The board of directors in a nonprofit organization serves as a protection compass, and board members bear financial responsibilities, which means they must act with a high level of diligence and for the benefit of the overall organization they serve.

Often, a nonprofit board capable of meeting risks, at its core, possesses leadership qualities to maintain the sustainability of the organization, and in the meantime, board members who are aware of all the necessary conditions for overseeing a nonprofit organization and its budget are in fact good managers of various risks facing the organization and ideal supervisors in relation to corporate governance principles.

Nonprofit organizations advocate for some of the toughest issues that government and private institutions struggle to address, unlike profit-driven companies that aim to satisfy their shareholders and customers, board members and leaders of nonprofit organizations need to feel the trust and responsibility granted to them by the community and supporters of the organization, while their main goal is to achieve the organization's mission, rather than making profit.

According to a report by Oliver Wyman titled “Risk Management for Nonprofit Organizations,” many nonprofits have come to the brink of resource depletion, as board managers lack the knowledge and experience necessary to effectively oversee a nonprofit organization.

Risks are growing in the world of nonprofit organizations:

When we think of all the good things that nonprofit organizations offer, it is easy to overlook any risks they may face along the way, meanwhile, the insurance policies for directors and staff protect board members from lawsuits that may arise from actions or decisions made by the board. While board members have the ability to control some risks, they may struggle to confront other challenges.

In general, well-managed nonprofits know how to present the issues they advocate for to major donors, yet this does not negate the fact that there is significant competition for granted funds.

What makes this a challenge for nonprofits is that they are first required to provide public services to beneficiaries before they can receive some funding, and various governments usually allocate money within their budgets for some nonprofits, but those responsible for such tasks may be slow to issue payments.

In this context, the state of Illinois is a recent and live example of this, as the governor and general assembly's failure to approve a budget allocated for nonprofits for two years led to the accumulation of over $15 million in debt in the form of unpaid bills, as a result, nonprofits that were not prepared for such delays had to resort to their reserves, and once those reserves were depleted, many nonprofits often find themselves struggling to survive, in light of these changes, nonprofit boards must do their utmost to anticipate financial fluctuations and plan how to cope with them.

Good governance requires a risk management plan:

The process of fundraising and financing is a key issue for nonprofits. Board members should be able to understand financial reports and how to assess the budget in the short and long term, as much of nonprofit funding is unpredictable, and boards should develop disaster and emergency plans so they do not have to withdraw if they face a complex situation.

Governance starts from the board:

Board members must evaluate risks and opportunities that may arise in the near or distant future, and to achieve this goal, board managers must have a comprehensive vision, which will provide the organization with broader prospects, the board must continuously work to identify, assess, and manage risks, which is quite similar to the duties of the boards of publicly listed companies, where the board has significant authority to delegate key actions and transactions, hence, they should use their influence wisely.

Good governance means overseeing the management of the organization while making decisions about various operations, at the same time, boards need to build strong communication bridges concerning management, and the role of the board in these relationships is to provide advice and guidance to managers and provide resources to them.

Good governance also refers to providing opportunities to hear the opinions and perspectives of all board members, without allowing one or two members to dominate discussions, all board members should feel a degree of comfort in requesting the inclusion of certain information in their agendas and sharing information they have obtained from their own sources, under the guidance and management of the board chair, board members in a nonprofit organization strive to exchange views among themselves, as well as with management, community professionals, the advisory board, and independent advisors when necessary.

Final thoughts on the relationship between risk management and governance:

Risk management is part of prudent corporate governance in a nonprofit organization. Nothing is entirely certain in the nonprofit field, but boards that practice prudent corporate governance will mitigate the inherent risk factors in any type of organization.

Source: BoardEffect