September 30, 2013

Charity Navigator, the agency most known for rating nonprofit organizations according to their financial health, announced an update to its rating process that is set to be implemented no sooner than 2016. Charities that hope to maintain or achieve a strong rating under the new system, however, should consider preparing for the upcoming changes now.

The goal of “results reporting,” which Charity Navigator has said represents the final dimension of its rating metrics, will be to encourage nonprofits to provide measurable evidence that their programs have a successful positive impact on their client populations. This, Charity Navigator believes, will help social investors and conscientious donors support charities that have demonstrated an ability to accomplish their missions.

The new rating system will be known as CN 3.0. Charity Navigator states in The Road to CN 3.0: “We believe effective charities manage their performance and thereby know and act on their results. These high performing organizations use early results as milestones to important longer-term results.”

Charity Navigator recognizes this update will likely encourage charities to reconsider their internal operations. Because of the scope of anticipated changes, Charity Navigator will not incorporate results reporting into its rating system until at least 2016, which provides time for charities to invest in a better understanding of the new framework and develop reporting requirements that will adequately satisfy the agency.

The agency expects to continue communicating with charities to encourage improvement in results measurement. Results reporting will incorporate five separate rating elements derived from answers that charities provide in response to a multi-question survey:

  1. The alignment of mission, solicitations and resources-This   first element is one of the most critical because it represents a pass/fail test for charities. Charity Navigator will investigate how closely solicitation materials (website, public financial reports, other materials, etc.) reflect actual program expenses as broken out on the charity’s IRS Federal Form 990. Charity Navigator will work to determine if, as a result, “a reasonable person would conclude that the way the charity allocates its resources would ordinarily be appropriate to meet its solicitation claims.”

If a charity fails this test, the reviewer will go no further and the review will be complete. The organization will get no credit for this element of results reporting.

  1. Results logic and measures-Charity Navigator will take into account how nonprofits propose to reach program outcomes and the likelihood that they will succeed. Is there causal logic based on evidence?
  1. Validators-Charity Navigator will give credit to charities that are affiliated with codes of conduct, standards and certification mechanisms that reflect on positive outcome measurements.
  1. Constituent voice-Charity Navigator will determine how well charities collect feedback using rigorous data collection methods from the constituents they serve. The desired feedback is expected to include details about how well the organization’s programs have met the needs of respondents.
  1. Published evaluation reports-Charity Navigator will want to know that charities regularly report on the results of their programs.

The proposed CN 3.0 rating system has created discussion among advocates and skeptics. While some believe CN 3.0 can ultimately hold nonprofits more accountable to their missions based on evidence-based data, others are concerned the new measurement system cannot apply to nonprofits for which quantitative data cannot be readily collected to determine success.

CN 3.0 may also change how nonprofits market the effectiveness of their programs. For example, storytelling that details individual success stories may not meet Charity Navigator’s criteria as sufficiently as comprehensive analytical methodologies that account for broader populations. An additional concern relates to staffing. Some detractors of CN 3.0 express concern that the staffing needs for collecting evidence of program effectiveness may hurt smaller nonprofits.

Charity Navigator says its announcement this far in advance offers time to dialogue with charities and determine the most meaningful way to implement the new rating system in a way that will not unfairly penalize nonprofits but still provide an additional layer of accountability. Charity Navigator also emphasized that while its goal is to implement the new rating system by 2016, it cannot absolutely commit to the timeline. The availability of sufficient resources will be a determinant in terms of when the new ratings will finally be utilized to rank nonprofits.

Helpful Resources

Charity Navigator’s announcement about results reporting is bound to cause much discussion in the future. Gelman, Rosenberg & Freedman will continue to monitor this issue and distribute updates as they become available.

This article was originally posted on September 30, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at