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Charity Watchdog Launches New Rating System

Charity Navigator unveiled the first of four pillars upon which its new rating system is built, expanding the number of charities rated almost 20-fold, from 9,000 to 160,000 and including smaller organizations for the first time.

The Encompass Rating System analyzes nonprofit performance based on four key indicators: finance and accountability, impact and results, leadership and adaptability, and culture and community. The finance and accountability indicator was released last week and assesses an organization’s financial health, including measures of stability, efficiency, and sustainability.

The remaining three indicators are expected to be rolled out every six months during the next two years:

  • Impact and results will evaluate available data on the results that a nonprofit achieves toward delivering on its stated mission;
  • Leadership and adaptability will provide an “assessment of leadership capacity, strategic planning, and the ability to readily innovate or respond to changes in constituent demand/need to achieve mission.”
  • Culture and community will provide an “assessment of people operations/HR, connectedness and engagement with constituents and communities served, reputation, and Diversity, Equity and Inclusion (DEI) measures.”

The Encompass Rating System uses a newly-implemented technology stack to automatically analyze tax forms of 501(c)(3) organizations, allowing the tool to expand the number of nonprofits rated. It requires three years of electronically-filed Form 990s, allowing more recently established, smaller nonprofits to receive a rating for the first time. The four-star rating system Charity Navigator has used since its inception 2001 requires seven years of financials. Organizations with a star rating will retain their rating and not be impacted by the new system.

Encompass is based on a numerical score out of 100 and will be in addition to the existing four-star rating system. Scores of 75 or better will be signified with a “Give with Confidence” wordmark, similar to how Charity Navigator recommends 3- and 4-star rated charities. 

The finance and accountability beacon will employ five metrics:

  • Program expense ratio, worth 25 points, would be calculated over the three most recent fiscal years;
  • Independent audit or financial review, 25 points, will require organizations with revenue of more than $1 million to complete an independent audit while those between $250,000 and $1 million would be expected to have a formal audit, review or compilation completed. This metric would not be applicable to organizations with less than $250,000 in revenue.
  • Board composition, 25 points, would require an organization to have at least three board members, with more than half identified on the Form 990 as independent.
  • Liabilities to assets percentage, 15 points, would be determined by total liabilities as a percentage of total assets, calculated for the most recent fiscal year end.
  • A website must be listed on the organization’s Form 990 as a transparency and accountability measure, 10 points.

“The future of giving is data. By engaging a more technology-forward approach, we welcome an unparalleled amount of nonprofits to the rating system at this launch, including many small and recently established nonprofits that are doing extraordinary work,” said Michael Thatcher, CEO of Charity Navigator since 2015.

The Saddle Brook, N.J.-based charity reports more than $7 million has been donated to nonprofits through its Gift Basket since March. That’s a 200-percent increase compared with the same time period in 2019, likely related to the coronavirus pandemic (COVID-19) and social justice issues raised over the past few months.

The launch of the Encompass Rating System is made possible by donors and funders, including the Bill & Melinda Gates Foundation, the John D. and Catherine T. MacArthur Foundation, and the Fidelity Charitable Trustees’ Initiative, a grantmaking program of Fidelity Charitable separate from its donor-advised fund program.

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