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Charity Watchdogs and the Limits of Information-Based Regulation

Abstract

Transparency concerns and the concomitant accountability challenges have motivated policy and legal scholars to explore information-based regulatory approaches. We examine their usefulness in the context of the nonprofit sector which tends to show signs of governance failure. Although nonprofits are required by law to disclose information on fund use, nonprofit donors face difficulties in accessing and interpreting information about how nonprofits are deploying resources. Charity watchdogs make this information available to donors in a convenient format. In theory, this should allow donors to reward nonprofits that devote resources to service delivery and to punish those that are less careful about controlling overheads. To test the relationship between charity ratings and donations, we examine 90 nonprofits in the state of Washington for the period 2004–2007. Drawing on ratings data provided by Charity Navigator, we find that changes in charity ratings tend not to affect donor support to these nonprofits. We explore this statistical finding via interviews with 10 charities located in Washington State. Supporting the statistical results, we find that charities believe that donors tend not to systematically embed ratings in their donation decisions. Instead, they believe that donors assess nonprofits’ effectiveness and trustworthiness via other means such as familiarity, word-of-mouth, or the visibility of the nonprofit in their community. In sum, the policy challenge is to provide information which users desire such as organizational effectiveness as opposed to basic fund allocation in the case of non-profits. What matters for policy efficacy is not how much information is provided but of what type.

Résumé

Les problèmes de transparence et les défis concomitants de responsabilité ont motivé les institutions et les juristes pour explorer des approches réglementaires basées sur l’information. Nous examinons leur utilité dans le contexte du secteur non lucratif, qui montre des signes d’échec de gouvernance. Bien que les organisations à but non lucratif soient tenues par la loi de dévoiler des informations sur l’utilisation des fonds, les donateurs à but non lucratif font face à des difficultés pour accéder et interpréter les informations sur l’utilisation des ressources par les organisations à but non lucratif. Les associations caritatives de surveillance rendent disponibles ces informations aux bailleurs de fonds sous un format pratique. En théorie, cette action devrait permettre aux donateurs de récompenser les organisations à but non lucratif qui consacrent des ressources pour les prestations de services, et de punir celles qui sont moins rigoureuses sur le contrôle des frais généraux. Afin de mesurer le rapport entre les notations des associations caritatives et les dons, nous examinons 90 organismes à but non lucratif dans l’État de Washington, pour la période 2004–2007. Nous appuyant sur les données des notations fournies par Charity Navigator, nous constatons que les changements dans les notations des associations caritatives n’influencent pas le soutien des donateurs envers ces associations. Nous examinons ces conclusions statistiques par l’interview de 10 organismes de bienfaisance situés dans l’État de Washington. Soutenant les résultats statistiques, nous constatons que les associations caritatives pensent que les donateurs n’intègrent pas systématiquement les évaluations dans leurs décisions d’effectuer des dons. Au lieu de cela, elles croient que les donateurs évaluent l’efficacité et la fiabilité des associations à but non lucratif par d’autres moyens, par exemple la familiarité, le bouche-à-bouche, ou la visibilité de celles-ci dans leurs communautés. En somme, le défi politique est de fournir les informations souhaitées par les utilisateurs, telles que l’efficacité organisationnelle, par opposition à l’allocation de base des fonds dans le cas des associations à but non lucratif. Ce qui importe pour l’efficacité politique n’est pas la quantité mais le type d’information fournie.

Zusammenfassung

Bedenken hinsichtlich der Transparenz und das gleichzeitige Problem der Rechenschaftspflicht haben politische und Rechtsgelehrte dazu angehalten, auf Informationen beruhende regulatorische Ansätze zu finden. Wir untersuchen ihre Nützlichkeit im Zusammenhang mit dem Nonprofit-Sektor, der oftmals Zeichen mangelnder Steuerung aufweist. Zwar sind Nonprofit-Organisationen gesetzlich dazu verpflichtet, Informationen über die Mittelverwendung offenzulegen, doch ist es für die Spendengeber schwierig, sich Zugang zu diesen Informationen zu verschaffen und zu verstehen, wie die Nonprofit-Organisationen ihre Ressourcen einsetzen. Die Aufsichtsbehörden der Wohltätigkeitsorganisationen stellen den Spendengebern diese Informationen in einem verständlichen Format zur Verfügung. Theoretisch sollte es den Spendengebern dadurch möglich sein, die Nonprofit-Organisationen zu belohnen, die ihre Ressourcen für die Bereitstellung von Dienstleistungen verwenden und diejenigen zu bestrafen, die weniger Sorgfalt bei der Kontrolle ihrer Betriebskosten ausüben. Zur Prüfung des Verhältnisses zwischen der Bewertung von Wohltätigkeitsorganisationen und den bereitgestellten Spenden untersuchen wir 90 Nonprofit-Organisationen im U.S.-Bundesstaat Washington im Zeitraum von 2004 bis 2007. Die von der Institution Charity Navigator bereitgestellten Bewertungsdaten zeigen, dass die Änderungen in den Bewertungen der Wohltätigkeitsorganisationen oftmals keine Auswirkungen auf die Unterstützung seitens der Spendengeber haben. Wir erforschen das statistische Ergebnis weiter anhand von Befragungen von 10 Wohltätigkeistorganisationen im Staat Washington. Im Einklang mit den statistischen Ergebnissen finden wir heraus, dass die Wohltätigkeitsorganisationen glauben, dass die Spendengeber in der Regel die Bewertungen nicht systematisch bei ihren Spendenentscheidungen berücksichtigen. Sie glauben stattdessen, dass die Spendengeber die Effektivität und Vertrauenswürdigkeit der Nonprofit-Organisationen anderweitig messen, zum Beispiel am Bekanntheitsgrad, der Mundpropaganda oder der Präsenz in ihrer Gemeinde. Zusammenfassend lässt sich sagen, dass Richtlinien zur Bereitstellung von Informationen etabliert werden sollten, die sich die Betroffenen wünschen, wie beispielsweise im Falle der Nonprofit-Organisationen Informationen zur Effektivität der Organisation anstelle von Angaben über die grundsätzliche Mittelverteilung. Ausschlaggebend für effektive Richtlinien ist nicht die Menge der bereitgestellten Informationen, sondern die Art der Informationen.

Resumen

El interés por la transparencia y los retos de contabilidad consiguientes han llevado a los expertos jurídicos y políticos a analizar las estrategias normativas basadas en la información. Hemos analizado su utilidad en el entorno del sector sin ánimo de lucro, que tiende a mostrar signos de errores de gestión. Aunque las organizaciones sin animo de lucro están obligadas por ley a revelar la información sobre el uso de sus fondos, los donantes tienen problemas para acceder e interpretar la información sobre cómo estas organizaciones utilizan sus recursos. Las entidades protectoras de la caridad se encargan de que esta información esté disponible para los donantes en un formato práctico. En teoría, esto debería permitir a los donantes premiar a las organizaciones que dedican recursos a proporcionar estos servicios y castigar a aquellas que se esfuerzan poco por controlar sus gastos. Para poner a prueba la relación entre las evaluaciones y las donaciones de caridad, hemos analizado a 90 organizaciones sin ánimo de lucro del estado de Washington durante el periodo 2004–2007. Basándonos en los datos de evaluación proporcionados por Charity Navigator, hemos descubierto que los cambios en las evaluaciones de caridad no suelen repercutir en el apoyo de los donantes a esas organizaciones. Hemos analizado los resultados estadísticos a través de entrevistas con 10 organizaciones benéficas del estado de Washington. Como apoyo a los resultados estadísticos, hemos descubierto que las organizaciones benéficas creen que los donantes muestran una tendencia sistemática a no tener en cuenta las evaluaciones a la hora de decir sobre sus donaciones. En su lugar, creen que los donantes evalúan la efectividad y la formalidad de las organizaciones por otros medios, como la familiaridad, las recomendaciones o la visibilidad en su comunidad. En resumen, el reto político consiste en ofrecer la información que los usuarios desean, como la eficacia organizativa y no la asignación básica de fondos en el caso de las organizaciones sin ánimo de lucro. Lo que importa en la eficacia política no es la cantidad sino el tipo de información ofrecida.

摘要

对透明度的关注和随之而来的问责制难题激励政策和法律学者探讨信息化监管办法。我们研究它们在非营利部门的作用,结果表明往往存在治理失效的情况。虽然非营利组织按照法律规定需要披露基金使用的信息,但非营利性捐款者面临获取和解释有关非营利组织如何部署资源信息的困难。慈善监察机构以便捷的形式向捐款者提供这些信息。从理论上讲,这可以让捐款者奖励投入更多资源提供服务的非营利组织,惩罚那些不注意控制费用的组织。为了测试慈善机构评级和捐款之间的关系,我们在2004–2007年期间考察了在华盛顿州的90个非营利组织。根据Charity Navigator(慈善导航者)机构提供的评级数据,我们发现,慈善机构评级的变化往往不会影响捐款者对这些非营利组织的支持。我们通过访谈位于华盛顿州的10个慈善机构对这项统计调查结果进行探索。与统计结果一致的是,我们发现慈善机构认为捐款者在决定捐款时往往不会系统地考虑这些评级。相反,他们认为,捐款者会通过其他方式,如他们社区的非营利组织的知名度、口碑和曝光率评估非营利组织的效力和可信性。总之,对政策的挑战就是为用户提供其所需的信息,如非营利组织的组织效力,而不是基本的基金分配情况。对政策效果而言,重要的并不是提供多少信息,而是提供什么类型的信息。

要約

情報ベースで規定されているアプローチについて調査するために、透明性とともに責任に関する問題が政策と法学者を刺激している。本論文では、ガバナンスの失敗の傾向を持つ非営利セクターの状況下にある有用性を調査する。非営利団体が資金を使用する際は情報を開示する必要があるが、非営利団体への資金提供者はリソースの展開方法に関する情報にアクセスして、理解することが困難である。慈善事業団体の監視機関は、便利な形式で情報を資金提供者に利用できるようにする。理論上、資金提供者は、サービス提供のリソースに専念する非営利団体に資金を与えて、諸経費の節減に対策を立てないものについては罰するべきである。慈善事業団体の格付けと寄付との関係を検証するために、2004年から2007年の間、ワシントン州における非営利団体90団体を調査した。慈善事業団体のナビゲーターが提供したデータ解析図を用いて、慈善事業団体の格付け変化が、非営利団体の資金提供者に影響しない傾向があることがわかった。ワシントン州における慈善事業10団体とのインタビューから統計調査結果を調査する。統計結果を踏まえて、資金提供者が系統的に寄付決定を行う格付けを限定しない傾向があると、慈善事業団体が考慮していることがわかった。代わりに、慈善事業団体は、資金提供者が地域における非営利団体への親密性、口コミ、可視性などの手段を用いて、非営利団体が有効性と信頼性が確保できると考えている。つまり、政策の問題とは、非営利の場合、基本的な資金援助の配分と対照的に、組織における有効性のように、ユーザが望んでいる情報を提供することも必要となってくる。方針の効力において重要なことは、どのくらいの情報を提供するかということではなく、どのタイプの情報を提供するかということである。

ملخص

مخاوف الشفافية و تحديات المسؤولية المصاحبة لها دفعت علماء السياسة و القانون على إستكشاف نهج تنظيمي قائم على أساس المعلومات. ندرس الفائدة في سياق القطاع الذي لا يسعى للربح الذي يميل إلى إظهار علامات فشل الحكم. رغم أن أن الذين لا يسعون للربح مطلوب منهم بالقانون الكشف عن المعلومات المتعلقة باستخدام الإعتماد المالي، المانحين للذين لا يسعون للربح يواجهون صعوبات في الوصول إلى وتفسير المعلومات حول كيف يوزع الذين لا يسعون للربح الموارد. رقيب العمل الخيري يتيح هذه المعلومات للجهات المانحة بشكل مناسب. ومن الناحية النظرية، هذا ينبغي أن يسمح للمانحين أن يعطوا مكافأة للذين لا يسعون للربح و يكرسوا الموارد لإنجاز الخدمات ومعاقبة الذين أقل حذراً حول السيطرة على النفقات العامة. لإختبار العلاقة بين تصنيفات الأعمال الخيرية والهبات، درسنا 90 من الذين لا يسعون للربح في ولاية واشنطن للفترة بين 2004–2007. إعتماداً على تصنيف البيانات المقدمة من موجهين للأعمال الخيرية، فإننا نجد أن التغييرات في التصنيفات الخيرية عادة ما لا تؤثر على دعم الجهات المانحة للذين لا يسعون للربح. نستكشف هذا الاستنتاج الإحصائي عن طريق المقابلات مع 10 مؤسسات خيرية واقعة في ولاية واشنطن. دعم النتائج الإحصائية، فإننا نجد أن المؤسسات الخيرية تعتقد أن الجهات المانحة تميل إلى عدم ترسيخ منهجية التصنيفات في قراراتهم بالتبرع. بدلاً من ذلك، أنهم يعتقدون أن الجهات المانحة تقييم فعالية الذين لا يسعون للربح والجدارة بالثقة عبر وسائل أخرى مثل معرفة، كلمة شفوية ، أو رؤية الذين لا يسعون للربح في مجتمعاتهم المحلية. بإختصار، يتمثل التحدي سياسة توفير المعلومات التي يرغب فيها المستخدمين مثل الفعالية التنظيمية بالمقارنة مع تخصيص الأموال الأساسية بالنسبة للذين لا يسعون للربح. وما يهم لكفاءة السياسات ليس بكم المعلومات التي تقدم ولكن من أي نوع.

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Notes

  1. 1.

    Stephan (2002) points out that the information-based approach is inspired by literatures pertaining to public management (Schneider and Ingram 1990), agenda setting (Iyenger and Kinder 1987), Coasian bargaining (Coase 1960), and comparative injustice (Hamilton 1995).

  2. 2.

    Some scholars view beneficiaries of nonprofit services as principals. Others suggest that governments be viewed as principals because along with the legal mandate and tax exemption, governments can employ nonprofits as subcontractors. We focus on donors as principals because charity watchdogs seek to mitigate information problems at the donors’ end, thereby enabling donors to vote with their charity dollars.

  3. 3.

    We recognize that some scholars employ the stewardship theory to study nonprofits (VanSlyke 2007). Information-based policies seek to correct information assymteries, which the agency approach identifies as they key reason for agency problems and governance failures. Non-profit donor relationship can be viewed in agency terms, and some nonprofit failures can be traced to information problems. Thus, the logic of information-based regulation coheres with the agency approach.

  4. 4.

    On the issue of public confidence in the charitable or the nonprofit sector, see O’Neil (2009). Also see the surveys conducted by Paul Light and the Brookings Institute (2008).

  5. 5.

    A survey conducted by The Charities Review Council of Minnesota ( 2007 ) suggests that a lack of generalized trust in charities discourages giving only in about 15% of the surveyed donors. This finding is not necessarily inconsistent with our argument. Charity watchdogs may have high traction in diverting donations from a given population of donors instead of increasing or decreasing overall levels of donations.

  6. 6.

    Another body of research examines the “crisis of confidence” hypothesis in the context of volunteering for non-profits (Bekkers and Bowman 2009). Our argument is there is a perception, correct or incorrect, that nonprofits have transparency issues. Consequently, to address such perceived transparency problems, there has been an emergence of charity watchdogs. We are interested in examining whether information provided by such watchdogs has intended effects on donors; if not, then why not.

  7. 7.

    http://stats.oecd.org/glossary/detail.asp?ID=3295; accessed 03/20/09.

  8. 8.

    http://www.epa.gov/climatechange/emissions/ghgrulemaking.html; 04/18/2009.

  9. 9.

    There is an increased interest in studying the use of voluntary programs and accreditation system by nonprofits to signal their trustworthiness to donors. Bekkers (2003) examines the case of the Netherlands where NGOs use the accreditation system to signal their trustworthiness. Gugerty and Prakash’s (2010) edited volume provides numerous case studies of how nonprofits have used voluntary programs to signal their trustworthiness to different stakeholders. In the context of the broader debate on the accountability of NGOs, see the special issue of Chicago Journal of International Law, 2002, 3(1).

  10. 10.

    Sidel (2008) examines new nonprofit governance initiatives in developing countries. In the context of India, he notes the emergence of “a nonprofit rating scheme initiated by Indianngos.com, ratings of microcredit finance institutions in India and around Asia undertaken by Micro-Credit Ratings International Ltd. (M-CRIL), and the emergence of powerful domestic funding intermediaries that imposed or negotiated self-regulatory principles and rules on their downstream Indian funding recipients and partners.”

  11. 11.

    Sidel (2008) identifies intranet regulation as a new model of NGO regulation.

  12. 12.

    Gromley and Weimer (1999) suggest that opinion leaders play an important role in familiarizing different audiences with “organizational report cards.” In addition to politicians and celebrities, opinion leaders include professionals such as high school counselors, who reduce consumers’ search costs by directing their attention to most salient or important reports that these consumers should consider in making their choices. In this context, see Lee (2004) who evaluates “e-reporting” by various federal and state agencies.

  13. 13.

    Unlike some other cases of information-based regulation, charity ratings do not reflect program outcomes. Yet, even information-based systems reporting program outcomes have problems, as discussed above. The broader message we want to convey is that no evaluation system is perfect; once the method of rating or evaluation is known, organizations “play to the test” and it leads to its own perversities. Because no information-based system can perfectly measure outcomes in their full complexity and at the same time create incentives for the evaluated actors to game the system, almost all such systems will have problems.

  14. 14.

    The Charities Review Council of Minnesota’s (2007) online Accountability Wizard differs from charity watchdog because nonprofits elect to provide information pertaining to their compliance with the Council’s standards that pertaining to Public Disclosure, Governance, Financial Activity and Fundraising.

  15. 15.

    The BBB Wise Giving Alliance gives charities a “pass,” “no pass,” or “undetermined” rating based on governance and oversight, effectiveness, finances, and fund-raising and informational materials (Sloan 2008).

  16. 16.

    The American Institute of Philanthropy gives charities a letter grade (A, B, C, D, F) based on the percentage of money spent on programs, the cost to raise funds, and the years of available assets (Silvergleid 2003).

  17. 17.

    Our use of Charity Navigator’s ratings in this analysis should not be considered an endorsement of its rating system. We chose to use Charity Navigator in this study not because we agree with its methodology but rather because it is one of the most widely cited charity ratings organizations in the media and because it rates the largest number of charities. Our goal is not to advocate for Charity Navigator but rather to assess the claims regarding its impact on donors.

  18. 18.

    Charity Navigator rates all 501 (c)(3) organizations that fulfill the following criteria: file a Form 990, have public support greater than $500,000 in the most recent fiscal year, have completed a Form 990 for four consecutive years, are based in the US, and are registered with the IRS. Charity Navigator excludes hospitals, hospital foundations, universities, colleges, community foundations, PBS stations, land trusts and preserves, charities that receive most of their funding from government grants or from fees they charge for their programs and services, and charities that report $0 in fundraising expenses. Source: www.charitynavigator.org. For a breakdown of all 501 (c)(3) organizations in Washington State by category, including those not rated  by Charity Navigator, see http://www.tess.org/NPinWA/07NTEEbyCounties.html.

  19. 19.

    Konisky (2007) makes a similar point in his article on regulatory races to the bottom.

  20. 20.

    In addition to the transparency dimension is the notion that donations are tax-deductible. This gives these organizations more “publicness” in terms of revenue conception, role, and protection. Indeed, 501 c3s are required to make their Form 990s publicly available, and websites such as Guidestar increase the ease with which citizens can access these documents. Donors to 501c 3s may have a greater distance from the operations of the nonprofits (creating the information asymmetry problem we identify) than they might to the exempt religious 501c 3s (which tend to have greater participation by their donors in their operations and services) or political nonprofits (donations to which are generally not tax exempt). These distinctions are not only important to the agency theory explication, but also reinforce our point regarding the importance of proximity to donor-decision making.

  21. 21.

    We could not find the data for the number of charities rated by BBB and AIP in the state of Washington. We assume that similar to the national coverage, in relation to BBB and AIP datasets, the Charity Navigator dataset offers a more comprehensive coverage of charities in this as well.

  22. 22.

    http://www.charitynavigator.org/index.cfm?bay=content.view&cpid=484#11, downloaded on 03 March 2009.

  23. 23.

    A survey sponsored by Better Business Bureau Wise Giving alliance suggests that 79% of Americans believe that “it is important to know the percentage of spending that does towards charitable programs.” (cited in Bekkers 2003, p. 600).

  24. 24.

    We tested for colinearity between the variables before running the models and did not find any.

  25. 25.

    For our exploratory case studies, we sought to focus on areas in which donors have a choice to move their funds to another charity working in broadly the same area. Donors in Washington State have sufficient choice regarding charities from which to choose in each mission area. For example, of the Washington State nonprofits listed on Charity Navigator, 14 organizations are dedicated to the environment, 11 to education, and 16 to the arts.

  26. 26.

    We also ran our models with dichotomized dependent variables, i.e., the dependent variable is coded as 1 if ratings increase and 0 if ratings did not change or decreased (and vice versa). These models also did not support the hypothesis that changes in ratings are associated with changes in primary revenue or donations.

  27. 27.

    See North, Scott and Jackson Holtz. May 17, 2009. “Pasado’s Safe Haven: Charity is a force for animals but critics question tactics, finances,” and May 27, 2009. “Pasado’s vows fight, faces new questions.” Heraldnet.com: Snohomish County’s Online News Source.

  28. 28.

    In addition to information problems, there might be path dependencies in donation decisions. In exploring whether government subsidies crowd out provide giving, Horne et al. (2005) report that donors often do not know how much government subsidy a given non-profit receives, and only a few anticipate changing their donation decisions even when provided with such information.

  29. 29.

    We are not suggesting that citizens do not follow any ratings. Students often carefully follow the rankings of the university they are applying to (Espeland and Sauder 2007). Thus, it is important to appreciate the scope conditions of our argument.

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Correspondence to Aseem Prakash.

Appendices

Appendix 1: Rating Criteria

Charity Navigator rates organizations by evaluating their organizational efficiency and their organizational capacity.

Organizational Efficiency has five broad components: program expenses, administrative expenses, fundraising expenses, fundraising efficiency, and deficit adjustment. These categories are calculated as follows:

  1. 1.

    Program Expenses: program expenses divided by total functional expenses.

  2. 2.

    Administrative Expenses: compare administrative expenses to total functional expenses.

  3. 3.

    Fundraising Expenses: compare fundraising expenses with the charity’s overall spending.

  4. 4.

    Fundraising Efficiency: determined by calculating how much each charity spends to generate $1 in charitable contributions.

  5. 5.

    Deficit Adjustment: when a charity runs a combined deficit over time, the efficiency score is adjusted downward.

If a charity spends less than a third of its budget on the programs and services it exists to provide, it is automatically given a score of zero for organizational efficiency.

Organizational Capacity has three broad components: primary revenue growth, program expenses growth, and working capital ratio, which Charity Navigator defines as follows:

  1. 1.

    Primary Revenue Growth: increasing contributions from corporations, foundations, individuals, and government grants; program service revenue, contracts and fees; and revenue from membership dues and fees.

  2. 2.

    Program Expenses Growth: growing programs and services.

  3. 3.

    Working Capital Ratio: reserves of liquid assets; includes cash, savings, accounts receivable, grants receivable, pledges receivable, investments in securities, accounts payable, accrued expenses, and grants payable; determined by how long a charity could sustain its current programs without generating new revenue; organizations with $250 million or more in working capital automatically receive full points in this category.

Both primary revenue growth and program expense growth are analyzed over the three to five most recent fiscal years. The overall rating combines the charity’s performance in both efficiency and capacity. The final rating is also in part determined by comparing the individual charity’s performance with the performances of similar charities. Further explanation of the methodology behind the ratings can be found on Charity Navigator’s website (www.charitynavigator.org) under “Methodology.”

Appendix 2: Model Variables

All of our data is taken from the Charity Navigator website. Charity Navigator derives its data from the IRS Form 990 s that tax-exempt nonprofits file.

Dependent Variables

Changes in primary revenue: Includes contributions, program services, and membership fees. We subtract 2006 primary revenue from 2007 primary revenue and divide the total by primary revenue in 2006.

Changes in contributions: We subtract 2006 contributions from 2007 contributions and, in order to account for differences in organizational size, divide the total by 2006 contributions.

Independent Variables

Charity Navigator Ratings: A combination of the Organizational Efficiency and Organizational Capacity ratings.

  • Organizational Efficiency:

    • Program Expenses: divides program expenses by total functional expenses.

    • Administrative Expenses: compares administrative expenses to total functional expenses.

    • Fundraising Expenses: compares fundraising expenses with the charity’s overall spending.

    • Fundraising Efficiency: determined by calculating how much each charity spends to generate $1 in charitable contributions.

    • Deficit Adjustment: when a charity runs a combined deficit over time, the efficiency score is adjusted downward.

    • If a charity spends less than a third of its budget on the programs and services it exists to provide, it is automatically given a score of zero for organizational efficiency.

  • Organizational Capacity:

    • Primary Revenue Growth: increasing contributions from corporations, foundations, individuals, and government grants; program service revenue, contracts and fees; and revenue from membership dues and fees.

    • Program Expenses Growth: growing programs and services.

    • Working Capital Ratio: reserves of liquid assets; determined by how long a charity could sustain its current programs without generating new revenue; includes cash, savings, accounts receivable, grants receivable, pledges receivable, investments in securities, accounts payable, accrued expenses, and grants payable; organizations with $250 million or more in working capital automatically receive full points in this category.

Changes in Fundraising Expenses: We subtract 2005 fundraising expenses from 2006 fundraising expenses and divide the total by 2005 fundraising expenses.

Net Assets 2005: Calculated by subtracting 2005 liabilities from 2005 assets and taking the log of the resulting value.

Longevity: Calculated by subtracting the year founded from 2006.

Scope: Coded 0 if the organization focuses on local outreach (city, state, or immediate region) and 1 if the organization focuses on national and international outreach.

Humanitarian: Coded1 if the organization conducts humanitarian work and 0 if the organization conducts non-humanitarian work.

Religious: Coded 1 if the organization has religious ties and 0 if it does not.

Animal: Coded 1 if the organization focuses on helping animal or training animals for disability services and 0 if it does not.

Policy: Coded 1 if the organization includes influencing public policy in its mission and 0 if it does not.

Art: Coded 1 if the organizations mission focuses on the arts and 0 if it does not.

Environment: Coded 1 if the organization’s mission is primarily focused on environmental issues and 0 if it is not.

Education: Coded 1 if the organization’s primary mission is to provide education and 0 if it is not.

Appendix 3: Case Selection

Table 3

Appendix 4: Descriptive statistics

Table 4

Interview Questions

  • What do you know about nonprofit ratings systems and are you familiar with Charity Navigator?

  • Do you know what the current rating for your organization is on Charity Navigator or any other nonprofit rating system?

  • Does your organization systematically track ratings?

  • Have the changes in your ratings over the past few years affected your organization, and if so, how? Do negative ratings harm donations? Do positive ratings improve donations?

  • Has your organization made changes based on the nonprofit ratings? If so, what kind?

  • What influence do nonprofit ratings systems have on your donors? Do they impact your reputation among donors?

  • What impact do you think they have on donors to other types of organizations?

  • Which factors motivate your donors to give?

  • In what ways does the reputation of your organization in the community impact your organization?

  • How does your organization seek to differentiate itself to donors?

  • Do you think the ratings are accurate and fair?

  • What information would ratings ideally convey?

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Szper, R., Prakash, A. Charity Watchdogs and the Limits of Information-Based Regulation. Voluntas 22, 112–141 (2011). https://doi.org/10.1007/s11266-010-9156-2

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Keywords

  • Charity watchdogs
  • Accountability