Major Types of Risk That NFP Leaders Need to be Thinking About

Not for Profit organizations have risk just like any other organization. However, many NFPs, especially smaller and mid-sized organizations are less likely to have risk focused leaders at the helm. As a result, NFPs tend of focus on operational issues as they arise and can miss looming organization threatening problems until it is too late.  NFP Leaders and Boards need to get educated on risk and to devote resources and attention to prepare the organization.

As a NFP leader, I was always on the lookout for issues that could impact the organization.  There is a great deal of advice available and plenty of reading material on risk, but taking that data and transforming it into a set of actionable areas of concern is the first step toward protecting your organization. Talk with your network, insurance broker and financial auditors. Keep an eye on the NFP sector media and take advantage of learning opportunities on risk topics.

In this article, I have identified ten of the areas of risk that I have encountered often when working with NFPs.  This is by no means an exhaustive list. It is a place to start for NFP executives and Board members who are concerned, but overwhelmed by risk.  I encourage NFP Executives and Boards to formally discuss risk on a regular basis and work toward developing and implementing a risk management plan.

The Risks

No Risk Management Plan

Start with the obvious! A risk management plan provides a process for accessing and addressing risks in your organization.  Not having a plan is a serious risk since the organization may not have a mechanism for raising and dealing with risk issues. Organizations tend to consider risk at the program level, but broader than that, there are few people in the organization with a wider perspective.

A Risk Plan is not an easy thing to put together and many organizations fail at developing their own risk management plan.  The plan requires an honest assessment of the risks that face an organization.  This is a tall order for those inside the organization, so it requires external help (which typically means money!).  There are alternatives, such as finding Board members with backgrounds in risk.

No Board and/or Leadership Succession Plan

This is the ultimate topic that people tend to procrastinate about.  It is not typically a fun topic to discuss and depending on the size of the NFP is can be exceedingly difficult to start.  However, once you have done an initial plan for your senior leaders and Board, it can become a relatively easy process to review and update. To get started, identify the top 3-5 executive or leadership positions vital to the NFPs operation.  In addition, note any Board members, especially Chairs or members with specific areas of unique expertise whose departure could degrade the Board’s capacity significantly.

Non-diverse Revenue Streams

Small to mid-sized NFPs seem to rely very heavily on a small number of programs or funders and that can cause huge issues.  Those relying on state funding can be at the mercy of budgets and the loss of one major program can impact the organization’s ability to function.

For more information on Revenue Diversity, follow this link NFP Revenue Diversity

Burned Out Employees / Volunteers

The needs are great in NFPs and the desire to do as much as possible can lead to burnout.  There will always be more to do, so leaders need to recognize and look for creative ways to help avoid overloading staff and volunteers.  Find ways to establish some limits or find ways to gather additional resources.

Also, although this is a little off topic, be mindful of staff compensation.  This is an area of risk since staff compensation does not typically have the Board oversight that leadership compensation receives.

Competing Priorities / Lack of Focus

NFPs can face challenges if they are over-concentrated in one or a small number of programs.  Unfortunately, the reverse is true as well.  NFPs can be overwhelmed by too many or by competing programs. As with most issues the challenges are balance and resources. Executives and the Board need to consider if programs are less effective because they are competing for the same resources.

Sometimes related programs that seem like a good fit can cause issues. I read about a food kitchen that also served as an education program to prepare people for jobs as cooks and kitchen staff. Unfortunately, the heavy use on the equipment for food preparation caused breakdowns that resulted in training issues for the education program.  The organization was so focused on volume for the kitchen that they neglected the fact that their education program was suffering.

In addition, the Board itself can get bogged down in its own initiatives, so it is very important that Board initiatives do not take over meeting time to the exclusion of oversight responsibilities.

No Strategic Plan and/or No Execution of Strategic Plan

You can’t get anywhere if you don’t know where you are going. Not sure who said that, but it is true.  For NFPs it is very important to develop and implement a strategic plan.  NFPs that operate only in the here and now, without any plan for the future, are risking the future of the organization.  The Strategic Plan is looking ahead, considering changes in needs and capabilities, setting targets and selecting paths to get there.  NFP Leaders and Boards should spend time on a recurring basis, thinking strategically and preparing.

For more on Strategic Planning, follow this link:  Strategic Planning Sins

 

Undertrained and/or Disengaged Board Members

All NFPs seek qualified, engaged Board Members, however, those Members need to stay current on the environment in which the NFP operates. Members need to learn about risk and strategy, succession, compliance, finance and all of the other components of operating the NFP. In order to add value, Board Members need to interact with the client community as well as the communities at large which the NFP serves.  They need to be trained on how the organization and Board function, such as bylaws, etc. They need to understand risk and be ready to fulfill their fiduciary responsibilities.

Known as Pay for Play, some NFPs provide Board Memberships to large donors. That in and of itself is not necessarily a bad thing, if they are qualified and engaged.  However, it is important to remember that Board Members have fiduciary responsibilities and should operate in the best interests of the organization.  And that means they need to show up and engage in Board activities.  I have heard stories of bylaws changes because Boards could not gather a quorum, due to disengaged members.

Board Chairs, this issue is yours.  Do you have a formal Board education program?  How about Board orientation?  Can your Board Members understand your organization’s financial statements?  Can they contribute to discussions on the strategic plan?  Do you follow a Board, Committee and Member assessment process?  Is that assessment process more than a checklist of tasks?  Do you have Members that miss more than one meeting per year?

 

NFP Sector Environmental Factors

The current political environment for NFPs is clearly a concern.  Issues related to the tax benefits of contributions to NFP political neutrality may have huge impacts for years or decades ahead. While there is not much that can be done on these issues in the short term, your Board and Leaders should remain engaged. They should keep informed and take the initiative when possible to express their concerns with lawmakers.

In addition to political issues, there are some major shifts in funding opportunities as “big bet” funding seems to be becoming more common. In addition, the sheer number of NFPs has been growing, which increases competition between NFPs for funding.

There have also been a number of high profile NFP failures and organizations in trouble that are snagging headlines and could be impacting your contributor base.

Demographics are also an important environmental factor and NFP leaders and Boards are aging, are we bringing in new voices? Are we listening to changes in our client community? Are we being proactive or reactive to change?

 

Too Narrow Focus on Existing Programs

Similar to the issue on revenue diversity, NFPs need to be concerned with having a narrow focus on existing programs.  Just as it is risky to try and focus on too many things, it can be just as big a risk to focus exclusively on core programs.  This “do only what we do best” perspective can be deadly to an organization if the client needs are shifting.  Leaders and Boards should be discussing sector trends on a regular basis and that discussion needs to be bidirectional.  Boards shouldn’t be waiting to be told about what is going on in the sector. They should be active in the sector and should be keeping their eyes and ears open.

 

Tech Issues – Cyber, Systems

Risks associated with technology are a huge challenge. When large organizations with big technology budgets are getting hacked, what is the small to midsized NFP to do?  This issue is one where there is a great temptation for some head burying! However, that is rarely a good answer. Don’t ignore these issues or accept that the budget does not exist to address them. Add someone with technology expertise to your Board.  Challenge management to find some cost-effective solutions that provide a reasonable level of protection.  In addition, there are insurance products that can protect the organization in the event of a cyber issue.

In the same vein, do not assume that the organization cannot benefit from new technologies.  There are plenty of new systems available that are designed to aid in fundraising, improve financial reporting and provide targeted data for decision making.  These are investments in the organization that can help it to remain viable and relevant for the long-term.

 

Bottom Line

This article is meant to provide NFP Leaders and Board Members some thoughts to consider.  The risks noted here are surmountable.  My hope is that this article will generate some discussion and encourage Board members to raise issues and ask questions. In my mind, any discussion about risk add value to the organization. The discussion can expand perspectives or at a minimum foster understanding.

The common themes here are communication and action.  Boards and management need to discuss these and other risk issues on a regular basis.  The discussions should attempt to find a balance point between meeting fiduciary responsibilities, but not flailing away at every issue that goes bump in the night.  In my experiences with NFP and for-profit organizations, I have seen good, bad and ugly risk assessment and review processes.  However, my biggest concern is for all the organizations that have no risk assessment or review process.  Don’t be on that list.

 

Risk is an important topic.  However, I will take a somewhat different tack with an upcoming article, tentatively titled Huge Opportunities that NPF Leaders Should Be Thinking About.  Check it out here!

 

Learning is a shared experience, so share your thoughts in the comment section below.  Please check out my blog Not for Profit Beyond the Numbers

Thanks! –mike

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