Magazine article Risk Management

Boards and Nonprofit Risk Management

Magazine article Risk Management

Boards and Nonprofit Risk Management

Article excerpt

In an article published by the American Institute for Certified Public Accountants, Dr. Mark Beasley noted, "some may naively conclude that more effective risk oversight is a corporate issue that isn't relevant to not-for-profits. That perspective is dangerously wrong." Why, then, do so many board members routinely commit their time and reputations to nonprofits without asking about risk management? It often comes down to seven factors:

1. Board members lack awareness of risk management.

Although most large for-profit organizations have risk management programs, many smaller organizations use ad hoc risk management efforts--or none at all. As a result, some board members lack familiarity with contemporary risk management. Many do not know what it does, why it is necessary, or how to begin. In other words, they don't know what they don't know. As fiduciaries of their non-profits, however, the board has a responsibility to become aware of the threats and opportunities facing their organization, and to learn about how the organization addresses these risks.

2. Board members believe insurance is enough.

Some know enough about risk to ask whether the nonprofit has directors' and officers' liability insurance. If it does, they believe they and the organization are protected. But insurance is not a substitute for risk management. A D&O policy may protect a director from personal liability, but it does little to directly protect the nonprofit. Furthermore, even if the organization has other policies for errors or accidents, insurance rarely compensates for an entire loss and cannot compensate for the reputational harm that can flow from missteps. Nor does insurance increase a board's awareness of the threats and opportunities facing the nonprofit. Insurance merely shifts certain identified risks from one person to another.

3. Board members are not sufficiently engaged in oversight.

Some board members do not know enough about the nonprofit's operations to ask informed questions about the threats and opportunities it faces. They may also feel inhibited by this lack of awareness and remain silent rather than confess ignorance. Nevertheless, board members are obligated to know enough about an organization to fulfill their basic duties of care.

4. They believe cost considerations prevent the adoption of risk management initiatives.

Understanding that their nonprofit is strapped for resources and always seeking new funds, board members may believe there is no room in the budget for another program, especially one focused on infrastructure rather than end-user services. But risk management does not have to cost very much. In fact, a risk management program can be started with very little expenditure of time or money.

5. They believe programming or fundraising come first.

Boards often believe that programming activities or fundraising must always take priority over efforts that may not immediately bolster the organization's resources. It is not an "either/or" proposition, however. Risk management enhances programs and fundraising and, through the assessment of threats and opportunities across various functional areas, may identify even more important organizational priorities.

6. Board members believe risk management is only for for-profit companies.

This assumption recalls the "dangerously wrong" perspective Beasley described. Risk management is actually even more important for nonprofits than profit-seeking enterprises. …

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