Are foundations missing out on impact by not managing enterprise level risk?
Enterprise risk management in philanthropies
Philanthropies as risk takers
To make meaningful progress, philanthropies need to embrace risk. Progress towards transformative social or political improvement invariably means funding ‘longshots’ – programmes that are “risky” or likely to face significant obstacles in achieving their end goals, but are nevertheless worth trying. Today, philanthropic funders often talk about making “big bets” and taking smart risks to achieve impact. However, they often do not have a shared understanding about what risks they can and should take, and therefore cannot reach consensus.
As a result, individuals and programmes within a foundation can take a completely different approach to risk. Some might take too many risks, putting the organisation and its reputation in jeopardy and others might be more conservative, just funding safe and proven ideas that may not lead to sufficient impact. Enterprise level risk management offers a more transparent and structured way of looking at risk that recognises how individual decisions can combine to create or compound risks such that they are of enterprise wide significance.
This blog has been written with a focus on philanthropic foundations but may be equally relevant and useful to other types of funders and programme implementers operating in the social impact, advocacy, and development space.
Why is a holistic risk management approach needed?
Whilst some philanthropy CEOs and programme leaders may at first view enterprise risk management as something designed to prevent an organisation from taking unnecessary risks, it is intended to enable an organisation to make better informed decisions around risks that lead to greater impact.
A defined and robust approach to enterprise-wide risk management will:
- Ensure that risks are taken intentionally and are aligned with strategic priorities to maximise opportunities and make meaningful impact;
- Improve chances of success by recognising and evaluating risks that foundations can monitor, prepare for, and mitigate; and
- Build visibility and transparency by establishing defined risk-taking processes and decision-making criteria to increase clarity for internal and external stakeholders.
A holistic enterprise-wide view of risk will require an organisation to have an explicit approach to clearly establish:
- Risk governance: Who is taking risk decisions? What is the appetite for risk? What is the overall risk strategy?
- Risk processes: How to identify, assess, monitor, manage and report on risks? How is this aligned with the organisation’s philanthropic mission and thematic initiatives
- Risk infrastructure: Who are the people supporting risk processes? What systems will enable the organisation to manage risk?
Today’s key challenges for philanthropies
For many organisations, “reputational capital” is a fragile concept, and in a polarised world foundations have a choice of how much reputational exposure they are prepared to take in pursuit of making an impact. Furthermore, foundations can typically take on more reputational risk than other funders such as, for example, government development agencies. However, the materialisation of key risks will often have a reputational impact with the potential to seriously damage an organisation’s legitimacy, undermine the capacity to operate freely, as well as the ability to attract co-funders, implementing partners or staff. Funders who allow reputational considerations to overly constrain decision-making may find their ability to take ‘longshots’ limited. In today’s polarised world reputational consequences of decisions will not be uniform; what is reputationally damaging for some stakeholders may add kudos and strengthen reputation with others.
Whilst endowed foundations are unique in that the materialisation of reputational damage does not directly pose funding challenges, exposure to reputational scrutiny may increase the interest in an organisation’s financial affairs. Indeed, all foundations are exposed to the potential for a change in tax regulation and/or the tax status of individual foundations. Any change in a foundation’s tax status has the potential to severely curtail how entities could use their funds and in the worst-case scenario lead to a withdrawal of non-profit or charitable status.
Philanthropies also face strategic headwinds around the world with ongoing military conflicts, political polarization, trends towards nationalism and regionalism, impacts of climate change, as well as widespread misinformation and cybersecurity challenges. Whilst foundations may well be funding philanthropic initiatives arising from these challenges, each of these threats have the potential to impact organisations and detract from their missions. This underlines the need for the structured and systematic assessment of the external risk environment.
A further challenge faced by many philanthropies is their leadership structure as organisations are often led by key visionary individuals with a concentration of power and authority. Leadership changes therefore have the potential to prompt both operational and strategic shifts which could have knock-on implications for both internal and external stakeholders and will further contribute to the risk environment.
What other risks do philanthropies face?
Although the key challenges outlined above may be amongst the most ‘top-of-mind’ considerations, there is a wide arrange of operational, strategic, and programmatic risks which a philanthropic organisation may face. A high-level view of some of these is shown below.
Establishing a shared understanding of risk
To establish a holistic approach to risk, funders – philanthropic and other – should formalise their risk appetite to explicitly articulate what risks they are comfortable taking and those risks which they are not. A simple example of how a philanthropic organisation could articulate its risk appetite is shown in the figure below.
The need to consider risk appetite is particularly acute given the unique capacity of philanthropies to take risk. The nature of philanthropies exposes them to an array of political, legal, regulatory, and potentially physical security challenges, all of which should prompt careful consideration and balance between risks taken at the programmatic level and the aggregated enterprise-wide view of risk.
Such considerations will require a shared understanding of the risk environment between programmatic / in-country staff and those at the centre. An additional challenge is that decision-making is often concentrated in North America or Europe, whilst programmatic activity may well be executed in the Global South and in conflict-affected environments.
Balancing programmatic and enterprise risk
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The imperative for philanthropies to embrace risk management to maximise impact
Conceptually, risk taking is a natural part of business for funders, but too often, consideration of risk stays “in concept,” and as a result, funders leave themselves vulnerable in ways they may be unaware of. The complexities of the risks these organisations face, as well as the strategic headwinds faced by many philanthropies, underlines the imperative for philanthropies to be able to have a complete picture of their risk environment and ensure that day-to-day decision making is supported by a fit-for-purpose risk management approach. Implementing this approach will result in taking better risks that lead to greater social impact and transformational change.
Deloitte International Affairs and Development
Deloitte partners with international, purpose-driven organisations around the world including philanthropic foundations, not-for-profits, NGOs, and development agencies in pursuit of the UN Sustainable Development Goals. Our work involves supporting enterprise transformation of these organisations, as well as supporting the design and implementation of the programmes they fund.
Deloitte Enterprise Risk Management
We help organisations become more resilient through intelligent risk management. Our work supports client to navigate the complex external and operating environments they face. We support organisations to rethink how they anticipate, plan, respond and recover from disruption and manage uncertainty better.
Contact us today to discuss how we can support your foundation in achieving its goals while minimising risk.
