Philanthropy January 21, 2010, 5:00PM EST

Philanthropy: Rethinking How to Give

A growing movement to review and rate charities on their real world results may give donors a better idea where they can do the most good

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When disaster strikes, as it has in Haiti, Americans dig into their pockets and give. While such generosity is unquestionably a good thing in a terrible time, few individuals do much research on the groups they've chosen to receive their money. The uncomfortable truth in philanthropy is that it's not easy to know whether the group you're giving to is particularly effective at what it does. With Americans giving more than $200 billion a year, that's a lot of ambiguity.

A growing movement to review and rate charities on their real world results could give individuals a far better idea of where their donations can do the most good. Moreover, it could guide nonprofits to focus on the programs that have the most impact and to jettison those that aren't working as well.

Charity Navigator, the largest nonprofit rater, is overhauling its rating system to look beyond financial measures and gauge effectiveness. Other online evaluative efforts include GiveWell, Philanthropedia, and GreatNonprofits. Their approaches vary, from crowdsourcing to research reports. In addition, GuideStar, which serves as a clearinghouse of information on nonprofits, has begun including some of these rating reports on its site. Two other initiatives, from Root Cause and Partners for Change Initiative, are working to get more and better rating information to financial advisers so they can help clients make giving decisions.

Not all the efforts are new, but they're starting to reach critical mass. "There is a mindset shift going on in philanthropy," says Sean Stannard-Stockton, chief executive of Tactical Philanthropy Advisors, a Burlingame (Calif.)-based advisory firm to high-net-worth donors. "People want to know that their money is actually making a difference." That's especially true in the current economic downturn: Donors have fewer funds to give, while charities need more cash to provide services to more people in need.

It may be smarter for donors to think about their giving as they would their investment portfolios. That means addressing the big questions first (what matters most to you?), then drilling down to the groups that have the most impact. "We as Americans like to do things immediately," says GuideStar President Robert Ottenhoff. But a more thoughtful way to give away money is to have a longer-term plan.

Figuring out a charity's effectiveness is not simple. A homeless shelter, international relief organization, or other philanthropy is not a business, and their social impact needs to be evaluated on different criteria than profit and loss. The true benefit of their programs may not be clear for years. "Social-impact assessment is the Holy Grail of people doing philanthropy and nonprofit work," says Laura Callanan, a philanthropy expert at McKinsey. "How do you know what works and why? And how do you know that money is making a difference in people's lives?"

If average Americans look to one place for advice on giving, it's Mahwah (N.J.)-based Charity Navigator. It gives ratings—going from zero to four stars—to nearly 5,500 charities, and its site gets some 4 million page views annually. Those ratings have focused largely on financial yardsticks. For instance, it has given charities high marks for low overhead, but research now shows that metric is not as helpful as others in evaluating a nonprofit's work.

So Charity Navigator—under the direction of Ken Berger, its executive director since June 2008—is devising a system that will still go from zero to four stars but will include measures of financial strength, accountability, and effectiveness. Berger says he is planning to roll out those ratings in the spring of 2011, with additional information appearing between now and then. "