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What's the Board Got to Do With it?

The Vital Link Between Good Governance and Risk Management

By Melanie Lockwood Herman

During my trip to Australia this summer I was surprised and delighted to see that risk management tops the list of key agenda items for a typical nonprofit board. At a conference for board members and CEOs sponsored by the Nonprofit Governance & Management Centre, the subject of risk management was featured in two keynote sessions and again in two conference workshops.

Like their American counterparts, nonprofits in Australia face increasing scrutiny and the call for greater accountability and transparency. But in stark contrast with their American counterparts, Australian nonprofit boards see the discipline of risk management as a vital and necessary tool for achieving greater accountability. None of the board members or CEOs I met equated board involvement in risk management with "meddling" in day-to-day operations. Rather, the enlightened leaders I met on my trip saw board attention to risk-taking and risk management as integral to mission fulfillment. Several conference participants told me that they viewed risk management as providing a clear path to good governance for Australian nonprofits.

The Nonprofit Risk Management Center's second book on the subject of boards and risk management was published earlier this month. The book titled Pillars of Accountability: A Risk Management Guide for Nonprofit Boards, dovetails with the free, online tool also known as Pillars of Accountability. The tool has been used by several thousand nonprofits since its debut in 2002.

The excerpt below is drawn from Chapter 2 of the new book, which addresses the subject of Strategic Risk Management. In Chapter 2 we present a "laundry list" of steps that a nonprofit board might pursue in order to address weaknesses in the organization's existing risk management efforts. In addition to selecting an action step, it is vital to identify a target date for completion and the lead board or staff member for the task. Review the list and check those that are suitable to your nonprofit.

Risk Management Committee

• If a Risk Management Committee does not currently exist, determine whether there is an existing committee that could be re-purposed or broadened to take on risk management issues, or whether it makes more sense to create a separate committee for this purpose.
• Determine the appropriate makeup of the committee. Are there essential positions versus flexible positions on the committee? For example, some nonprofits determine that having the organization's legal and insurance advisors on the committee is absolutely necessary, but the participation of various staff members can change.
• Establish an appropriate mission and work program for the risk management committee. What tasks will it take on? How often will it meet? What are the immediate or top priority assignments for the committee? In some nonprofits a top priority might be overseeing the bidding process for the nonprofit's insurance program.
• Consider the reporting structure and format for the risk management committee. How will the decisions or actions of the committee be reported to the board and how often?

Governance Risks

The legal structure and operation of a nonprofit affects the possibility of suffering a loss or achieving a gain. Disregard for the organization's mission or not following the bylaws can have negative consequences.

• Determine if the nonprofit's articles of incorporation are reviewed periodically to ensure both compliance with state law and concurrency with the organization's mission and purpose. If necessary, determine the steps required to amend the articles.
• Determine if the nonprofit's bylaws are reviewed periodically to ensure that they reflect current circumstances and operations. If the bylaws require updating, establish a schedule to bring this important governing tool up to date.
• Confirm that the nonprofit's bylaws contain a provision indemnifying board members. When an organization agrees to indemnify its board members it promises to pay the directors' legal costs (usually both defense expenses and any settlements or judgments) from claims arising from board service. Keep in mind that indemnification is a hollow promise unless the nonprofit has a financing strategy in place (with respect to claims against board members, the most affordable strategy might be a directors' and officers' liability insurance policy).
• Review the organization's current conflict of interest policy. Does the policy require that board members report conflicts on an annual basis? Is the policy followed or disregarded? Is it suitable for the organization or cumbersome?
• Does the nonprofit have a clearly-defined risk financing strategy, which describes the nonprofit's philosophy about paying for losses and the tools that the organization intends to use to pay for losses? If not, consider developing a risk financing strategy. For example:

  [Name of Nonprofit] is committed to protecting its financial and human assets to the greatest extent possible. [Name of Nonprofit] will seek to eliminate or reduce as much as practicable the conditions, activities, and practices that cause insurable losses. The organization will purchase insurance to provide indemnity for catastrophic losses and will decide, based on an analysis of the best interests of the organization, to either insure or retain those risks not considered of major importance to mission-critical operations and financial well-being. The board will receive an annual insurance stewardship report summarizing its insurance program, any significant losses and any changes made to the program during the prior year.

• Review the nonprofit's risk financing strategy to make certain that the division of labor between the staff and the board is clear. For example:

  To safeguard the assets and resources of [Name of Nonprofit], the organization will purchase insurance for those insurable risks of major importance to mission-critical operations and the financial health of the organization. It is the executive director's responsibility to oversee the organization's insurance program and provide an annual insurance report to the board.

Insurance Awareness

When asked about the adequacy of their nonprofit's insurance coverage, some board members report that they have received assurances from the organization's broker that the coverage meets the nonprofit's needs. Other board members express concern that the insurance program — a term referring to the collection of coverages purchased by an organization — may not be adequate. Responsibility for the fiscal health of a nonprofit and its mission are important facets of board responsibility.

While professional staff members and outside advisors can provide invaluable assistance to the board, the board should never view the subject of insurance as falling completely outside the board's territory. As is true with other areas of operations, when a nonprofit matures day-to-day responsibility gradually shifts to professional staff and paid advisors. However, the board should periodically consider its understanding of the insurance program and make certain it has the tools it needs to make its own assessment of adequacy.

• Determine the board's comfort level with the nonprofit's insurance program. Does each board member have a basic understanding of the coverages purchased by the organization?
• If the board is unfamiliar with the package of policies that protect the nonprofit from catastrophic financial loss, what information, resources, or education about the program are required to bring the board up to date?
• If the board has a strong, working knowledge of the nonprofit's insurance program, are there periodic reports and presentations which highlight changes, challenges or new developments?
• What concerns have board members raised about the nonprofit's insurance program? Have these concerns been addressed to the board's satisfaction? If not, what additional help might be required to obtain timely answers that will facilitate informed decision-making?

Independent Insurance Advisor

When a nonprofit's insurance advisor also serves on the board, various difficulties can ensue due to the lack of independence of this key advisor. The first step below is appropriate for nonprofits that find themselves in this difficult situation.

• Identify ways that the insurance professional could be supportive of the organization without serving on the board or other governing body. For example, perhaps he or she can serve on the risk management committee, or another committee involving nonboard members.
• If your nonprofit does not currently have an insurance advisor (broker, agent or consultant), consult peers at several nonprofit agencies in your community and request contact information for each agency's insurance professional.
• Remember to check the references of a prospective insurance professional. Ask the candidate's nonprofit clients: (1) How long have you been a client of the agent/broker? (2) How would you describe the service you have received? (3) What advice would you offer to a new client of this agent/broker? (4) Was the agent/broker responsive when you filed a claim? (5) Do you have any reservations about recommending your agent/broker to another nonprofit?

Achieving greater accountability is within reach for every nonprofit. Begin by choosing practical steps that are consistent with your resources and circumstances.