A Nonprofit Financial Transparency Rating System

Mark Bane, the Chairman of the Orthodox Union Board of
Governors, wrote an article in the current issue of Jewish
Action entitled “The Financial Restructuring of the American
Orthodox Community.” In the article Bane states that many
Jewish nonprofits remain “oblivious to the bleak new economic
realities.” If corporate CEOs failed to respond to these new
realities, their actions would constitute a breach of fiduciary
duty to shareholders and creditors. Nonprofit leaders do not
have these fiduciary responsibilities, but their failure to
respond to the crisis indicates that they are not acting in a
responsible manner in the allocation of the Jewish community’s
limited resources.

During a credit crunch, lenders to business demand greater
transparency and accountability. Nonprofit donors are the
equivalent to lenders to business and they will also demand
increased financial transparency and greater accountability of
how their dollars are being used.

These demands, rather than being problematic, are actually an
opportunity for well managed nonprofits. Bane stated that
“…significant donors are likely to be even more generous when
they observe their money being used in a responsible manner.”

What should nonprofits do to better respond to donors’ growing demands for additional financial information? Bane proposed that nonprofits should have a uniform standard for reporting their financial information.

Following is a possible uniform standard for reporting financial information that would allow donors to compare the transparency of different nonprofits. This system is similar to the donor friendly four star system used by Charity Navigator for evaluating nonprofit efficiency and capacity. For each parameter provided on the nonprofit’s website, the nonprofit would receive one star. A nonprofit that provided each of the following financial parameters on its website would receive a six star rating.

Provided on nonprofit’s website:
1) The nonprofit’s Charity Navigator rating
2) A pie-chart breakdown of the nonprofit’s expenses
3) The nonprofits most recently filed 990 tax return
4) The nonprofit’s annual report
5) The nonprofit’s audited financial statement
6) The nonprofit’s investment philosophy

This transparency system would allow a donor to conclude that a
nonprofit with a five star rating is more transparent, and acting more
responsibly, than a nonprofit with a three star rating. Bane believes that not only would this system help the donor, but it would help the well managed nonprofit as donors are more likely to be more generous with the more transparent nonprofit.