Relationship Between Risk Management and Nonprofit Governance
The board of directors for a nonprofit organization works a little bit like an insurance policy. In simple terms, the definition of risk is the “threat of loss.” Board directors have fiduciary responsibilities, which means that they must act with the highest standard of care and in the best interests of the organization that they serve. If we think about a nonprofit board protecting against risk, in essence, they are ensuring that the organization will remain sustainable. Board directors who understand all the necessary conditions for overseeing a nonprofit organization and its budget are good risk managers and good stewards of corporate governance principles.
Nonprofit organizations champion some of the toughest issues — ones that overwhelm governmental and private organizations. Unlike a listed corporation whose goal is pleasing shareholders, board directors and leaders of nonprofit organizations require trust and accountability from the public. Their main purpose is fulfilling the organization’s mission, rather than making profit.
According to a report by Oliver Wyman and SeaChange Capital Partners called “Risk Management for Nonprofits,” many nonprofit organizations are living on the edge of their budgets because board directors don’t have the knowledge and expertise to effectively oversee a nonprofit organization.
Risks Abound in the Nonprofit Realm
When we think of all the good that nonprofit organizations do, it’s easy to gloss over any risks that they may face along the way. Directors and Officers’ insurance policies protect the board directors from lawsuits that may result from the actions or decisions of board members.
Additionally, nonprofit organizations have many other liabilities. Let’s say that ABC Nonprofit Corporation fails to perform appropriate screenings for their volunteers. One of the volunteers alleges that another volunteer is sexually harassing them. Or perhaps money was misappropriated after a fundraising event because a volunteer didn’t receive adequate training. These are just a couple of examples where board directors could be held financially and legally liable for not adequately screening and training volunteers. These situations would also be considered a breach of fiduciary duties.
As part of their duties for overseeing the organization, board directors have responsibility for overseeing the organization’s activities in ways that reduce or eliminate liability.
While board directors have the ability to control some risks, they have little or no control over other types of risks. Well-run nonprofit organizations know how to get their causes in front of the major philanthropic donors; however, there is vast competition for donor dollars. As a result, many nonprofit organizations rely on funds from government programs to keep their organizations sustainable. What makes this challenging is that nonprofits generally provide services to the public first and receive government funds at some point after they provide services. State and federal governments allocate funds in their budgets for some nonprofits; however, comptrollers can be slow to issue payments.
The state of Illinois provides a valuable recent example of this. The governor and the general assembly failed to approve a budget in over two years, resulting in over $15 million in unpaid bills. Nonprofit agencies that weren’t prepared for this had to dig into their reserves. Once those reserves were depleted, some nonprofits struggled to survive. Nonprofit boards need to do their best to predict fluctuations in finances and to plan for them.
Good Nonprofit Corporate Governance Requires a Responsible Risk Management Plan
To be responsible, board directors of nonprofit organizations need to consider all the ways that they or the organization could be held liable for risk. Not only must they purchase Directors and Officers’ insurance, but they must also understand what situations might generate a claim. In addition, they need to be aware of what the policy does and doesn’t cover.
Nonprofit organizations also usually have general liability policies. Board directors need to make sure that policies cover their organization’s volunteers and activities adequately.
Fundraising and finances are major issues for nonprofit organizations. Board directors need to be able to understand financial reports and how to assess short- and long-term budgeting. As much of the nonprofit’s funds are unpredictable, boards should develop plans for disasters or catastrophes, so they aren’t forced to fold if they come face-to-face with a situation similar to the Illinois example mentioned previously.
Good Corporate Governance Starts in the Nonprofit Boardroom
Board directors need to evaluate risks and opportunities that may arise in the near or distant future. To that end, board directors need to be visionaries, giving the organization the big picture perspective. The board should be continually working to identify, evaluate and manage risk, which is very similar to the duties of boards of listed companies. The board has great power to authorize major actions and transactions. They must use their power wisely.
Board members must be cognizant that their duties complement the duties of management, taking care not to supplant their authority. Good governance means overseeing management and still letting them make decisions about the organization’s operations. At the same time, boards need to establish sound relationships between themselves and management. The board’s role in the relationship is to mentor and advise managers and to provide resources for them.
Good governance means providing opportunities to hear the opinions and perspectives of all board members, without allowing one or two members to dominate discussions. All board members should feel comfortable asking for input on board agendas and sharing information they’ve gleaned from their resources. Under the facilitation of the board chair, the members of a nonprofit board seek perspectives from each other, as well as from management, community professionals, the advisory board, and from independent consultants as necessary.
Many nonprofit organizations make use of the executive committee as a steering committee. Managers sometimes have a separate meeting with the executive committee. Alternatively, managers may participate in part of the executive committee meeting in order to strengthen the relationships between the board and management. The call of a special meeting sometimes causes unnecessary concern. At-large board members and members of the organization aren’t likely to become alarmed with managers when meetings are held regularly.
Final Thoughts on the Relationship Between Risk Management and Nonprofit Governance
Risk management is one part of good corporate governance in a nonprofit organization. Nothing is completely certain in the nonprofit space, but boards that practice good corporate governance will alleviate many of the risk factors that are inherent within any type of organization.
