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Managing Risk in Nonprofit Organizations

John Wiley & Sons

Chapter One

Every nonprofit organization takes risks as it goes about achieving the
mission established by the organization's founders. Yet managers in
the nonprofit world often bring a schizophrenic attitude about risk to their
work. While acknowledging the inherent risks in the nonprofit's mission,
from serving a vulnerable population, to using volunteers to deliver services,
to relying on the kindness of strangers for donations to meet payroll
and other expenses, managers often express their risk management goals as
focusing on eliminating or avoiding risk. To complicate matters, chapters on
risk management buried in nonprofit management texts often describe minimizing
or avoiding risk as the ideal without paying any attention to the inherent
and desirable risks that nonprofits must take to accomplish their
missions. An organization that designs its risk management activities solely
around the goal of minimizing or avoiding risk will missout on opportunities
to strengthen the organization's assets, to offer more meaningful services
to individuals or a wider community, and to attract a steadily growing
constituency of donors, supporters, and volunteers. Ironically, risk taking is
inherently positive: A nonprofit takes risks in order to achieve positive or
beneficial outcomes. Prospective volunteers may be more likely to view an
organization that takes bold risks, for example, through innovative service
delivery or working with a difficult or ignored client population-as a
desirable place in which to volunteer. This is particularly significant as
community-serving nonprofits compete for volunteers. Today's volunteer
may feel a greater attraction to a nonprofit that boldly takes risks in order
to address social conditions, such as poverty or homelessness.

The discipline or practice of risk management must compete for managerial
attention and resources with other important concerns, from strategic
planning to program evaluation to financial management and fund
development. Like strategic planning, risk management in the nonprofit
sector often involves groups of volunteers, in addition to paid staff, who
engage in a process of examining the organization's past experiences, future
prospects, and environment in order to reach decisions that will best propel
the organization toward a mission-centered future. Like financial management
and fund development, risk management activities cannot be
accomplished at an annual retreat and then shelved until the next all-hands
meeting. The risks facing a nonprofit and the strategies it chooses to address
priority risks require care throughout the year. Like the increasingly popular
discipline of program evaluation that seeks to determine the true effect
the nonprofit has in the community and incorporates this information into
program design and future services delivery, a risk management program
requires periodic adjustments to ensure its effectiveness. Unworkable and
ineffective strategies or those that are having unacceptable, undesired results
should be substantially changed or abandoned altogether.

Why Manage Risk in a Nonprofit?

With myriad pressures coming to bear on the CEO of a nonprofit and its
beleaguered and overworked staff, and with its governing board pressed
continually to focus on policy versus day-to-day management issues, why
devote any precious resources to risk management?

There are a number of reasons why risk management deserves the attention
of the governing board of a nonprofit, as well as that of its senior,
midlevel, and junior level staff and volunteers. These reasons include protecting
tangible and intangible assets the nonprofit requires to operate and
freeing up resources for community-serving activities. We discuss some of
the general reasons below.

Asset Stewardship

A nonprofit that has integrated risk management practices into its operations
is in the strongest possible position to prevent the unnecessary erosion
of core assets, such as property, income, and good will, or the departure of
or harm to its human resource assets, the human face of the nonprofit. For
example, a nonprofit that pays scant attention to the protection of its blank
check stock and accounts payable procedure may find that it is the victim
of embezzlement by a determined employee or volunteer. Funds that
would have been able to support educational programs for a vulnerable
population are lost to the organization. A nonprofit that suffers a similar
theft but has purchased crime coverage may find itself in a similar position
when it learns that its failure to seek criminal charges against the employee
voids coverage under the policy. The nonprofit's decision in this case stems
from its fear that criminal prosecution of a popular and community-minded
volunteer treasurer would bring disastrous negative publicity to the
nonprofit and ruin its chances of meeting the goal of an ongoing fundraising
campaign.

Achieving Public Accountability

The call for greater accountability in for-profit and nonprofit organizations
has never been greater. With new legislation adopted in response to the
corporate scandals of the early twenty-first century, experts predicting unprecedented
regulation of nonprofits in the years ahead believe that it is not
a question of if such regulation and scrutiny will occur, but when and how.
Nonprofit leaders have learned in recent years that the issue of accountability
is inextricably woven into every aspect of an organization's success.
Questions about the use of a nonprofit's charitable assets make it more difficult
to recruit volunteers, including board members; retain generous institutional
and individual donors; and attract competent staff. It is therefore
imperative that every nonprofit give thoughtful consideration to how it is
achieving accountability to key stakeholders and remaining faithful to the
organization's mission.

Attracting Stakeholders

A nonprofit organization cannot operate successfully without the sustained
support and participation of a wide array of stakeholders. Institutional supporters
and individual donors provide the funds the nonprofit needs to pay
operating expenses and deliver services. Paid and volunteer staff perform
the work of the organization, from providing direct service to clients to
public advocacy to fundraising and administrative activities. Members of
the community in which the nonprofit operates benefit from its services
and provide the support for the organization that enables it to compete for
financial resources and clients. When an organization is viewed as careless
or uncaring, support from its stakeholder network is certain to wane. A
nonprofit that seeks to fortify the support of stakeholders must take the
management of risk-both upside and downside risk-seriously.

Freeing Up Resources for Mission

When a nonprofit faces an accidental or intentional loss, it must devote resources
to replace the lost or damaged equipment or pay the victims of
harm resulting from its operations. In most instances, the cost of repairing
damaged equipment or compensating a victim exceeds the cost of preventive
measures. For example, when a faulty sprinkler head is triggered in a
nonprofit's administrative offices, the accumulated water causes irreparable
damage to a dozen CPUs sitting on the floor-a loss in excess of $25,000.
By comparison, the cost of plastic stands elevating the CPUs off the floor
would have been around $250. Because the organization did not purchase
the stands, it must reallocate $25,000 in operating revenue to replace the
equipment. Even if the organization is adequately insured for this loss, the
cost is still significant. The nonprofit must devote numerous person-hours
to calculating the value of the loss, meeting with the insurance company's
adjuster, ordering new equipment, configuring the new equipment with
custom software, and replacing lost data from back-up tapes.

Staying True to Mission

No nonprofit operates for the express purpose of causing harm to persons
or property. When a nonprofit's operations and activities result in harm,
the outcome is antithetical to the mission of the organization. By directing
the attention of key personnel away from core service delivery or program
activities, the harm that results is also likely to slow down the nonprofit's
pursuit of its mission. A nonprofit that endeavors to stay true to its mission
is well served by a risk management program that helps managers predict
and evaluate future events and take actions in accordance with these predictions
and informed expectations.

Key Starting Points: Risk,
Uncertainty, and Loss

What Is Risk?

When asked to identify words that come to mind when they hear the term
risk, nonprofit managers often suggest terms such as hazard, harm, and danger.
There is a bias toward viewing risk in its pejorative sense. The traditional
discipline of risk management has heightened this bias by focusing
principally on losses resulting from accidents. Yet it is necessary to think
about risk in its broadest sense in order to effectively manage risk in a nonprofit.
Focusing only on the negative dimension of risk imposes unacceptable
limits on the ability of the nonprofit to consider a wide range of
possibilities in fulfilling its destiny.

To better reflect the positive and negative dimensions of risk in the
nonprofit sector, we offer the following definition of risk:

Risk is a measure of the possibility that the future may be surprisingly different
from what we expect.

A risk, therefore, is something for which there is a greater than zero but less
than 100 percent chance of its happening.

What Is Uncertainty?

Every nonprofit operates with continuing uncertainty-a lack of knowledge
about something. A youth-serving nonprofit may not know whether
any of its clients for a summer camping program have a propensity to violence.
A nonprofit advocacy group does not know whether one of its recent
hires will be able to program the organization's systems, a skill listed
on her resume. A mentoring program does not know whether the adult-child
pairing it has just identified will be the right match for the child.

Uncertainty is an important concept in the field of nonprofit risk management.
Managers must be prepared to make decisions in an environment
of uncertainty while working to reduce the degree of uncertainty associated
with a particular decision. For example, the youth-serving nonprofit
cannot eliminate the uncertainty that exists about the personalities and
likely behaviors of its summer campers, but it can design a screening
process that requires a recommendation from one adult who knows the
camper. The nonprofit advocacy group can reduce uncertainty by conducting
in-person interviews with prospective employees, checking at least
three professional references, and providing thoughtful, careful supervision
of new employees once they have joined the nonprofit's staff. A mentoring
program can reduce some of the uncertainty it faces by closely monitoring
the adult-child pairs, seeking feedback from both adult and child on
how the relationship is progressing, and prohibiting certain activities it
considers too risky during the first six months of the match.

What Is Loss?

A loss is damage to or destruction of an asset a nonprofit uses to achieve its
mission. Nonprofit assets typically fall into one of four broad categories:
people, property, income, and reputation. A loss could be damage or destruction
to facilities, equipment, supplies. A loss also could be an injury to
or the death of a participant, staff member, volunteer, or member of the
general public. A loss can also be the erosion of a nonprofit's reputation,
perhaps following public allegations of wrongdoing, such as misuse of
donor funds or client neglect. A nonprofit also sustains a loss when a large
foundation announces a change in its grant-making priorities and the intent
to discontinue its historical support for the nonprofit's operations.

Losses in the nonprofit sector can be gradual or sudden. When a funder
announces that it will slowly reduce the amount of funding it provides
to a nonprofit over a two-year period, the organization has some time to
cope with the gradual loss of core funding. When the nonprofit's executive
director arrives at the headquarters office one morning to discover that
all the organization's computers have been stolen, she must act in the face
of a sudden, unexpected loss. Losses may stem from accidents or intentional
acts. When the contractor refinishing the woodwork at the nonprofit's residential
treatment facility tosses a rag soaked in benzene into a cardboard
box and the resulting fire causes substantial damage to the facility, the nonprofit
has suffered an accidental property loss. When a part-time bookkeeper
embezzles $10,000 by writing and cashing a series of checks payable
to cash, the nonprofit suffers a loss stemming from an intentional act even
though the loss was a surprise to the nonprofit management.

The magnitude of a loss depends on a number of factors, including:

* Whether the organization has anticipated the possibility of the loss occurring and
taken steps to mitigate the loss. For example, in anticipation of a possible
fire at its headquarters building, an organization may install smoke detectors,
a fire alarm, and a sprinkler system (some may be required by
local building codes, whereas others may be installed as pure mitigation
measures). Although a malfunctioning sprinkler could also cause loss
under different circumstances, when it works as intended it can greatly
reduce the amount of damage from a fire. Another category of mitigation
is work the nonprofit does in advance of a loss to prepare its response.
For example, to prepare for allegations of wrongdoing or client
maltreatment, a nonprofit prepares a template press kit containing
background information on the nonprofit and a statement expressing
concerns for people who suffer harm when participating in the nonprofit's
programs. When a group of children is injured in a bus accident
while returning from an outing sponsored by the nonprofit, the media
materials are finalized and delivered to the media within two hours of
the accident. The story on the evening news includes the nonprofit's
statement of concern, which serves to bolster the nonprofit's reputation
as a caring community organization. A similar organization whose executive
director is vacationing in the Caribbean when the accident occurs
and therefore is unavailable for comment is the subject of critical
editorial coverage and faces a dramatic drop in enrollments for the upcoming
program year.

Continues...

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Excerpted from Managing Risk in Nonprofit Organizations
by Melanie L. Herman George L. Head Peggy M. Jackson Toni E. Fogarty
Copyright © 2003 by Melanie L. Herman, George L. Head, Peggy M. Jackson, Toni E. Fogarty.
Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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