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Melanie Herman, director of the Nonprofit Risk Management Center, shares her thoughts on six major risk issues common to nonprofit organizations today.

Six Risk Issues for Nonprofit Executives

  • 2/9/2012

Six Risk Issues for Nonprofit Executives

As the executive director of the Nonprofit Risk Management Center, Melanie Lockwood Herman faces risk every day. In that sense, she is like any other nonprofit executive. Where she differs is in her unique perspective on risk, based on years of helping hundreds of nonprofit organizations manage risk, fulfill their missions, and stay out of trouble.

“We work with nonprofit leaders on a wide range of risk issues each and every day,” Herman said when we caught up with her in December 2011. “In some cases our engagements help uncover unfamiliar risks, but in other instances we simply enable senior leadership teams and nonprofit boards to see and understand familiar risks more clearly. Our mission is to help leaders manage effectively in a world of continuing uncertainty.”

We asked Herman to narrow down an extensive list of risks she sees in the nonprofit sector and share her thoughts on six major risk issues common to nonprofit organizations today.

  1. Lack of effective board oversight. “A trained, engaged board, where everyone accepts responsibility for fiscal oversight, is absolutely essential to good fiscal health and overall organizational health. Accepting that responsibility for fiscal oversight is a great first step toward the board accepting its overall risk oversight role. People are often drawn to board service because of the mission of the organization; very few people are being elected to boards because they have an interest in exploring ‘what could go wrong’ or scrutinizing spreadsheets. There is often a sense that, as long as we have someone on the board who has a financial background, or we have a finance committee that meets from time to time, then the rest of us are off the hook. This is a huge risk issue for nonprofit organizations. Every board member has equal responsibility for risk management and fiscal oversight, whether they are on the finance committee or not.”
  2. Limited understanding of nonprofit financial statements. “It is not unusual to encounter an organization where board members don’t have a solid understanding of the terminology used in nonprofit financial statements, or how nonprofit financial statements are different from their for-profit counterparts. Great boards insist on taking time to provide some level of fiscal education so every board member understands what the numbers and presentations mean. Boards should provide at least 30 minutes of fiscal literacy training every year.”
  3. Lack of regular financial reporting. “Great boards acknowledge the present while looking ahead to the future. They forecast on an ongoing basis, but if they don’t have a good sense of the fiscal health of the organization, they will make plans that have little value or meaning. Many nonprofit boards review financial results on a quarterly basis. In some organizations, the full board only receives a financial presentation annually. Organizations often resist having financial updates at every meeting because they don’t believe that’s why people are there. But the truth is, your mission won’t matter if you’re in financial trouble. And the board can’t help the organization maneuver out of trouble that it doesn’t know exists.”
  4. Risk of inadequate corporate structure. “This can include everything from poorly defined parent/chapter or parent/affiliate relationships, to poorly equipped boards, ineffective committees (or an inadequate committee structure), and dangerous assumptions about liability exposures. Some organizations develop chapter or affiliate structures to isolate the parent or national organization from liability. A great deal of care is required when establishing or revising the corporate structure of an organization. Leaders should give thought to achieving the right balance between controlling what chapters or affiliates do, and encouraging autonomy.”
  5. Partnership risk. “Nonprofit organizations frequently look for ways to partner and collaborate with like-minded organizations to achieve efficiencies and economies. But we have to be careful about managing risk in the vetting phase of the relationship, as well as once the relationship is underway. During the planning or vetting phase it’s important to think about risks that could surface along that journey. The devil is in the details, and it’s really important to figure out who is going to be doing what and when. Another important part of any partnership negotiations is articulating the escape clause: deciding under what circumstance one or the other or both partners can trigger an end to the relationship. Make the plan flexible to allow for circumstances where continuing the relationship is counterproductive to either party.”
  6. Lack of effective succession planning. “This comes up in almost every risk assessment that we do, including engagements with mid-sized nonprofits as well as assessments for large, complex organizations. Board members and leaders on the senior management team often worry what will happen if the CEO should depart with minimal notice. Without a succession plan, uncertainty reigns and an extended period without a strong leader can set the organization back. The more charismatic or successful the CEO is, the more critical this issue tends to be. But it’s not something that appears on the typical CEO’s to-do list.”

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