Posted By Christina Bell, CPA
Regardless of the individual mission, every nonprofit share a common goal: to raise awareness and funding to propel its mission forward. And, when prospective donors are determining what charity is most deserving of their various resources, there is perhaps no better asset than Charity Navigator. Charity Navigator, the world’s largest and most-utilized independent nonprofit evaluator, empowers donors of all sizes with free access to data, tools, and resources to guide philanthropic decision-making.
Since 2001, Charity Navigator has rated the efficiency and effectiveness of thousands of nonprofits based on measures of finance, accountability, and transparency through their Star Rating System. In July 2020, Charity Navigator announced a new nonprofit rating system – Charity Navigator Encompass Rating System. The Encompass Rating System is a comprehensive evaluation tool that analyzes nonprofit performance based on four key indicators.
While eligibility requirements for a star rating disqualify less established and smaller nonprofits, the Encompass Rating System uses a newly implemented technology stack to automatically analyze the tax forms of 501(c)(3) organizations, allowing the tool to expand the number of nonprofits rated. Encompass is based on a numerical score out of 100 and will live alongside the current Star Rating System.
The four key indicators evaluated under the Encompass Rating System include:
- Finance & Accountability – A nonprofit’s financial and accountability score is determined by the following metrics. The maximum total score is 100.
- “Relevance to donors” criterion – The nonprofit receives private charitable contributions from individuals, corporations, or foundations.
- Program Expense Ratio – The Program Expense Ratio is determined by the amount an organization spends on program expenses as a percentage of its total expenses. This data is an average of an organization’s three most recent 990 forms. A ratio of 70 percent or higher earns an organization the maximum points allowed. Nonprofits that fall below 50 percent will receive zero points.
- Independent Audit or Financial Review or Compilation – Organizations with a total revenue above $1 million are expected to have completed an independent audit. This indicator is not factored into the score given to organizations with less than $250K in total revenue and is removed from the scoring methodology. Nonprofits with a revenue between $250K and $1million are expected to have completed a formal audit, review, or compilation.
- Board Composition – An organization must have at least three board members. 50 percent of those members must be identified as independent.
- Liabilities to Assets Percentage – The Liabilities to Assets percentage is determined by total liabilities as a percentage of total assets. This information is secured from the organization’s most recent 990 form. Organizations with a percentage of less than 50% will receive the maximum points allowed.
- Website Listed – The organization must have a website listed on its 990.
- Conflict of Interest Policy – Charity Navigator looks for the existence of a conflict of interest policy on the Form 990.
- Documents Board Minutes – Charity Navigator looks to confirm on the Form 990 that the organization has a method in place to record the events that take place during a board meeting ensuring that a contemporaneous document exists for future reference.
- Records Retention and Destruction Policy – Charity Navigator looks for the existence of a document retention and destruction policy per the Form 990.
- Whistleblower Policy – Charity Navigator looks for the existence of a whistleblower policy per the Form 990.
- Impact & Results – Charity Navigator uses publicly available information to estimate the actual impact a nonprofit’s program has on people’s lives. Charity Navigator defines impact as the change in mission-driven outcomes net of what would have happened in the absence of the program (the “counterfactual”), relative to the cost to achieve that change. Charity Navigator then compares the estimated impact of the nonprofit’s program to a benchmark to determine if it is cost-effective. A nonprofit receives a total of 0 out of 100 points if, after a thorough search of its public materials, there was no sufficient information to estimate the impact of a substantial portion of its programs. A nonprofit receives a total of 50 out of 100 points if it has published sufficient information for Charity Navigator to estimate the impact of a substantial portion of its programs, but the impact was found not to be cost-effective. A nonprofit receives a total of 75 out of 100 points (a passing score) if it is cost-effective by Charity Navigator’s estimates. A nonprofit receives a total of 100 out of 100 points if it is highly cost-effective by Charity Navigator’s estimates.
- Leadership & Adaptability – Evaluates if the organization’s leadership and strategy aide in achieving the mission of the organization. Charity Navigator is currently developing an evaluation system for this key indicator. As a result, scores are not being currently calculated or issued for leadership & adaptability.
- Culture & Community – Evaluates if the organization has Diversity, Equity, and Inclusion measures as well as evaluates the organization’s overall connectedness with its communities served. To receive a culture and community score nonprofits must complete a voluntary survey. Participation is voluntary; however, organizations that complete the survey will be rewarded with a full 100 point score for sharing their information publicly. To be included in the Encompass Rating System, nonprofits must meet either the criteria to receive a Finance & Accountability score or Impact & Results score, or both. Nonprofits can receive a Finance & Accountability score if they have e-filed their last three IRS Form 990s. The 990 EZ or 990N is not sufficient. Nonprofits that satisfy the criteria below are eligible to receive an Impact & Results score:
- “Direct” criterion – At least two-thirds of the nonprofit’s activities (as measured by percent of total program service expenses) are directly delivered to beneficiaries and reasonable to expect impact measurement for.
- “Service” criterion – The nonprofit provides a service charitably, that is, at low or no cost to beneficiaries who are distinct from its donors. Specifically, the nonprofit’s beneficiaries do not pay most of its costs (e.g., through tickets, membership dues, medical bills, or donations), or, if they do, paying beneficiaries constitute a minority of total beneficiaries. The “service” criterion excludes many arts and culture institutions, religious organizations, and fee-seeking health care providers in the U.S.
Both the Star and Encompass ratings serve as important trust indicators for donors of all sizes. Charity Navigator recommends 3- and 4-star rated nonprofits, as well as organizations earning an Encompass score of 75 or higher (signified with a “Give with Confidence” designation). Nonprofits with a rating of 75 or above can download a promotional toolkit that includes a seal, social graphics, a sample press release, and email announcement. To access this, visit your Charity Navigator rating page and look for the call to action to ‘Download ratings toolkit’.