The world of funders and philanthropists is quite diverse. Yet regardless of our size, focus, or decision-making process, we all have two things in common: First, we all want our dollars to result in real impact and change. Second, no matter how we deploy those dollars, the impact we seek is not a sure thing. In other words, every grant and investment we make carries risk.
As described in an earlier blog post, The Missing Piece of Modern Philanthropy, few funders think about, discuss, or plan for the unexpected in their work. As a 2015 survey shows, 76% of funders don’t even ask their grant applicants ‘what could go wrong,’ and when funders don’t ask, grantees don’t tell. This missed communication matters deeply, because when funders and grantees ignore risk, we jeopardize the impact we seek to achieve.
Now there is a tool to help.
In 2016, a 25-member group, called The Commons, spent six months working to create a baseline Risk Management Toolkit including how-to guides, templates, and sample protocols that any funder can adapt or adopt for its own uses.
To help small-staffed foundations, families, and individual donors more easily navigate the toolkit, we offer the following key takeaways and three “top tools” to consider to bring a greater risk awareness and practice to your work.
Key Takeaways About Risk
- Risk is a nebulous concept, with both subjective and objective faces. The Commons defines risk as: the likelihood that an event will occur that will cause some type of undesirable effect. Although risk (i.e., the likelihood of something bad happening) objectively exists in all things, whether a funder chooses to take risk is a subjective evaluation of personal preference. So, although the existence of risk refers to a potentially negative event, choosing to take risk can be profoundly positive—or even necessary.
- Managing risk is about preserving impact. In the executive summary, the toolkit outlines several categories of risk that funders might consider: risks to their finances, risks to their reputation, governance risk, and finally risk to impact. If we are indeed investors in social impact, then risk to impact is the most important category to consider. As such, all steps that we take to minimize, avoid, or mitigate other risks, such as reputational for example, must keep preserving impact at the top of our minds. In other words, if you’ve eliminated every possible risk, you’ve probably also eliminated any chance for meaningful impact. Although we can and need to get better at managing risk, we should be careful that those efforts don’t stifle our fundamental work towards impact.
- Every tool should be “right-sized” for you. One of the tools suggests, for example, ways for funders to incorporate questions about risk into their RFP process. Many of you, however, may not have a formal RFP process. No problem! If your application process is more conversation based, then consider including the questions in your conversation rather than on a formal paper application. Similarly, while every funder should conduct some sort of risk assessment on potential grantees, make sure that the scope and scale of that assessment is proportional to your investment and engagement with the grantee. For example, if you make a $10,000 grant to an organization with a $1M budget, it’s probably not worth it to ask for a 5-page risk assessment (even if $10,000 is the largest grant that you make). However, a $10,000 grant to an organization that only spends $50,000 a year may warrant a deeper risk assessment and due diligence.
Top 3 Tools for Small-Staffed Funders
- How to Talk About—and Determine—Your Appetite for Risk: As Henry wrote in The Other Investment Policy Statement, foundations tend to be very intentional about setting a risk tolerance for their endowed investments, but hardly any foundations have deliberately discussed and codified their risk tolerance when it comes to their grants for impact. This multi-question discussion guide can help even a 2-trustee foundation intentionally and thoughtfully consider, decide, and set their risk profile for grants.
- How to Implement Non-Financial Risk Mitigation Strategies: Like any business, when nonprofits run into a problem, they often need more money to implement a solution. Yet, unlike most businesses, nonprofits neither have the internal cash reserves nor access to fast external capital to address the problem at hand. For this reason, the toolkit recommends that donors set aside contingency funds. However, for small donors who are constrained by a strict pay-out percentage, or unable to dip into their corpus for emergency funding, this financial solution may be unrealistic. Instead, we encourage small funders to consider a variety of non-financial risk mitigation strategies. Even if you can’t give more money, there are often many other tools at your disposal including no-cost extensions, technical assistance, connecting the grantee to other funders, or even simply adjusting expectations and milestones.
- How to Build Effective Funder-Grantee Relationships: This toolkit is not the first guide to promote more transparency, trust, and communication between funders and grantees. Moreover, many small-staffed funders pride themselves on their ability to be flexible, responsive, and have direct and frequent communication with their grantees. However, research shows that most funder-grantee relationships are not as effective as funders think they are. For example, while 77% of funders believe their grantees are comfortable coming to them with problems, only 52% of grantees actually say they would. So, while you may already be taking steps to build effective funder-grantee relationships, this tool is good checklist of best practice, and a reminder that building strong relationships is an ongoing process that requires iteration, iteration, iteration.
Maya Winkelstein is the executive director of Open Road Alliance and served as chair of The Commons. As executive director, Maya is responsible for the organization’s overall investment strategy, which includes finding new ways to deploy capital to achieve maximum social impact. For more updates from Maya and Open Road Alliance, follow Open Road on Twitter.
Henry Berman is CEO of Exponent Philanthropy. Since 2011, Berman has led Exponent Philanthropy using his wealth of experience managing people, projects, and budgets in the nonprofit and for-profit sectors. In addition to serving as CEO, he is also a member in his role of a co-trustee of a private foundation.