The Importance of Risk Management for Nonprofits
Of the many duties that nonprofit board members agree to fulfill when they accept a board position, the importance of risk management ranks high on the list. Nonprofits are vulnerable to a wide range of risks, and it’s wise for boards to consider the importance of risk management to their business success. Is your board aware of what proper risk management looks like? Are your board members clear on what their responsibilities are related to risk management? Nonprofit board members need to understand what risk management is, how it factors in their success, and the benefits of having a risk management policy.
Defining Risk Management for Nonprofits
To understand why risk management is important, boards need to understand what risks could impact the organization they oversee and ensure they have a risk management plan in place to protect the organization and its stakeholders.
To get a good grasp on understanding risk management, let’s look at a definition of risk management. The Alliance for Nonprofit Management defines risk management this way, “…a discipline for dealing with the possibility that some future event will cause harm. It provides strategies, techniques, and an approach to recognizing and confronting any threat faced by an organization in fulfilling its mission.” Risks are the chance that something might happen. Lots of things can happen in running a nonprofit organization.
To name a few nonprofit risks:
- Legal liabilities
- Financial crises
- Natural disasters
- Errors in management
Risks are prevalent in business, in personal life, and in the nonprofit world. Since there’s no escaping them, it’s important to have a risk management plan. It’s not something boards can leave up to the executive director or other staff.
Boards are generally somewhat aware of the risks that nonprofits face. Yet, many are unknown and hit without warning. In tackling risk management, boards should be having regular discussions about identifying risks and they should always be asking, “What if…?”
The Importance of Risk Management
Risk management is one of the fundamental principles of governance. Nonprofit boards bear oversight responsibility as part of their fiduciary duties of care, loyalty, and obedience. Board members are accountable for how they manage risks whether they’re prepared for them or not.
All opportunities that nonprofits encounter come with risks. There are several steps in risk management including:
- Identify risks
- Analyze risks
- Rank risks
- Manage risks
- Monitor and review risks
Boards also have to make important decisions about how to manage those risks.
These are the ways boards mitigate risks:
- Assume or accept them
- Avoid them
- Control them
- Transfer them
- Monitor them
A risk management policy outlines your organization’s approach to risk and defines the process for managing them.
The Importance of a Risk Management Policy
The importance of a risk management policy is something your board shouldn’t overlook. If you don’t have one, be sure to put the topic on your next board meeting agenda.
What does a risk management policy do? It’s intended to provide the framework for how to manage risks. By virtue of having a risk management policy, your board will naturally be more aware of potential risks and will be more inclined to report them and work toward controlling them.
A risk management policy outlines the roles and responsibilities of groups and individuals in carrying out your risk management policy. Risk management policies also typically describe best practices for risk management. Nonprofit risk management policies should include the different elements that boards need to oversee to protect the organization and themselves from liability.
The Importance of Business Risk Management to Business Success
It would be great to go full speed ahead in pursuing your business goals without worrying about risks, but that’s just not reality. Boards have to find the balance between leveraging important opportunities while mitigating the risks that accompany them. The idea is that the benefit of the opportunities far outweighs any risks. Without a risk management plan, your board won’t be able to pursue all the objectives in your strategic plan with success. By having a risk management policy and a sound risk management plan, your board will be able to make informed business decisions to further the work of your mission.
Your board should do its best to eliminate risks, but that won’t be possible every time. In that case, the board has to decide how to manage them. Beyond having a risk management policy, you need to have a risk management plan so that risks won’t derail your goals for business success.
It’s helpful for nonprofit boards to develop a risk profile for their organizations because of the importance of business risk management. To further your business goals, you need to take a few chances sometimes. If you take a gamble on a risk and lose, it could affect your organization’s ability to continue its programs and activities. The reason for creating a risk profile and risk management plan is to gain a consensus on the degree of risk your board is willing to take without putting your organization’s livelihood at risk. This way, your board will have some parameters for deciding which risks are worth taking.
Your donors and volunteers give of their time and money to help your organization thrive and succeed. As a nonprofit board, you have a responsibility to protect their investments on behalf of your organization. Nonprofits commonly work with budget constraints, making it even more challenging to protect against risks. Poor risk management could put your nonprofit in a precarious position and threaten its livelihood.
Hopefully, after reading this, you have a greater appreciation for the importance of risk management for nonprofits. A BoardEffect board management system is the best and most secure place to keep a running list of the risk your organization faces. Your risk management plan should include the likelihood that a loss could occur and the potential amount the risk could cost your nonprofit. A good place to start is with your insurance agent, as many nonprofit risks (liability, property, auto, D&O, etc.) are insurable. Your BoardEffect board portal offers unlimited document storage which makes accessing insurance documents and your risk management plan convenient and accessible.