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Revealing Risk in Philanthropy – bonus content

After I researched and wrote about risk in philanthropy, I’ve inevitably been affected by Frequency Illusion. In this decision-making bias, an idea or term that has recently come to one’s attention suddenly seems to appear with improbable frequency shortly afterwards.

So, as “bonus content” to my previous posts and the piece I wrote for the National Center for Family Philanthropy, here are good resources on risk I saw in the past 45 days:

  • Questions Nonprofits Should Ask to Assess Their Risk Management Practices – an infographic by the consulting firm BDO that would serve as a good guide for staff and board conversation.
  • Risk Management for Nonprofits – SeaChange Capital Partners and Oliver Wyman look at fiduciary risk and enterprise risk management through the lens of a study of nonprofits in New York City. The report serves as a sober reminder of how many nonprofits live close to the edge of insolvency.
  • 3 Ways Foundations Squash Risk-Taking – philanthropy consultant Kris Putnam-Walkerly describes three areas “in which foundations that want to take more risks unintentionally limit their capacity to do so: planning, practice and policy.”
  • Philanthropy Lessons: Risk and Mistakes – an 8:37 video by Exponent Philanthropy with observations about a greater tolerance for risk and experimentation by seven smaller foundations and three grantees.
  • Forgetting Failure – June Wang of the William and Flora Hewlett Foundation offers good ideas for discussing and learning from failure, risk, andphilanthropic strategies that didn’t go as planned.

OK. That’s it. I’m done with risk as a topic. On to something else philanthropically geeky…

Risks in Family Philanthropy - A Starting Framework

Revealing Risk in Philanthropy – part 3

In two previous posts, I wrote that I’d been researching the topic of risk in philanthropy. I tested some ideas about the topic at a conference session, co-designed with folks from the Quixote Foundation, Open Road Alliance, and Arthur M. Blank Family Foundation.

Based on my research and feedback from others, I developed this framework for five different types of risk philanthropic organizations encounter:

Risks in Family Philanthropy - A Starting Framework

The framework is meant to serve as a conversation tool to help a foundation or philanthropic family explore the risks most relevant to their giving. No person will worry about all of the types of risk. Few, if any, organizations will have the desire to delve into every type. However, it is easy to forget that each person’s comfort zone around risk may be based on personal and professional experiences very different from yours.

In brief, the five interrelated types of risk in a philanthropic organization are:

  • Our personal risk profiles, shaped by our cognitive biases (our unconscious mental shortcuts), our default decision-making styles, our own giving styles, and our fears about risks to our reputation and identity. We have to continually question our “default settings” and how they apply or don’t apply to a situation.
  • Our organizational risk culture, the “norms of behavior for individuals and groups within an organization that determine the collective ability to identify and understand, openly discuss, and act on the organization’s current and future risks” (McKinsey & Co.). Organizational risk is often intertwined with organizational reputation, legacy, and brand identity.
  • Strategic risk, in one definition, is the “risk that your efforts will come to naught; that the resources you have invested either fail to generate any results whatsoever, or that the results are, at best, unsatisfactory” (Tierney & Fleishman). It involves risks in planning, implementation, and evaluation of an overall philanthropic strategy or a particular grantmaking program.
  • Risk at the foundation grant or investment level involves issues of due diligence, performance monitoring, evaluation, and sometimes opportunity costs. This is the type of risk that foundations and nonprofits discuss the most, perhaps because it feels like the risk that is easiest to mitigate.
  • External risks are factors beyond our direct influence or control. They’re not preventable and often can’t be avoided.

An organization’s risk culture influences its people, its strategies, and its individual grants and investments. All of those are subject to the underlying threat of external risks.

We can often tame the first four types of risk through ongoing processes for: a) risk identification; b) assessment and prioritization; and c) mitigation through better planning, operational controls, staff training, and other tactics. We can’t mitigate external risks, but we can tame their potential impact on our work through scenario planning exercises and developing contingency plans.

Some foundations and donors mitigate risk through participating in a funder collaborative or using an intermediary or fiscal sponsor. Some segment risk into a specific fund or budget, or informally adopt a portfolio mindset by tailoring a mix of high-risk and low-risk grants to meet their comfort level.

Others tame risk, and even embrace it, through creating longer-term trusting relationships with grantees. They practice more flexible adaptive philanthropy and favor investing in leadership development and organizational capacity over investing in a specific direct service or project.

Want to learn more?

Recent research by the Open Road Alliance showed that too few foundations and nonprofits had policies and practices in place for risk mitigation and contingency planning. If you’re interesting in learning more, here are my top picks:

I’ve also written a longer Issue Brief for foundations and philanthropic families that are subscribers or Friends of the Family of the National Center for Family Philanthropy. The brief, Expanding Your Comfort Zone: A Window into Risk in Family Philanthropy (©NCFP, March 2016), has short stories about family foundations and donor-advised funds tackling the different forms of risk, questions to ask internally, and links to a broader set of tools and resources.

As always, I welcome your feedback on the framework I developed. And, I’d be glad to hear your insights on how you’ve embraced risk or tamed risk in your philanthropy.

risk

Revealing Risk in Philanthropy – part 2

Last fall, I started researching the topic of risk in philanthropy for a conference session. I wrote a post soliciting feedback on the topic and cited a couple of the resources I’d found useful.

Some of the best thinking I’ve found comes from the team at the Open Road Alliance. Philanthropist and psychologist Laurie Michaels, Ph.D., founded Open Road to “fill a market demand for fast, flexible contingency funding in the philanthropic sector.”

In addition to its grant and recoverable grant programs, Open Road helps nonprofits and funders think about:

  • Risk mitigation – better forecasting, planning, and budgeting for risks that can be predicted and tamed. These would include strategy risks, implementation risks, and organizational culture risks.
  • Contingency planning – creating scenarios and contingency plans for external risks, the factors beyond an organization’s direct influence or control.

Open Road’s newest publication is Contingency Funding in Philanthropy. It describes the results of a survey which asked 200 nonprofits and 200 funders how they dealt with contingency funding – the need for additional money related to unforeseen disruptive events during the lifetime of a grant. Four highlights from the report include:

  1. About 1 in 5 nonprofit projects require contingency funding to help deliver their anticipated results on time and with the full impact desired. The disruptive events they faced didn’t include natural disasters, but did include such challenges as costly shifts in government regulations and a critical infrastructure failure.
  2. Funders think grantees can easily find contingency funding other places should the funders decline a request. However, most nonprofits end up having to use their savings, take on debt, and/or reduce the impact of a project.
  3. Only 35% of the funders had a policy for managing off-cycle requests for contingency funding, and it was often unclear to nonprofits that they could apply for contingency support. Even if nonprofits thought that contingency funding was available, they often did not feel comfortable asking for it.
  4. The surveys verified Open Road’s central premises – too few nonprofits and funders have policies and practices in place to deal with risk (especially external risk) and too few have honest, open conversations about risk.

The disconnect between nonprofit and funder expectations isn’t a surprise. Those honest, open conversations require a high degree of trust between the funders and nonprofits. However, not many foundations devote the time and human resources it takes to build real trust and make a dent in the power imbalance between funder and fund requester. And, I can’t help but wonder if the declining amount of trust between people and in institutions is also slowing damaging opportunities for conversations about risk.

Open Road has a couple of other reports useful to funders and nonprofits:  Risk in Philanthropy has practical guidance on risk mitigation and contingency planning, and Project Risk and Impact has a longer case study on risk assessment and mitigation in an international health nonprofit.

Tune in next time…

As a follow-up to the fall 2015 conference session, the National Center for Family Philanthropy invited me to write a longer Issue Brief on the different types of risk in family philanthropy. That publication will only be available to NCFP subscribers and Friends of the Family. But, in my next blog post, I’ll describe an overview graphic I created and a few other key ideas I ran across in my research.