Nonprofit Risk Management The Role of the Board

Elder Care of the North

Nonprofit Risk Management The Role of the Board


Points to Cover– Defining Risk Management – Why is it Important to a Nonprofit– What is the Role of the Board– Connection to Governance– Conclusion


Defining Risk Management– Risk is defined in the dictionary as “exposure to

the chance of injury or loss; a hazard or dangerous chance”

– Management is defined as “the act or manner of managing; handling, direction, or control.”

– Putting the two terms together and you have the definition of risk management – basically handling or controlling the exposure that an organization has to loss.


Risk management is extremely important to a nonprofit organization because any type of loss could have a significant impact on the ability of the nonprofit to meet its mission and its financial stability. Financial resources need to be protected and a key way to do this is to identify and manage the possible risk that the organization may face.


● The different types of risk that may impact a nonprofit include:

– Financial Risk– IT Risk– Insurance Risk– Employment Risk– Vendor Risk– Collaboration Risk


The Board of Directors and management need to be involved in identifying the potential risks linked to each of these areas.

Once the risks have been identified it is up to management and the Board to create a plan to manage that risk so it does not have an impact on the mission of the organization.


● Financial Risk– Fraud and Embezzlement– Financial Losses Due to Poor Decision Making– Misstatement of Financial Reports– Cuts in Primary Funding– Lack of Proper Controls over Resources


● IT Risk– Virus Infection– Computer Hackers– Lack of Security Controls– Theft of Hardware– Loss of Personal Information


● Insurance Risk– Insufficient Coverage– Incorrect Types of Insurance– Lack of Periodic Reviews– Lapse in Coverage


● Employment Risk– No Background Check– Lack of Proper Hiring Policies and Procedures– Lack of Safety and Training Program– No Controls in Place to Protect Personal Data– Lack of Formal Review Procedures


● Vendor Risk– Lack of Credit Check– No Procedure for Reviewing References– No Policy for Completing Annual Vendor Audit– Lack of Process for Contracting– Lack of Input from Users


● Collaboration Risk– Lack of Review of Potential Partners– Lack of Formal Agreements– Lack of Understanding of Resource Allocation– Lack of Understanding of Duties of Partners


● Role of the Board– Board Members need to be trained to identify

potential risk and how to put in place policies and procedures to manage it.

– Board Members need to work with management to insure that a risk management plan has been developed and is continually updated to address potential risk


● Role of the Board (continued)– Board Members need to create an environment

of accountability and transparency to support this undertaking

– Board Members need to understand how poor governance practices can lead to a high risk situation

– Sitting on the sidelines is not an option when it comes to risk


● Role of the Board (continued)– The Board needs to create a culture where risk

management is part of the normal activities addressed by Board Members and Management

– The Board needs to establish a Risk Management Committee to direct, advise, and report to the full Board. This would be structured similar to the Audit or Personnel Committee.


● Risk Management and Governance– Risk Management is about identifying and

managing those issues that could become problems for the nonprofit to continue to meet its mission.

– Board Governance is about creating an environment that supports the nonprofit in meeting its mission.


● Risk Management and Governance (continued)Boards need to make sure that the nonprofit is in compliance with its Articles of Organization and By-Laws. This could create a serious issue with Federal and State organizations and have a significant impact on the nonprofit having the ability to remain operating.


● Risk Management and Governance (continued)Board Members need to make sure that they are in compliance with the new requirements of the IRS Form 990. There are several new policies that need to be in place such as Whistleblower, Conflict of Interest, and Executive Compensation. Non-compliance could risks the organizations 501(c)(3) status.


● Risk Management and Governance (continued)Board Members need to assume a more active role in the operations of the nonprofit so that they are able to identify potential risks more easily because they will have a much better understanding of the nonprofit. Recommendations can be made to management when risks are identified.

Elder Care of the North Shore

● Risk Management and Governance (continued)The Board needs to make sure it has appropriate committees established that meet on a regular basis, such as Finance, Audit, Personnel, Compensation, and Risk Management that report back to the Board on the different areas of the organization that can be areas of risk.


● ConclusionIt is important for the Board of Directors as part of governance to be more aware of risk and its impact on the nonprofit agency. Setting the tone at the top and working with management to put in place policies and procedures to help identify and manage risk needs to be a top priority.


● Conclusion (continued)With the new Federal and State regulations that have been put into place and nonprofit agencies coming under closer scrutiny the Board needs to make sure the organization is protected. The first thing to do is for Board Members to get active and become part of the risk management process.


● Conclusion (continued)The Board of Directors are charged with helping the nonprofit meet its mission by providing appropriate governance. With the world changing rapidly and potential exposure popping up everywhere, risk management has to take more of a role in how things are looked at.


● ReferencesNonprofit Risk Management Center Website –

www.nonprofitrisk.orgTaylor, B., Chait, R., & Holland, T. (1996,

Sept/Oct). The New Work of the Nonprofit Board. Harvard Business Review, 36-46.

Benjamin, L. (2008). Bearing More Risks for Results. Administration & Society, 959-983.

http://www.nonprofitrisk.org/

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Nonprofit Risk Management The Role of the Board