This article is from the Summer 2017 edition of the Nonprofit Quarterly, “Nonprofit Graduation: Evolving from Risk Management to Risk Leadership.”
Mary hung up the phone, stunned by the news that her nonprofit’s largest funder was dramatically reducing funding because of a change in giving focus. This funder’s annual gift, which comprised 60 percent of the organization’s annual revenue, was crucial to funding the non-profit’s renovations to its newly inherited building, making it safe for the public. This building, an unimaginable gift that had arrived twelve months earlier, would enable the historical society to revive its programs and better serve its community. Now the dream of its renovation seemed impossible, and the additional fixed costs that the building represented made it a threat to the organization’s survival rather than an opportunity for expansion.
Mary’s story is far from unique in the nonprofit sector; in fact, it is extremely common. While we most often hear dramatic stories about the closures of large nonprofits that affect thousands of clients and hundreds of employees—as in the case of Federation Employment and Guidance Service Inc. (FEGS)—nonprofits of all sizes and issue areas are challenged with risks on an ongoing basis.1 Foundations decide overnight that their attention and money are needed elsewhere, and governments at every level decide anew their priorities each time an administration changes hands; loss of funding can happen at the worst possible time. Events like this devastate not only the organization in question but also its clients, its employees, and its donors.
To fully engage with risk questions, nonprofits need to take an intentional approach and become more strategic in their consideration of their own business model—how mission and financial sustainability interact—and their specific contexts. For example, board and staff need to become intimate with the dynamics of the organization’s budget and the relationships and circumstances that underlie those dynamics. Similarly, to have a true understanding of how best to engage with the most critical risks, nonprofits need to push themselves to understand on the one hand how all areas of operation interrelate and affect mission achievement and on the other hand how to maximize opportunities—by intentionally taking risks—that will further mission achievement and organizational sustainability. Only in this way can they responsibly engage with risk and opportunities—linked as they so often are.
Why Risk Leadership Matters
In a sector in which risk is inherent and uncertainty is a constant—particularly as we see more changes coming out of Washington—identifying and engaging with risk have never been more important for nonprofits. Not doing so undermines our sustainability, along with the well-being of the people we serve.
Even before the November election, numerous examples of nonprofit closures confirmed the need for nonprofit boards, leaders, and staff to better understand how to identify, assess, and engage with risk. We have seen this in our work at Community Resource Exchange (CRE) as our client organizations grapple with challenges such as inconsistent funding or multiyear contracts with flat funding, capped overhead rates, changing community needs, and increasing demand, to name a few. This manifests in real-life examples, such as a $14 million local workforce-development agency that had to close its doors after suffering a massive loss in cash. The cash loss followed from investment in a new office at the same time that a major grant was cut. Combined, these losses made it impossible to weather the shocks, given the nonprofit’s already tenuous financial health after years of overreliance on government funding. Another example is a youth-serving organization that is now pursuing a merger to preserve core services after losing its 501(c)(3) status as a result of failing to file its 990 or fulfill basic contract commitments—all of which might have been avoided had the board been informed and proactively engaging with risk all along. From these organizations, as well as nonprofits that are performing well, we’ve seen a desire to learn more about risk and not only how to intentionally manage it but also how to make the switch from risk management to risk leadership. For example:
- Between 2015 and 2016, New York’s Human Services Council (HSC) brought together thirty-two seasoned human services executives, social sector leaders, and experts in nonprofit management to form its Commission on Nonprofit Closures. This group recommended, among other things, that nonprofit boards and staff “be engaged in risk assessment and implement financial and programmatic reporting systems that enable them to better predict, quantify, understand, and respond appropriately to financial, operational, and administrative risks.” Assessing, managing, and mitigating risk was identified as a crucial endeavor for all nonprofits, regardless of size, age, or issue area.2
- Follow-on articles and reports have supported the imperative, such as a paper published by Oliver Wyman and SeaChange Capital Partners in 2016, titled Risk Management for Nonprofits, and Ted Bilich’s “A Call for Nonprofit Risk Management” in Stanford Social Innovation Review.3 Grantmakers also have identified the need for risk management; for example, in January 2017, the Open Road Alliance and Arabella Advisors published Risk Management for Philanthropy: A Toolkit to promote best practices and conversations around risk management between funders and their nonprofit grantees.4
- Nonprofit conferences and convenings have further supported this need. For example, Ahead of the Curve (AOTC), a consortium of New York City–based capacity-building organizations, came together last year to host a convening to “advance [the] collective knowledge of the discipline of risk management” within the nonprofit sector.5 The two hundred nonprofit leaders, consultants, and academics who attended were all hungry to learn.
- At the national level, groups like the Alliance for Nonprofit Management are similarly discussing and preparing to better support non-profits as they assess and engage with risk.
CRE’s own conversations with nonprofit leaders about risk, and the discussions highlighted above, confirm that: (1) nonprofits both need and desire to better engage with risk, in order to embrace risk leadersh