Magazine article Risk Management

Risk Management in the Nonprofit Sector

Magazine article Risk Management

Risk Management in the Nonprofit Sector

Article excerpt

The complexity and diversity of nonprofit organizations is often underestimated. Professionals from the corporate sector think of nonprofit activity as volunteering to coach an after-school sports program, or being a member of the neighborhood association or a nonprofit board. Such experience with nonprofit organizations provides a sampling of what these entities do, but the range of resources and risk is vast. With every institution unique--based on size, services provided and the clientele served--it is difficult to make any sweeping statements about risk and risk management when it comes to nonprofits.

Nonprofit Primer

In 1998, nearly 110 million Americans--more than 55 percent of the total U.S. adult population--volunteered their time and services to nonprofit organizations. The same year there were 27.7 million organizations in the United States, of which approximately 1.6 million were tax-exempt nonprofits recognized by the Internal Revenue Service. Of that number, 734,000 were charitable tax-exempt nonprofits, also known as 501(c)(3) entities, which were eligible to solicit and receive tax-deductible donations, and 354,000 were religious congregations.

The activities and programs in which nonprofits are involved have never been more complex. Many services that fall squarely on the shoulders of nonprofits across the country were at one time the responsibility of government entities. Such efforts as work-release programs for recently paroled offenders, welfare-to-work training, employment programs for single mothers, drug treatment and mental health services, safe and decent housing construction for poor families, and teenage pregnancy prevention are increasingly handled by community-based nonprofits. Nonprofits are tackling the most difficult social and economic issues facing the United States.

Risk, Risk Management and Nonprofits

Most nonprofits are experienced risk takers. They recognize that without taking bold risks they have no hope of reaching hard-to-serve client populations, recruiting armies of volunteers to deliver services, or raising enough money to meet operating expenses. Nonprofits welcome the challenges associated with meeting compelling community needs. Though risk taking is familiar to individual nonprofits, the discipline of risk management is, in many respects, still in its infancy in the nonprofit sector as a whole.

The ranks have grown, however, and the number of individuals who acknowledge today that they serve as their nonprofit's "risk manager" has increased many times over. There are still comparatively few risk managers, though, when compared to the more familiar finance directors, directors of administration and directors of volunteers.

Risk management in the nonprofit sector is complicated by a number of issues, including the magnitude of uninsurable risks facing a typical organization. Nonprofits live on the edge and are frequently vulnerable. The source of this vulnerability lies in a wide range of perils, including:

* Allegations that an organization is working outside of its defined mission or spending charitable assets irresponsibly or in a fashion contrary to the intent of donors.

* Pressure from funders to recognize their donations in a way that costs money and time. Or worse, hidden strings attached to major gifts that are not evident at the time the donation was deposited.

* Discontent on the part of the board due to personal differences or personal agendas.

* Balancing the challenge of obtaining objective advice from truly independent advisors with the difficulty of rejecting the recommendation of a board member recruited for his or her professional contacts.

* Expectations by nonprofit employees that tax-exempt organizations should treat them with the compassion and caring afforded to clients.

Challenges and Opportunities

As is the case with for-profit organizations, the fortune of the nonprofit sector is tied inextricably to the ebb and flow of the stock market, the overall economy and consumer trends. …

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