The Board’s Role in The Board’s Role in Risk ManagementRisk Management

Nonprofit Risk Management Center

Webinar

June 8, 2005

The Board’s Legal Duties

The AccountabilityImperative

Risk Management

The Board’s Legal DutiesThe Board’s Legal Duties

CareCare ObedienceObedience LoyaltyLoyalty

What is accountability?What is accountability?

StakeholdersStakeholders Transparency – Transparency –

“glass pocketbook”“glass pocketbook” ResponsivenessResponsiveness Mission focusMission focus What else?What else?

What is accountability?What is accountability?

Panel on the Nonprofit Panel on the Nonprofit SectorSector Convened by Independent Convened by Independent

SectorSector

Goal: “help the nonprofit Goal: “help the nonprofit sector meet the highest sector meet the highest ethical standardsethical standards in in governancegovernance, , fundraisingfundraising and and overall operationsoverall operations.”.”

What is accountability?What is accountability?

Panel on the Nonprofit SectorPanel on the Nonprofit Sector TransparencyTransparency

IRS returns, financial statement auditsIRS returns, financial statement audits GovernanceGovernance

Conflict of Interest disclosureConflict of Interest disclosure Audit committeesAudit committees Reporting of malfeasanceReporting of malfeasance

Government OversightGovernment Oversight

Accreditation and Standard-SettingAccreditation and Standard-Setting

What is accountability?What is accountability?Evelyn Brody – “Accountability and Public Trust”Evelyn Brody – “Accountability and Public Trust”

www.brookings.eduwww.brookings.edu

Financial ProbityFinancial Probity ““to answer for one’s actions”to answer for one’s actions”

Good Internal GovernanceGood Internal Governance What about when stakeholders demand a role in decision-What about when stakeholders demand a role in decision-

making?making?

Adherence to Donor Direction and MissionAdherence to Donor Direction and Mission Changes in donor base; need for organization to evolveChanges in donor base; need for organization to evolve

Effectiveness and Public TrustEffectiveness and Public Trust Little agreement about what it means to be effectiveLittle agreement about what it means to be effective ““America’s Top 100 Charities”America’s Top 100 Charities”

What is accountability?What is accountability?

Independent SectorIndependent Sector Narrow:Narrow: reporting actions to higher reporting actions to higher

authorities (e.g. IRS), reporting mechanisms, authorities (e.g. IRS), reporting mechanisms, explicit standards (e.g. accreditation)explicit standards (e.g. accreditation) But can accreditation be learned rather than But can accreditation be learned rather than

earned?!earned?!

Broad:Broad: upholding public trust; ethical conduct upholding public trust; ethical conduct (“obedience to the unenforceable”) - difficult (“obedience to the unenforceable”) - difficult choiceschoices

What is accountability?What is accountability?

Nonprofit Risk Management Center, Nonprofit Risk Management Center, free online software and companion bookfree online software and companion book

Pillars of AccountabilityPillars of Accountability Ethical FundraisingEthical Fundraising Strategic Risk ManagementStrategic Risk Management Fiscal IntegrityFiscal Integrity Cultural CompetenceCultural Competence

And then…And then… Leadership Leadership

SustainabilitySustainability Sound Employment Sound Employment

PracticesPractices

What is the genesis of the What is the genesis of the call for accountability?call for accountability?

Possibly:Possibly: Scandals involving nonprofitsScandals involving nonprofits

Excessive (?) payExcessive (?) pay Misuse of grant funding / donationsMisuse of grant funding / donations Insider relationships and conflicts of interestInsider relationships and conflicts of interest

Public contempt and mistrust of nonprofitsPublic contempt and mistrust of nonprofits Taxi-driver in RaleighTaxi-driver in Raleigh Customer at 7-11Customer at 7-11

How bad is it?How bad is it?

One in three One in three Americans believes Americans believes that U.S. nonprofits that U.S. nonprofits are wasteful in their are wasteful in their use of funds.use of funds. Independent SectorIndependent Sector, 1999, 1999

Changing Expectations, Changing Expectations, Evolving StrategyEvolving Strategy

Only your nonprofit can defineOnly your nonprofit can define Your own “code of accountable” conductYour own “code of accountable” conduct Adherence! Adherence! Legal compliance is baselineLegal compliance is baseline What’s reasonable? What’s practical?What’s reasonable? What’s practical? Consider contextConsider context

You need a “to do list” and guiding principlesYou need a “to do list” and guiding principles

The discipline of risk management can The discipline of risk management can provide a roadmapprovide a roadmap

What is accountability?What is accountability?another approachanother approach

Compulsory Compulsory AccountabilityAccountability Filing tax returnFiling tax return Reporting UBI and paying Reporting UBI and paying

UBITUBIT Complying with Bylaws and Complying with Bylaws and

Articles of IncorporationArticles of Incorporation Submitting payroll taxesSubmitting payroll taxes Meeting contractual Meeting contractual

obligationsobligations

What is accountability?What is accountability?

Enlightened AccountabilityEnlightened Accountability A customized plan based on your:A customized plan based on your:

History, resources, stakeholders, missionHistory, resources, stakeholders, mission Not based on a template; based on what Not based on a template; based on what

accountability means to youaccountability means to you Ethical conduct modeled from top down and Ethical conduct modeled from top down and

bottom up—no one left behindbottom up—no one left behind

What does it mean for What does it mean for your nonprofit?your nonprofit?

What can I do?What can I do? What should I do?What should I do? Who needs to be involved?Who needs to be involved?

Can we establish Can we establish measurable goals without measurable goals without lapsing into “met my goal lapsing into “met my goal syndrome”syndrome” The dieter’s lifestyle changeThe dieter’s lifestyle change

What is Risk?What is Risk?

““Risk is subjective… Risk is subjective… It is a word that refers to It is a word that refers to a future that exists only a future that exists only in the imagination.”in the imagination.”

John Adams, John Adams, University University College LondonCollege London

Risk management = Risk management = dealing with uncertaintydealing with uncertainty

What sorts of risks?What sorts of risks?

Volunteer / customer dissatisfactionVolunteer / customer dissatisfaction Unfavorable publicityUnfavorable publicity Failure of computer systemsFailure of computer systems Breach of contractBreach of contract Fraud /embezzlementFraud /embezzlement Funder dissatisfactionFunder dissatisfaction What else?What else?

Critical GoalsCritical Goals

Risk management Risk management sensibilitysensibility ““fire escape plan”fire escape plan”

Awareness / visibility Awareness / visibility of riskof risk

Enable focus on most Enable focus on most critical riskscritical risks

Reduce surpriseReduce surprise

Risk Management: Why?Risk Management: Why? reduce the likelihood of injuries/mishapsreduce the likelihood of injuries/mishaps minimize adverse effects of any losses that do minimize adverse effects of any losses that do

occuroccur enable an organization to demonstrate due enable an organization to demonstrate due

diligencediligence meet minimum funder and/or insurer meet minimum funder and/or insurer

requirementsrequirements achieve legal and enlightened accountabilityachieve legal and enlightened accountability support the board’s discharge of its fiduciary support the board’s discharge of its fiduciary

dutiesduties

The Risk Management The Risk Management RoadmapRoadmap

Why is the board’s Why is the board’s involvement crucial?involvement crucial?

Managing the risk of Managing the risk of too much too much involvement?!involvement?!

The Risk Management RoadmapThe Risk Management Roadmap

1 Examine the context,Identify risks

Communicate and consult

2Evaluate risks

3Decide what to do

4Implement, monitor and review

How? Getting the Board How? Getting the Board Involved in Risk ManagementInvolved in Risk Management

The Risk Management CommitteeThe Risk Management Committee

The Risk Management PlanThe Risk Management Plan

Integrating “risk” into planning exercises and Integrating “risk” into planning exercises and activitiesactivities

The board’s operationsThe board’s operations Compliance with Bylaws?Compliance with Bylaws?

Prepare for an uncertain futurePrepare for an uncertain futurecan a nonprofit be accountable without risk management?can a nonprofit be accountable without risk management?

Examine threats and opportunitiesExamine threats and opportunities Must be periodicMust be periodic Must involve people with diverse perspectiveMust involve people with diverse perspective The board must be involved and up to dateThe board must be involved and up to date

Consider prevention, mitigation Consider prevention, mitigation andand coping coping strategiesstrategies

Address perception as well as realityAddress perception as well as reality be at risk vs. feel at riskbe at risk vs. feel at risk fears may not match the factsfears may not match the facts

Too afraid of lesser risks/not sufficiently afraid of bigger onesToo afraid of lesser risks/not sufficiently afraid of bigger ones Radiation from nuclear waste or mobile phones versus the sunRadiation from nuclear waste or mobile phones versus the sun

use information to sort things outuse information to sort things out

Remember compliance; but don’t Remember compliance; but don’t assume you’ve got it rightassume you’ve got it right

Good intentions aren’t Good intentions aren’t good enoughgood enough Classifying nonexempt Classifying nonexempt

workers as “exempt” workers as “exempt” because your nonprofit because your nonprofit can’t afford overtime paycan’t afford overtime pay

Classifying employees as Classifying employees as independent contractors to independent contractors to avoid the hassle and cost avoid the hassle and cost of employment taxes and of employment taxes and benefitsbenefits

Follow the Golden RuleFollow the Golden Rule

Treat employees with the Treat employees with the same respect you afford to same respect you afford to clients / consumersclients / consumers The most effective strategy for The most effective strategy for

managing the risk of managing the risk of employment claims!employment claims!

The all-too-important EDThe all-too-important ED What happened to the cause?What happened to the cause?

The field trip to the “best place to The field trip to the “best place to work in the state”work in the state”

What the outside world sees and What the outside world sees and hears; the demoralized staff hears; the demoralized staff insideinside

Accountability Starts with PeopleAccountability Starts with People

Your nonprofit cannot be accountable unless it Your nonprofit cannot be accountable unless it holds people within the organization holds people within the organization accountableaccountable:: Board membersBoard members

Paid staffPaid staff Supervisors who aren’t able to honestly assess the Supervisors who aren’t able to honestly assess the

performance of othersperformance of others Volunteer staffVolunteer staff

Having a plan for terminating a volunteer before you need to Having a plan for terminating a volunteer before you need to use ituse it

Clients / consumers?Clients / consumers? The Code of Conduct at the gym in Pensacola, FLThe Code of Conduct at the gym in Pensacola, FL

Acknowledge Failure; Be HonestAcknowledge Failure; Be Honest

Get ready to “de-program” if Get ready to “de-program” if necessarynecessary

Stop doing things that don’t Stop doing things that don’t workwork Put yourself in the shoes of an Put yourself in the shoes of an

investor… finding out years later investor… finding out years later that resources were poorly spentthat resources were poorly spent

Don’t “oversell” your programsDon’t “oversell” your programs The cost and availability of The cost and availability of

insurance may be affected!insurance may be affected!

Culture of CandorCulture of Candor

The Board must be engaged to fulfill its The Board must be engaged to fulfill its risk management responsibilitiesrisk management responsibilities Never asleep at the wheel nor over the lineNever asleep at the wheel nor over the line Cultivate a Culture of Candor—it begins at the Cultivate a Culture of Candor—it begins at the

board levelboard level Tough questions?Tough questions? Occasional discomfort and uneaseOccasional discomfort and unease

Tune in to signs of possible Tune in to signs of possible accountability failureaccountability failure

Volunteer / customer Volunteer / customer dissatisfactiondissatisfaction

Unfavorable publicityUnfavorable publicity Loss of fundingLoss of funding Breach of contractBreach of contract Fraud /embezzlementFraud /embezzlement Funder dissatisfactionFunder dissatisfaction

Accountability and Accountability and Conflicts of InterestConflicts of Interest

Acknowledge and Acknowledge and address conflicts of address conflicts of interestinterest Board members Board members

wearing two hats—not wearing two hats—not a good look for your a good look for your nonprofit!nonprofit!

Common conflicts:Common conflicts: Insurance advisorInsurance advisor Legal advisorLegal advisor

Remember the Free Online ToolRemember the Free Online Tool

Reach Out for Help!Reach Out for Help!

Nonprofit Risk Management CenterNonprofit Risk Management Center www.nonprofitrisk.orgwww.nonprofitrisk.org

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Melanie@nonprofitrisk.orgMelanie@nonprofitrisk.org (202) 785-3891(202) 785-3891