Considering A Charitable Gift? Four Tips For Identifying Organizations Who Will Use Your Money Wisely
More and more people now are supporting causes they have a passion for through a range of charitable giving options—from direct gifts, to contributions via donor advised funds, to donations of stocks and appreciated securities, to a range of other philanthropic vehicles. While we will talk more about these “other” vehicles in another article, today we will discuss a few ways to screen nonprofit and charitable organizations before making your gift.
A surprising number of donors, often individuals who know and understand the importance of doing due diligence when evaluating a business acquisition or investment opportunity, don’t always apply the same rigor to their philanthropic contributions. And while we would be happy to talk about a set of in-depth analyses we could help you with when evaluating potential recipients of a gift, there are many simple things you can do to assess an organization’s efficacy and impact before making a gift.
Check out independent evaluations. While you should always carefully review information from a nonprofit and on its website, it is often useful to review information from independent third parties focused on evaluating nonprofits. Thankfully, a number of these independent evaluators have flourished in recent years. Though none are perfect (and what is?) these independent evaluators can often provide you with a great deal of information quickly—for free—saving you quite a bit of time. A leader in this space is Charity Navigator.
Founded in 2001, Charity Navigator has evaluated over 160,000 nonprofits, scoring each organization on a scale of 1 to 4 stars (with 4 stars being the best). These ratings show charitable givers/social investors how efficiently Charity Navigator believes a charity will use their support today, how well the organization has sustained its programs and services over time, and the organization’s level of commitment to good governance, best practices, and openness with information. In general, we would suggest focusing on organizations with three or more stars.
Another independent evaluator worth looking into is Candid/Guidestar, which offers Guidestar Search; a free online tool offering consolidated information for evaluating nonprofit efficacy by ranking organizations as Gold, Silver, Bronze, etc. in terms of transparency and impact. One caveat related to both Guidestar and Charity Navigator, because both organizations have built evaluation models that work for a wide range of charities, there are occasionally some charities whose impact models are sound, but still do not rank very well according to one-size-fits-all evaluation systems. This is not to say that a lower rank from either of these sites is necessarily a deal-breaker, but may serve to raise additional questions and possibly explore alternative options.
Follow the money. Charity Navigator and Candid/Guidestar are great places to start initial research, but some donors will also want to do deeper research for themselves as they narrow down their search. A powerful way to do this is by examining a nonprofit’s Form 990. The 990 is publicly available IRS form, that provides detailed financial information about a nonprofit organization. A nonprofit should have this form posted on its website, and these forms are also available via both Charity Navigator and Guidestar. While different donors use different criteria when evaluating 990s, a few questions to consider might include:
- How does total revenue for the current year compare to the previous year (Page 1, line 12)?
- What is total revenue less expenses? How does that compare to the previous year (Page 1, line 19)?
- How do you feel about the level of executive compensation (Page 7)? Note, while some criticize higher executive salaries, we believe paying higher salaries for exceptional talent is often justified—and, in fact, critical—within organizational budget realities of course.
- How do expenses break down between the following three categories: program service expenses, management/general expenses, fundraising expenses (Page 10)? Each donor may have their own opinions about these breakdowns, but it is almost always useful to have a sense for how the organization is thinking about these decisions.
Get personal. While numbers and data provide a great deal of information, not every aspect of nonprofit impact and efficacy can be quantified on a form. For this reason, we also recommend going beyond the numbers and getting to know the organizations you are investing in more personally. This might be based on your own personal experience volunteering or advising the organization or you might have a friend or colleague who has personal experience with the charity who you can talk to. If neither of these are true, we suggest you simply call the organization and ask if you could speak with someone on the executive or development team to learn more about their work and discuss any questions you might have. In fact, this reaching out directly to the organization is a very good idea in any case; the way in which these organizations follow-up with prospective donors often says a great deal about their attention to detail, passion, and commitment to the mission.
Invest in leadership you trust. Finally, we cannot say enough about the importance of a visionary CEO and strong leadership team. Just as venture capitalists and other investors often place significant emphasis on their faith in a corporate executive team, those evaluating social change organizations should do the same. You may already know a member of the leadership team personally… or you may get to know someone at the organization via the personal outreach described above. If not, be sure to take a look at the executive bios on the organization’s website, or (even better) independent news articles or interviews. One other source in this category could be Glassdoor, a site that gathers a wide range of information from current and former employees at a range of private-sector groups and nonprofit organizations, including tracking the percentage of current and former employees who have faith in the CEO. One caveat here, of course, is that some employees who are let go for good reasons occasionally fill out reviews to rant and say disproportionately negative things about their prior employer. As with any data source, we suggest you explore these reviews as a facet of your research, but recognize that one or two bad reviews may simply be outliers; however if you see a trend, it might be something to explore more deeply.
The four tips above are, of course, simply a starting point for your own research and due diligence efforts. If questions come up as you do your own research or if you would like to talk about more wholistic ways we might be able to help you, feel free to email me at peter@svwealth.com to continue the conversation about charitable giving.
