Philanthropists have many tools available to help them be more effective, but even the most strategic donors may be missing an opportunity to maximize the impact of their giving. According to new research, donors can affect more meaningful change by reevaluating their approach to risk management. With a few simple steps, they can adopt policies and practices that enable them to better manage and mitigate risk.
Research shows that most grant makers do not discuss risk with grantees, and this lack of communication often leads to unexpected challenges and compromised results. The problem isn’t that philanthropists are risk-averse; in fact, a preliminary review of literature from the Foundation Center’s Issue Lab revealed that donors are often described—and describe themselves—as being able to take risks that neither the private sector nor the government can, will, or should take.
Philanthropy may be better positioned than other sectors to drive social change, but investment in risk management is a critical element for success. Consider these statistics from a recent Open Road Alliance survey of 200 donors:
- Grant makers acknowledged that 20 percent of their portfolio is at risk, but the vast majority do nothing, either before or after making a grant, to prevent unanticipated issues from damaging project outcomes.
- In fact, 76 percent of respondents reported that they do not ask potential grantees about possible risks that could derail projects.
- Only 17 percent of those surveyed reported they set aside funds for emergencies or unexpected problems, even though they know that one in five of their projects will encounter an unexpected disruption that threatens its successful completion.
In the same survey, nonprofits reported that 20 percent of their projects encountered unforeseen events that threatened outcomes. A recent publication by the Clinton Global Initiative corroborated these findings: During a 10-year period, 19 percent of its pledged projects have slowed, were put on hold, or were discontinued.
So what can be done to acknowledge, discuss, and plan for unexpected disruptions? Laurie Michaels, founder of Open Road Alliance, and Judith Rodin, president of Rockefeller Foundation, have convened leaders from across a range of philanthropic entities and sectors to produce practical methods for assessing and planning for risk through an effort dubbed the Commons. The Commons is made up of more than 20 members, representing institutional and family foundations, law firms with specialties in philanthropic governance and tax issues, financial advisers, and nonprofits from around the country. Since May, this group has been engaged in developing adoptable and adaptable policies for assessing risk culture and implementing risk management procedures.
In our experience, the conversation about risk and risk management is an ongoing process. Tools such as the risk assessment cycle (see illustration) can help donors get started. It involves the following steps:
1. Identify Risks
Risk always exists, and everyone has a different appetite for taking on risk. The process of identifying specific project risks will be unique to each project and to each organization, based on its ability to tolerate risk. A number of tools exist to help with this task, such as the SWOT and PESTLE frameworks. The Commons is also creating a online resource center to help point grant makers and nonprofits to existing frameworks as well as offering a new risk taxonomy.
2. Mitigate Risks
Consider taking steps to mitigate and protect against potential negative consequences. Grant makers should create a set of policies and practices — including financial and legal components — that can be used to help mitigate risk. For example, incorporating questions about risk into the application process and ensuring governance processes include avenues for emergency grant making are two effective ways to reduce risk. To figure out which tools are best for you, it is useful to seek input from staff members and beneficiaries at this stage. The more you discuss potential failures, the more likely that the grant will have a positive outcome.
3. Create Contingency Plans
For those things you can’t mitigate, like a currency fluctuation or weather event, you need to plan for the unexpected. This can take many forms, including creating budget hedging practices and developing bylaws to allow for contingency funding. Be sure to communicate contingency plans and decision-making protocols to key stakeholders, so they know which steps to take in the event of an emergency.
4. Monitor the Project
After careful planning for the obstacles that often arise, assess the risk-mitigation and contingency-planning protocols. Did the contingency planning help produce the expected outcome? If not, could the obstacles be avoided next time with alternate mitigating activities such as more training, additional staff capacity, or other activities?
Foundations and grantees should discuss the lessons learned from their experiences to help identify risks on future projects. Be sure to seek feedback from others involved in the project. Then adapt risk management approaches accordingly.
These steps can make it more likely that at-risk projects will be successful. Taking these steps requires only an incremental use of money and resources and prevents a project’s delay or discontinuance.
Ultimately, the beneficiaries of better planning for disruption are the people and places we seek to help.
Laurie Michaels is Founder of Open Road Alliance. Shelley Whelpton is Managing Director of Arabella Advisors. Both are members of the Commons.