurt by ‘Watchdog’ Groups: New Study

Your article was successfully shared with the contacts you provided.

At year-end, most Americans typically decide which nonprofits organizations they will give money to, and many seek help making their choices. However, donors are not helped by the most popular “watchdog” groups, according to studies released Monday by the Direct Marketing Association Nonprofit Federation (DMANF). These report that the focus on financial ratios hurts many good nonprofits.

The reports are “Charity Rating Scales: The Challenge of Developing ‘Effective’ Measures of Nonprofit Organizational Effectiveness,” by Jessica Sowa, and associate professor at the School of Public Affairs at the University of Colorado in Denver; and “Reframing the Discussion about Nonprofit Effectiveness,” by George Mitchell, a research assistant with the Transnational NGO Initiative at the Moynihan Institute of Global affairs at Syracuse University.

Sowa’s brief looks at the current watchdog organizations’ focus on financial reporting, while the Mitchell report is based on in-depth interviews with top leaders from 152 international nonprofits rated by Charity Navigator.

“Donor enthusiasm for ‘4 star’ or a simple thumbs up or down is understandable,” Robert Tigner, DMANF regulatory counsel, said in a statement. “‘Is this charity worthy of my support?’ is the ultimate question. However, that question is both too personal and too complex to distill into a handful of financial ratios. That’s exactly what the watchdogs do, followed in lock-step by state charity officials. Neither the nonprofit community nor the donating public is better off for it.”

So how should a donor choose a charity to support? In its statement, the DMANF suggests five areas for donors to examine in order to gain confidence in their chosen charity:

  • Impact: Does the charity have impact on an important issue or cause? Does it have methods in place to measure its impact? Does it do what it says it will with donated dollars? Does the organization actually do work that the donor wishes to support?
  • Growth: Growth can be an indicator of effective leadership, dynamic vision and success for a corporation or a charity.
  • Program support: A thriving charity should spend most of its revenue on programs. That is why donor give in the first place. How much is the right amount depends on several factors. Where is the organization in its life cycle? What kinds of donations account for the bulk of revenue? What does it need to accomplish its objective? The DMANF said that a healthy midsize charity in strong growth mode with a diversified development model that designates 60% of its assets to program could be far more effective and impactful than a charity that is not growing, that depends on only one or two sources of revenue and yet puts 75% of its income into program.
  • Managing and marketing: Skimping on either management or fund development is short sighted and ineffective. A strong management and marketing effort will contribute to a charity’s effectiveness, sustainability and long-term impact.
  • Ethics: Are there written guidelines for ethical conduct for management and staff? Are financial data easily accessible? Does an independent board provide governance and oversight? Does the organization have an outside financial auditor?

“What motivates people when choosing to give to a nonprofit isn’t a financial ratio,” Senny Boone, senior vice president, corporate and social responsibility at DMANF, said in the statement. “They should give to charities that solve problems that are important to the donor. Whether it is giving to end hunger, disease, provide disaster relief or other vital missions, donors give to have an impact and to solve problems that take years and many donations to fulfill that mission.”

The Nonprofit Federation of the Direct Marketing Association represents nonprofit organizations that use direct marketing channels to raise money and engage with donors. It advocates for nonprofits in Washington, D.C., and across the states on postal rates and delivery, privacy and data protection, fundraising accountability and other issues affecting nonprofit fundraising.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.