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.