Risk Culture and Risk Management in Philanthropy
May 15, 2017
Most for-profit companies and not-for-profit organizations have -- by necessity -- lived with the dueling cultures of risk-taking and risk-mitigation for years. Publicly traded companies are subject to myriad regulations governing the identification and disclosure of risk, and nonprofit organizations are subject to public scrutiny of their operations and finances. Missing from many of these discussions are foundations and other philanthropies where the discussion of risk has often been more academic than practical.
Enter the Open Road Alliance, the Rockefeller Foundation and Arabella Advisors who have recently published a white paper entitled, Risk Management for Philanthropy: A Toolkit. In it, the authors assert that there is a system-wide failure in practice that is diluting the impact of philanthropic dollars and potentially costing funders billions of dollars a year.
After surveying 200 donors and 200 nonprofit leaders, the authors found that risk management is absent as a common practice among funders and the topic of risk itself is often missing from the discussions between funders and grant recipients. Specifically, they found:
- Both funders and nonprofits report that one in five projects is negatively affected by unexpected events.
- However, only 17 percent of funders set aside funds for contingencies.
- Moreover, 76 percent of funders reported that they do not ask potential grant recipients about possible risks to the project during the application process, and grant recipients report that 87 percent of applications they complete do not ask for risk assessments.
In an effort to provide some guidance to both funders and nonprofits on the subject of risk, the sponsors convened a group of leaders from both philanthropies and nonprofit organizations to organize a list of practical suggestions for funders to consider.
The report defines risk as “the likelihood that an event will occur that will cause some type of undesirable effect.” It also defines the attributes of a “risk culture” as a funder’s appetite or tolerance for risk (high, medium or low), and “risk management” as the steps to prevent negative or harmful consequences in the face of existent risks.
For the former, it offers suggestions on how to define and describe your risk profile, determine the choices that you want to make, and integrate risk into your organizational culture. For the latter, it suggests ways of creating and incorporating risk management practices into your internal governance, budgeting processes and communications with grant recipients.
While much of this toolkit is purposefully “inside baseball,” as a funder I was reminded that frank discussions of risk are often missing from our conversations with nonprofit leaders, and our own application process – while focused on potential grant recipients being clear about their objectives and methods of measuring success for the project – is devoid of any specific questions about risk.
Accordingly, I found the following suggested questions as useful guides toward opening up these discussions with nonprofit leaders as well as providing a pathway for discussions with my own program staff about new projects and initiatives:
- Specify the top three risks you may encounter during the course of the project, the steps you will take to mitigate these risks, and how we (as the funder) could help.
- What kinds of events could happen to derail the intended impact of your project?
- What risks have you encountered implementing similar projects in the past, and how did you react/respond?
Lastly, the report reminds us that the most fundamental aspects of risk management lies within the funder-grant recipient relationship, and the primary barrier to successful risk management is the lack of transparency and trust between funders and nonprofits. A useful lesson for any type of organization and its stakeholders.
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