The following is a conversation with Michael Thatcher and Elijah Goldberg of Charity Navigator, and Denver Frederick, the Host of The Business of Giving.
Denver: Charity Navigator, the world’s largest evaluator of nonprofits has acquired ImpactMatters, a start-up that applies rigorous methodology to assess nonprofit impact. That announcement, issued on October 14, ushered in a new era for how donors will go about their giving. And here to discuss that with us is Michael Thatcher, the CEO of Charity Navigator, and Elijah Goldberg, the Co-Founder of ImpactMatters, and who is now serving as the Vice President of Impact Ratings for Charity Navigator.
Welcome to The Business of Giving, Michael and Elijah!
Michael: Thanks for having us, Denver.
Elijah: Thank you so much.
Denver: Let me begin with you, Michael, and that is to ask you: How did this all come about?
Michael: It’s a great question, and I think it’s been a long, slow but interesting process and not necessarily linear. Elijah and I met with Dean Karlan back, I want to say, 2016 in a coffee shop on the Upper West Side, and it was really a meet-and-greet. I was still a relatively new CEO at Charity Navigator. I was wanting to get to know who else was doing evaluation. Charity Navigator has been aspiring to take on impact for close to a decade. It was one of the things that brought me to the organization, and I wanted to hear what other people were doing.
We had had an attempt with the results reporting or what was called Charity Navigator 3.0 that didn’t succeed. And so, we were in a retrenching, new leadership really wanted to get a landscape analysis. And so, we met in 2016, started talking. I remember even saying, “Is there a way for Charity Navigator to be an on-ramp for some of the work that ImpactMatters was doing?” I don’t know if you remember that, Elijah, but it was kind of this…and also, ImpactMatters was doing a fairly—it was a different set of evaluations. It was more of an impact audit than what the current methodology is.
And through that conversation…it was a beginning. We then in 2017 started looking at how do we work with the existing data that’s in the field. And so, we began what we called our impact data experiment where we brought in data from GuideStar at the time, now Candid; GlobalGiving; and Classy. And in that first year, we started publishing results information for about 2,500 nonprofits. Dean Karlan, now at Northwestern, was the person that helped us with the analysis of that data to see how it affected donor behavior. In the second year of that experiment, we expanded significantly. We went to about 30,000 nonprofits, and in that second group, we also brought in ImpactMatters’ data.
And so, the relationship continued and the back and forth and—
Michael: — how do we get to scale, but also how do we bring in that methodology? And so, we’ve had a series of longer conversations. I guess it was November, December of last year, Elijah and I met in the city and had a conversation about joining forces. And then we got a little bit distracted—everything got really changed with the pandemic, and so that sure slowed things down. But following those discussions, we each went to our respective boards and tried to see how we could make it work. And super happy to say that it is live–
Denver: Here we are!
Michael: — and we’ve got impact data on our site for the first time in the history of Charity Navigator, so we’re very excited.
Denver: Fantastic. And what was the driving force for ImpactMatters, Elijah, to join forces with Charity Navigator?
Elijah: We’ve always faced two challenges. Challenge number one is: Can we produce a useful amount of impact information on nonprofits that’s of high enough quality to guide donations in a good way? And we’ve spent the last several years trying to crack that nut in different ways. So, as Michael mentioned, we started with impact audits for the first couple of years, which were a very high-engagement, high-touch relationship with nonprofits and foundations to understand their impact. And then we went successively to lighter touch, faster approaches to try and get that impact information.
Last year, we released 1,000 ratings or so, and that was our first big tranche of ratings at once. But at the time, we realized: Ratings are not enough. We need an audience. We need somebody to actually be using those so those ratings would be useful, and we didn’t have one. So we were looking around for different potential partners. Charity Navigator has always been at the top of our list because of their audience, and we decided to approach them and see what would happen.
Denver: There you go! The answer is eyeballs; that’s what you were looking for.
Denver: This union was helped along, Michael, through the support of the Bill & Melinda Gates Foundation. Tell us about that and their interest in this issue.
Michael: So we’ve been supported by the Bill & Melinda Gates Foundation for a number of years now, and primarily with the focus of expanding our ratings to…they have an initiative which is Greater Giving by All, which is looking to increase giving and increase impactful giving by all Americans. Charity Navigator is in that sweet spot of really being the interface to what I would call the consumer or the consumer-donor, or the average American giver.
What’s nice about working with the foundation and receiving grants from the foundation is you also engage with them, and you get counselling. It’s not just a check; it’s actually discussions. And they’ve been very interested in our desire to partner with others in the sector, and they, I think it’s fair to say, are in favor of consolidation and simplification so that the journey for both the nonprofit and the donor is simplified and improved. And so, they saw this as just beneficial and were willing to support it and helped us with the legal fees, and figuring out…it sounds simple, but it’s not.
Denver: Oh, I know. I know.
Michael: So covering some of those fees and the marketing and then just onboarding the team. Right now, there’s also the integration of the two teams and making that all work.
Denver: Yes, the whole backbone effort that’s required to make something like this happen. I know they had previously supported both of your organizations prior to this merger. And this merger, Michael, is just one of the things you’ve been doing to increase your impact. This past summer, you unveiled your expanded Encompass System. Tell us about that.
Michael: Encompass was almost necessary. We’ve had the Star system that’s been around now for almost 20 years, and it has a fairly rigid criteria for evaluation in that these are the larger nonprofits. They’ve got seven years of 990 filing or the tax filing. They’re over $1 million in revenue, and are limited to organizations that are primarily donor-supported.
We also had data in our database that’s from all of the e-file data that was coming from nonprofits. In fact, there are about 350,000 nonprofit profiles that we could make sense of. We didn’t necessarily have continuous data for a few years on that 350,000. And so, what we wanted was a system that we could, in the spirit of agile software development, that we could evolve and iterate on very rapidly to build out a much more holistic view of the nonprofit.
And so the Encompass Rating System launched in late July with 150,000 new evaluations by Charity Navigator, purely automated, from the tax filings. Encompass is set up in four Beacons: You have a Finance & Accountability Beacon; you have an Impact & Results Beacon; you have a Leadership & Adaptability Beacon; and then finally, Culture & Community.
What we did in July was launch with the Finance & Accountability, which is very similar metrics to the Star rating, a subset of those that we could fully automate. And then with the launch on October 15, we lit up the Impact & Results Beacon with the information from ImpactMatters merged in with the Finance & Accountability Beacon where we had it. And then we’re going to be working on other Beacons going forward.
So this is a long answer, but it’s a fast-moving system that’s going to iterate. And what it also means is that we have two systems in place right now. So we will at some point, probably in 18 to 24 months, bring the two systems together.
Denver: Measuring impact can be difficult and elusive, but you have a pretty novel methodology, Elijah. Tell us how you go about that work.
Elijah: I think it’s novel in some ways and then importantly, it’s not novel in other ways. We are building off of a tradition, a social science tradition that’s been around for many decades at this point about how to understand how one thing changes another, how one social program affects the lives of people. And so, I think what we’ve figured out is how do we take what is typically a very heavy process that takes years of data collection, often years of analysis, large amounts of staff and so forth, and actually take that and put it into a very efficient and fast-moving process.
And there’s a trade-off there. We’re not at the quality of an MDRC 3-year cost-effectiveness review, but what we are getting is a much larger slice of impact data, a much larger slice of cost-effectiveness data than we have had traditionally.
Denver: Are you able to automate a lot of this? I know it’s very labor-intensive compared to finance and accounting. When you do an impact, there’s a lot of labor in that. I’m just curious as to whether an automation can come into play at all.
Elijah: Yes. We obviously put it through spreadsheets that do a lot of formulas for us and so forth. So that part has been automated. I think that the question for us moving forward is whether we can automate the two big labor components.
One is, we probably can’t completely automate, but can we speed up the process of developing methodologies for new types of programs? So that’s really one of the critical time barriers as we know how to do, say, food banks. We know how to do emergency shelters. Do we know how to do long-term support of housing? No. We can figure it out, but it takes weeks of an analyst’s time to go in and understand that and come up with a methodology. So how can we do that more and more quickly so we can expand to a larger slice of the sector? So that’s one part that I think we’re hoping to speed up.
The other is the actual data collection and getting data in the right format and into the formulas, and that’s where a lot of the analysts’ time comes in now, is actually going through annual reports and 990s and pulling out that data. So we’re hoping that nonprofits will actually provide that data in the format we need. And if they’re able to do that, then we’re going to be able to do this a lot more quickly.
Denver: And currently, Elijah, what causes are you measuring the impact of, and how many charities does that encompass?
Elijah: So we have a coverage of about eight causes. So poverty, climate change, homelessness, food — let’s see if I can get them all — health, veterans, one or two others.
Denver: Usually people get six or seven out of eight. They never get them all.
Elijah: One or two important others. But I think that for those, we have about 1,100. The real challenge we face is that the first three causes or so, which were education and looking at scholarships, food distribution, and homelessness, we had a lot of nonprofits that had a lot of data. So for each of those, we’ve got about 300 ratings out of them because they all report basically the same thing and there are just a lot of groups out there that do that work.
Now, as we go, each additional type of program that we look at adds maybe another 50 or so programs of nonprofits. So it’s a diminishing margin for returns.
Denver: I got you. So, Michael, when you’re combining the work of Charity Navigator and ImpactMatters when you’re rating the charity, how are you going to weigh the factors?
Michael: It’s a great question. It’s I think one of these things that we made a choice for the initial release, and we’re going to be observing that, which is basically we’re scoring this as 60% of the score is coming from the Impact & Results Beacon, and then 40% coming from the Finance & Accountability.
Michael: The way we got to that, and the way we’ve…we have in the evolution of the Encompass system, we have a Consultative Council of Nonprofit Leaders, which is a group of about 25 leaders from a very diverse set in all senses of the word, “diverse” across the sector and the nation. We have an expert group on ratings, which is also weighing in on that, and then we do a fair amount of surveying of both the nonprofits and the donors. And what we’re trying to do is we’re trying to move the dial towards a focus on Impact & Results, but we’re also trying to do that in a way that respects what people have been coming to Charity Navigator for over the years.
…we’re going to have to come up with a system that will be the Charity Navigator, what we believe is our best interpretation of how the rating should be. But we’re trying to make this so that if somebody cares a lot more about one element or one particular area, or wants to filter on that, they will have that choice.
Michael: You can’t just flip a light switch. There’s a process. As we bring on new metrics, each time, there’s going to be a series of questions on that. And I think ultimately, we’re going to have to come up with a system that will be the Charity Navigator, what we believe is our best interpretation of how the rating should be. But we’re trying to make this so that if somebody cares a lot more about one element or one particular area, or wants to filter on that, they will have that choice.
Denver: That’s great. You can customize your own ratings based on your own particular interest. That is fantastic.
Michael: Yes. Well, think about it. When people look at quarterly reports from for-profit organizations, you have analysts sometimes care more about market share than they do about revenue, depending on where the organization is and their cycle of growth or decline, for example.
Denver: Yes. Let me see the dividends. I care about dividends. Give me those, whatever it may be, so you can dial up what you’re really concerned about.
Michael: So assuming we can…that’s going to be tooling on the website and customization at a later date once we populated all the Beacons, but that’s very much our intention. It’s about giving you the data, and then you make an informed choice.
…there are donors out there that look for some form of credibility that’s not coming from the nonprofits’ individual claims. Having that independent evaluative seal of approval or trust indicator is significant.
Denver: Yes. And generally speaking, Michael, what’s the impact of charity ratings on giving?
Michael: I wish I had a really crisp number for you. But I think one of the things that we’re able to do is that we allow organizations to highlight themselves and differentiate themselves from others. We also provide third-party accreditation.
We had a nonprofit working in Haiti, Hope for Haiti. They let us know the other day, “We just got a significant gift from an organization purely based on the star rating that we have.” So there are donors out there that look for some form of credibility that’s not coming from the nonprofits’ individual claims. Having that independent evaluative seal of approval or trust indicator is significant. We’re working to get a cleaner data set on how to show the difference. The problem is we don’t actually have that number. It’s the nonprofits themselves that can tell you more effectively.
Denver: And just speaking for myself, if I can, it’s not having that validation, which is even more powerful. So if I see four or five stars, it may not influence me that much. But if I see one or two…I’m really influenced by that.
Michael: And just to stay on this point for one thing. Sometimes, you get the question: What keeps you awake at night? And one thing that still keeps me awake at night, but not as much as it used to, was hearing people say, “Oh, you know, I will only give to organizations that are rated by Charity Navigator.” And I was hearing that when we were rating 9,000 organizations out of 1.6 million. That made me feel pretty inadequate. And so, when you hear that, you realize people really do want that accreditation. And it is significant.
Denver: Thinking about what you said a moment ago, Elijah, do you think that this union with Charity Navigator is going to encourage more nonprofit organizations to share their data that you need to create impact scores?
Elijah: I think so. I’m almost certain it will. When we released the first Impact & Results rating, we launched a portal for nonprofits to start sharing that data and invited through a couple of emails and messages for folks to start doing that. We got a couple of hundred nonprofits already who have signed up and have actually submitted data to us. So I think the answer is yes. And that’s going to be a key metric for us over the next years — what rate can we set up as the continuous rate of nonprofit sharing data with us, and if it’s high enough, then I think we can really grow this.
Denver: Yes. And I’m sure, Elijah, that this is still a work in progress. But ultimately, when visitors come to the Charity Navigator website, what will they notice that is different?
Elijah: I think that we’re trying to do two things. One is we’re not trying to create a disruptive user experience. What we’ve built is integrated in. But I think the main thing that they’ll see is that when they come to a nonprofit’s profile that has gotten a rating, they’ll see in a pretty large font a statement of that nonprofit’s impact. So $1 provides clean water to two people for a year, or $100 boosts the income of a poor family in Zambia by $300, that sort of thing. So they’ll see a pretty clear articulation of: If they give money, what is going to actually change in people’s lives?
Denver: Michael, a main reason that mergers can be challenging sometimes is because the corporate cultures don’t mesh. And I realize these are not two huge organizations, but I was wondering if the question of workplace culture came up before the merger?
Michael: It’s an ongoing discussion. It came up before the merger, it came up during the merger, and it’s a live issue right now. This is commonly one of the areas where things don’t work out.
Michael: And so, figuring that out and actually building the right support for both the people coming in and those that are there is important. Think about it. Going back to your former question about what do people see when they come to the website now — they’re still going to see two systems, and you have two teams that built those systems that are in process of becoming a single unit. And that creates tension.
We have analysts at Charity Navigator that have been working on the Star system, and Elijah and the team are analysts in their own right. But the definition of the term analyst is significantly different in terms of what each team is doing. And so, bringing those together and doing that in a way that actually helps grow the greater…where one plus one equals three is essentially…that’s the arc, and that’s what we’re working towards.
Denver: Maybe each of you could share your thoughts on this, and I’ll start with you, Elijah. What was the role of the board in this merger? Your board.
Elijah: That’s a good question. We have a fantastic board. We’re very lucky to have a group of people who signed on very early on to shepherd this work, who are all experts in their own way and have worked on this for decades-plus, this question of trying to understand the impact of nonprofits and make better decisions based on that.
And so, they had grappled for years with us on trying to figure out how do we actually do the substance of this work, but every conversation, every board meeting we had, 90% of it was how do we do the work, and everybody was like, “Oh. We’ve got to figure out how to get anybody to actually care about this.” So they’ve always been very attuned to this question of how do we scale this, and we’ve tried different things over the years and had different strategies and so forth.
And so, there wasn’t much convincing to do. It was a no-brainer. These are not people who are here for the name or the glory or anything like that. They already have their careers. They’re just here to see this happen, and this was a very clear way to do it. So they were in support. They’re skeptical people. They weren’t like “rah, rah, let’s go!” but they were in support.
Denver: They ask questions. That’s what boards are supposed to do. And they’re not easy questions.
Denver: How about your board, Michael?
Michael: We have significantly different boards, and also I love the board at Charity Navigator. Actually, now, it’s a fairly large board. There are 20 people on the board. There’s a sub-committee of the board that we created a couple of years ago to look at affiliations and partnerships, and we call this an expert group. That group was instrumental in actually going through the process. We had some joint interviews. Once Elijah and I had actually reached a…sort of said, “Hey, let’s explore this further,” there was immediately a connecting of the two boards at that point.
And so, I don’t think you can do something like this without the board. I also think, in our case, the board was very concerned about making sure the cultures work and making sure that we can actually make sense of this and go forward. But there’s huge excitement that here, we were finally…we were getting to a place where were going to have impact in what we’ve been wanting to do, and we were bringing it in from a really great group of people. So, a big part of the process.
I think one of the things is this is such a huge opportunity to tell your story about the impact you’re making in the world.
Denver: And with this terrible pandemic, we’re going to see a lot more nonprofits merging in the coming days. This is going to be a fact of life.
From this experience, do either of you have any advice or admonitions to them when they go into this process?
Michael: I’m happy to go on that. I think one of the things that…and this is actually very relevant to both sets of ratings at Charity Navigator right now, is that one thing is that for many organizations, their financial health has been massively impacted.
Denver: Yes, it has.
Michael: And we’ve done some surveys where we’re seeing a huge reduction in program, inability to fundraise in ways that they had brought in their primary revenue for the year — the galas, the events where there were people-centric events. I think one of the things is this is such a huge opportunity to tell your story about the impact you’re making in the world.
And then the other piece and this fits into something that we’re working on with the Leadership & Adaptability Beacon – How did you pivot? What did you do? What was your response to the pandemic, given that it may have completely upset or, in some cases, eradicated your ability to function? And so, what was it? What was it that you did? Because I think donors are going to want to see that. They’re going to want to hear how you did it. They’re going to understand that your financials have been compromised.
And we’re also working on a process right now to essentially take into account for the financial ratings, that essentially, you’ve… look, last year or the 12-month cycle that we’re in right now, 2020, has been massively impacted. And so, to give that too much weight makes no sense.
Denver: Right. You’re going to be a little bit easier on the reserves than you would have been a couple years ago. And Elijah, your thoughts on these mergers and what people should be keeping in mind as they go down that road?
Elijah: Yes. This is a little bit of a tangent, but I think it’s worth saying: Mergers are something that’s been talked about in the sector a lot in the last decade or two decades, and I think there are some critiques out there about how it’s the influence of the MBAs filtering into the sector, and we need to get more efficient and so forth. I guess I would just say that I think…I’m sure you’ve heard of the overhead myth, this idea that…
…we have this myth that nonprofits are not effective on average, that they’re not actually getting their jobs done… And I think one of the things that’s been very interesting about working with ImpactMatters over the last couple of years is that you look at the data itself, and that’s just not true. Most nonprofits are doing a really good job at achieving their mission, and they’re incredibly efficient at delivering goods…
Denver: Oh, yes. Michael and I have had some nice conversations about it, as a matter of fact, in the past.
Elijah: There you go. So I think that there’s a similar effectiveness myth in the sector, which is that we have this myth that nonprofits are not effective on average, that they’re not actually getting their jobs done, that they’re…and so forth. And I think one of the things that’s been very interesting about working with ImpactMatters over the last couple of years is that you look at the data itself, and that’s just not true. Most nonprofits are doing a really good job at achieving their mission, and they’re incredibly efficient at delivering goods. Now, there is a small percentage that are not, but that’s 5%. That’s a very small tranche of the sector that’s not actually doing a good job.
So I think that a lot of the…I’m not saying. I’m not against mergers. Often, mergers are out of financial necessity and so forth, but I think that often, they’re put up as a solution to this potentially fictitious problem that the sector is inefficient as it is. And I don’t know. I don’t see…look, maybe it’s not, but I don’t see the data that’s it’s not. The data that I see is that groups are doing a really good job at achieving their mission by and large.
Denver: Yes. That’s good to hear. Finally, Michael. We have Encompass, and now joining forces with ImpactMatters, what is your number one objective for this coming year, and what else might you be thinking of?
Michael: I think the number one objective is…we launched the Encompass rating system at the end of July with 150 new evaluations. We’ve brought ImpactMatters into Charity Navigator and launched the first-ever Impact & Results scores for 700 nonprofits. Closing that gap between 700 and 150,000, that’s going to take a lot of work, and I think that’s a key focus for us.
There is an additional focus which is we have this new system which has four Beacons to it, and so it’s populating those Beacons, and it’s getting some initial data points within those respective areas. So it’s about growing the depth of the ratings so that we’re really meeting the needs of both the nonprofits and the donors who support them.
Denver: And Elijah, tell us about your November 18 virtual event, and why people who are watching this now should definitely join?
Elijah: That’s a nice pitch for us. So we’re going to be talking. It’s going to be me and Stephen, and Victoria from Gates Foundation, and Kanika who is from Evidence Action, which is a nonprofit that is incredibly effective at doing what they do. I’ll give a little pitch for them. They provide clean water for one person per year for about 50 cents, which is very good.
Denver: Pretty good. I find that effective.
Elijah: I would say that’s effective. They could use some money.
So we’re basically going to be talking about: What does this mean for nonprofits? How can nonprofits participate? How can they get data to receive a rating? But then also more broadly: How does impact influence the various things that nonprofits care about? And I think a lot of that conversation is going to be about fundraising because I think…
Denver: Top of mind.
Elijah: We’re very high-minded in what we do but really, it’s about raising money for these causes and that’s what’s on their mind and what we need to focus on.
Denver: The website is charitynavigator.org. Always a place worth visiting, and now more than ever, and I’m sure they would appreciate your financial support to help them usher in this new era in philanthropy, which you can do while you’re on the site. I want to thank you both so much for being here. It was a real delight to have you on the program.
Elijah: Thank you so much.
Michael: Thank you, Denver. It was a pleasure.
Listen to more The Business of Giving episodes for free here. Subscribe to our podcast channel on Spotify to get notified of new episodes. You can also follow us on Twitter, Instagram, and on Facebook.