Charity aggravator

We all know bad things happen to good people. Now, according to one consultant, an extremely bad thing is happening to good charities.

Former Oracle executive Kevin Boulas is firmly in the nonprofits-are-businesses-and-need-to-be-treated-like-businesses-in-all-respects camp, so in a broad sense he favors the trend to apply the tools of financial analysis and transparency to charities. But he says the most prominent operation to do so -- Charity Navigator -- is bringing the worst of Wall Street to the nonprofit sector by inadvertently forcing the donors and executives who should be creating a better future, to focus instead on short-term results.

Charity Navigator, which is itself a 501(c)(3), assigns charities a rating of 0 to 4 stars, and this rating is based primarily on the proportion of revenue that the organization spends on its mission rather than on itself. Charity Navigator slices and dices the data in lots of fun ways, but it all comes from publicly available IRS forms. Anyone who has a calculator with a divide key can do the same thing.

The ratio of programmatic to administrative expenses was an important way of judging nonprofits long before Charity Navigator came along in 2001; indeed, many foundations restrict grants so that none of their money can go toward general operating expenses like salaries and utility bills. This has long irked nonprofit CEOs, who, when they are feeling particularly gutsy, point out that people (and the phone company) need to be paid if the mission has any hope of being fulfilled. To stigmatize general operating expenses is to imply that all charity work should be done by volunteers rather than professionals. Taken to its logical end, this means the only people permitted to execute the mission should be the independently wealthy on the one hand, and destitute monks and nuns on the other. The middle class need not apply.

“I’ve got a foundation willing to give me a million dollars, but only after I get a pilot program up and running,” the founder of a new organization that aims to bring more arts education into high-poverty schools told me. “How do I get the pilot up without funding?”

By blindly following this tradition of programs-and-services-good, general-operating-expenses-bad -- and amplifying it by throwing around judgmental words like “best” and “worst” and “overpaid” -- Charity Navigator may indeed steer donors away from crooked operators who blow money meant for crippled orphans on Jaguars and hookers for themselves. But it also steers them away from nonprofits that dare to invest in their own future capacity, Boulas charges. Giving to a charity that earns Charity Navigator’s highest marks is no different from investing in a company that spends 100% of revenue on production, with nothing left over to do research, pay employees or repay investors. Nice idea, but no company can afford to operate like…

Well, like a charity. Boulas’s point is that actual charities can’t afford to operate “like a charity” either. “Charity Navigator merely reinforces opacity. It forces nonprofits to game the numbers instead of opening the books,” he told me. “Companies build themselves to last for a very long time, but they seem to begrudge nonprofits the same privilege.”

By propagating an erroneous view of how nonprofits are supposed to spend their money, Boulas contends, Charity Navigator has perpetuated Wall Street’s most dangerous myth: that because only today matters, accountability can be put off forever.