PART III RISK FINANCING FOR NONPROFITS 249 Chapter 13 Fundamental Objectives and Alternatives
Chapter 2 Chapter 2
ment that the organization cannot afford to focus on risk management and so they abandon their prior commitment.
One simple approach to examining the context for risk management in a nonprofit is to consider a series of questions about the circumstances fac- ing the organization. For example:
■ What factors, events, or circumstances are fueling the nonprofit’s mo- tivation to focus on risk management?
■ What has been the nonprofit’s past experience, if any, with risk man- agement activities?
■ What level of support for risk management has been expressed by the nonprofit’s senior management and board of directors?
■ What barriers or circumstances might make it difficult to implement new risk management policies or practices?
The answers to these questions will provide contextual background for the remaining steps in the risk management process, allowing the planning group to avoid the pitfalls that result when contextual issues are ignored.
A more thorough approach to examining the context for risk manage- ment activities is to look at various aspects of context for the nonprofit.
Contextual issues can generally be divided into three broad categories: risk management context, organizational context, and strategic context.
Risk Management Context
The risk management context for a nonprofit consists principally of the ob- jectives the nonprofit seeks to achieve by focusing its attention and re- sources on risk management. Some nonprofits approach the discipline of risk management intending to examine all facets of operations for hidden or misunderstood risks. These organizations aim to root out risk and do some- thing about it as quickly and efficiently as possible. Other nonprofits ap- proach the process by recognizing that the organization’s risks are dynamic and that by the time the leadership has a grasp on today’s risks, circum- stances will have evolved and new risks will be present. Groups with this perspective may decide to address one or more areas of concern within the organization, such as volunteer screening and supervision or facility security.
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Risk Management Objectives
Organization-wide scope Program specific actions
Long-term health Fixing problem
Long-term, continuous effort Short-term project
Only focus on accidents Upside and downside risks
A nonprofit’s objectives for its risk management program may differ from those of a similar organization with regard to the perspective or mo- tivation for the activity. Some see risk management as a way to improve the health of the organization, similar to beginning a moderate exercise program, while others focus on risk management to fix a problem. It is not unusual for a nonprofit that has been unsuccessful in defending a lawsuit al- leging negligence in the delivery of professional services to focus immedi- ately on what it can do to avoid a similar loss. The group may hire a consultant to examine its practices and recommend changes in program de- sign and supervision. When an organization takes a broader, long-term view and sees risk management as a path to a healthy future, it may have a harder time obtaining support from key personnel, who question the de- votion of time and resources to an effort when “nothing bad has ever hap- pened here.” When the commitment to risk management follows a painful and costly loss, it is easier to rally personnel around the risk management effort. The likelihood that the activity will enjoy support from key per- sonnel is another facet of the context for risk management and is generally considered a component of the organizational context.
The following questions may be helpful in uncovering the risk man- agement context for a nonprofit:
■ What goals does the nonprofit hope to achieve by implementing a risk management program?
■ Does the organization view risk management only as a way to counter or avoid downside risks or as a way to counter threats and increase mission-related opportunities?
■ Has the nonprofit ever faced a serious loss that threatened the organi- zation’s ability to continue? If so, were lessons from that experience translated into new policies or practices?
Organizational Context
The organizational context for risk management includes the available resources (human and financial) for risk management deliberations and strategy implementation, as well as the attitudes and capabilities of key personnel. If the board of directors believes that the nonprofit’s status as a charity makes it immune from suit and the resulting liability, it is unlikely to approve proposed changes in policy or operations proposed by the risk management committee or outside consultants. Furthermore, if the board or executive director believes that risk management begins and ends with the purchase of insurance, the risk management committee is likely to face opposition when it proposes a new screening process for volunteers or the purchase of new equipment for the recreation program.
Additional issues that create the organizational context for risk man- agement include the management structure and style of the nonprofit. A nonprofit that relies on consensus building as a tool for decision-making will be in the strongest position to benefit from the work of a risk man- agement committee consisting of paid staff, volunteers, and outside advi- sors. A nonprofit with a more traditional, top-down decision-making style may be better suited to the assignment of risk management responsibilities to a staff person who reports to the CFO or CEO.
The key to examining contextual issues is to uncover the factors, issues, dynamics, and conditions that will either threaten the realization of the program’s goals or support the effort. These positive, negative, and neutral factors should be considered as the committee or staff embark on the iden- tification of risks and development of strategies.
The following questions may be helpful in uncovering the organiza- tional context for a nonprofit:
■ What are board and staff views about the relevance of risk management to the organization’s health and viability?
■ How are critical decisions about the nonprofit’s operations typically made? Are most decisions made by senior management and communi-
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cated to those affected? Or are decisions frequently arrived at through bottom-up, consensus-building activities such as staff committees and informal brainstorming?
■ What personnel at the nonprofit are available to participate in risk management activities?
■ Does the nonprofit have trustworthy outside advisors (such as legal, fi- nancial, and insurance experts) who would be willing to participate in a risk management program by serving on a volunteer committee?
■ What is the organization’s experience with and perspective on insur- ance? Does it purchase as much coverage as it can afford? Does it strug- gle to purchase the insurance it believes it requires? Is there a staff member who has special expertise and experience with insurance issues?
Strategic Context
Strategic context includes the environment in which the nonprofit oper- ates, its economic circumstances, political pressures or considerations, regulatory requirements, legal requirements, and historical events. A non- profit’s strategic context also includes the desires and perceptions of stakeholders.
For example, a nonprofit may decide to undertake a risk management program in order to address its past failure to meet various regulatory or legal requirements. When the group discovers that its practice of awarding compensatory time to staff in lieu of time-and-a-half on an hour-for-hour basis is illegal, it begins a thorough review of its human resource practices and policies. The goal of the program is to bring the organization into compliance as quickly as possible. The urgency of this matter forms a back- drop for the risk management effort. There is no time to convene a risk management committee that includes volunteers; the effort must be coor- dinated by a full-time staff member who can devote her full attention to working with legal counsel until the matter is resolved. Unlike a risk man- agement effort whose results are “sold” to the staff, the result of this effort is likely to be a policy change that will be communicated in writing and in person to the nonprofit’s staff.
The following questions may be helpful in uncovering the strategic context for a nonprofit:
■ In what type of environment does the nonprofit exist: competitive?
collegial? Is there stiff competition for grant funds, competent staff, and other resources among organizations that provide similar services in the community?
■ What is the nonprofit’s history of compliance or noncompliance with regulatory and legal requirements?
■ Has the nonprofit faced significant claims or lawsuits in the past? What were the lasting effects, if any, of these losses?