Charity Navigator launches new system for rating nonprofit efficiency, effectiveness

• Published date: 01 December 2020
• Date: 01 December 2020
• DOI: http://doi.org/10.1002/nba.30894

NONPROFIT BUSINESS ADVISOR DECEMBER 2020

6© 2020 Wiley Periodicals LLC • All rights reserved

DOI: 10.1002/nba

Industry News

Charity Navigator launches new system for rating

nonprot efciency, effectiveness

Charity Navigator, one of the world’s most popular

charity evaluator services, has launched a new non-

prot rating system, dubbed Encompass, that draws

on a new set of indicators to evaluate and ultimately

vet the efciency and effectiveness of charities. Ac-

cording to the organization, the Encompass Rating

System will allow Charity Navigator to rate organi-

zations more easily, which will dramatically increase

the number of nonprots it can rate, from 9,000 to

160,000 or so by the time the system is completely

rolled out.

The Encompass system differs from the Star Rating

System, which Charity Navigator has used since 2001

to rate the efciency and effectiveness of thousands

of nonprots based on measures of nance, account-

ability and transparency. Only a small fraction of the

1.6 million nonprots operating in the United States

received a star rating, the organization said, because

basic eligibility requirements disqualify less-estab-

lished and smaller nonprots. The Encompass Rating

System, however, uses a different technology that

enables Charity Navigator to automatically analyze

the tax forms of 501(c)(3) organizations, which means

that many of the nonprots that were ineligible under

the Star system will now be rated.

As the organization explains on its website, En-

compass will rate nonprots based on a numerical

score out of 100 points for each of four core indica-

tors. Details of two–Finance and Accountability, and

Impact and Results–have been fully disclosed thus

far. For Finance and Accountability, nonprots will

be scored as follows:

• Program Expense (25 points). The Program Ex-

pense Ratio is determined by the amount an organ-

ization spends on program expenses as a percentage

of its total expenses. Charity Navigator calculates

the average program percentage over the three most

recent scal years. A charity with a reported per-

centage of 70% or higher will receive the 25 points

for this metric.

• Independent Audit or Financial Review (25 points).

Organizations with total revenue above $1 million are

expected to have completed an independent audit.

Charities with a revenue between $250,000 and $1 mil-

lion are expected to have completed a formal audit,

review or compilation. Charities that have completed

the expected nancial documentation will receive 25

points for this metric. This metric is not applicable

to organizations with less than $250,000 in revenue.

• Board Composition (25 points). An organization

must have at least three board members. In addition,

more than 50% of those members must be identied

on the Form 990 as independent (i.e., not compen-

sated as an ofcer or other employee of the organ-

ization). A charity with an independent board that

meets this criterion will receive 25 points.

• Liabilities to Assets (15 points). The Liabilities

to Assets percentage is determined by total liabilities

as a percentage of total assets. Charity Navigator

calculates this percentage per the most recent scal

year end. A charity with a reported percentage of

less than 50% will receive 15 points for this metric.

• Website listed (10 points). The organization

must have a website listed on its Form 990. This is

an accountability and transparency measure, Charity

Navigator said; nonprots act in the public trust and

reporting publicly on activities is an important com-

ponent of its rating. A charity that lists their website

address on page 1 of the 990 will receive 10 points.

For Impact and Results, the scoring will be done

as follows:

• A nonprot receives zero out of 100 points if, af-

ter a thorough search of its public materials, Charity

Navigator was unable to nd sufcient information

to estimate the impact of a substantial portion of its

programs.

• A nonprot receives 50 out of 100 points if it

has published sufcient information for the rating

agency to estimate the impact of a substantial portion

of its programs, but Charity Navigator found it was

not cost-effective. The ratings agency will determine

cost-effectiveness by comparing its estimate of the

nonprot's impact to a benchmark for performance.

• A nonprot receives 75 out of 100 points (a

passing score) if it is cost-effective by Charity Navi-

gator’s estimates.

• A nonprot receives 100 out of 100 points if it is

highly cost-effective by the ratings agency’s estimates.

In addition to these indicators, the new rating

(See RATING on page 7)