Risk Management

Key Areas of Focus
Dr. William C. Crothers 
This article provided by the Engstrom Institute

Risk management is a major responsibility of the administration of nonprofit organizations, but it is seldom considered beyond simply having insurance coverage. Over the last two decades the need for more formal risk management program has become apparent. Risk might be categorized as operational, legal, financial, and image. While the examples given tend to focus on colleges and institutions, the principles apply regardless of type of nonprofit.

1. OPERATIONAL RISK

Property loss can result from many national events (e.g. weather, fire flood, and earthquakes), from theft or other crime, from machinery failure, or even from technology breakdowns. In addition to property loss, the operation can be shut down by civil unrest, chemical exposure, or utilities disconnect. Planning for the inevitable crisis should be well documented and procedures, well rehearsed.

2. LEGAL RISK

In today's litigious society, risk management is essential. The diversity of issues to anticipate is almost endless and would include for colleges, for instance, litigation by students and/or employees regarding student discipline, hazing, grades, failure to grant tenure, violation of academic freedom, and discrimination regarding religion, gender, race, or disability. Safety requirements can be an area of exposure, including liability during construction. There is also legal exposure regarding land use, contamination, and other aspects of real estate. It is important to be aware of federal, state, and local laws. Having access to good legal service is fundamental. Some firms conduct a formal legal audit. For example, the legal audit questionnaire by Gammon and Grange is comprehensive (over 100 pages) and costs just a few hundred dollars including one hour of consulting regarding the questionnaire. Follow-up reviews require a larger fee, of course, but can be helpful. However, one should note that an institution needs to be serious about fixing any problems discovered in the audit. If an organization knows there is a problem and does nothing, any lack of compliance becomes "knowing" instead of nearly " negligent" with correspondingly greater penalties. Of course, the objective is to both know what is right and to do it. One area related to legal risk of particular concern to faith-based colleges is employment regulations. There are religious exemptions at the federal and state level. Appropriate questioning during the pre-employment inquiry is very important and institutions need to train campus leaders who are involved in this process.

3. FINANCIAL RISK

Many institutions are vulnerable to financial losses due to sharp revenue declines, investment losses, or even changes in government policy regarding student financial aid. Planning for the possibilities is the responsible defense. Budgets should carry contingencies and reserve funds, and clear policies must be in place for endowment management. Most private colleges could not survive without federal and state student financial aid. Thus, it behooves the administration to participate with NAICU at the federal level and the CICU at the state level to influence legislation. Of course, ultimately, emphasizing the building of endowment is the best defense.

Other financial responsibilities carry risk, including the management of trusts and gift annuities. Twenty-eight states regulate the investments and management of gift annuities. Following state insurance laws and well-developed policies can minimize risk.

4. IMAGE RISK

A loss of accreditation or academic reputation can have a devastating effect in an institution's ability to recruit students and raise funds. Bad public relations surrounding campus decisions, statements made by faculty and campus leadership, or student behavior can hurt the institution. It is important for the institution to maintain ongoing good relations with reporters and those in leadership in media. If the president has good relations with the publisher and editor of local newspapers and TV news anchors for local stations, an institution or organization increases its chance for a fair hearing.

Insurance Review and Emergency Response Plan are Critical

An institution should consider having an insurance consultant to review all insurance policies and assess whether appropriate coverage is provided. The consultant can also prepare an RFP (request for proposal) and coordinate bidding out the purchase of insurance. The insurance consultant should not be a broker, but one compensated by a fixed fee specializing in securing comprehensive bids for coverage. It is also important to have clear conflict-of-interest policies governing doing business with donors and friends of the organization.

A well-developed emergency response plan should also be in place and tested through simulation. An annual risk management report to the Board of Trustees can give assurance that the risk management program is well developed. Ultimately, an organization must reach a balance of protection, prevention, and risk exposure. Determining the level of tolerance for risk that is appropriate should be discussed with the board.

Dr. William C. Crothers is the president emeritus of Roberts Wesleyan College, in Rochester, NY and former president of Asbury College, Wilmore, KY. In addition, Dr. Crothers has served as both a board member and a Senior Fellow for the Counsel for Christian Colleges and Universities (CCCU), and as the chair of the United Christian College Fund. He is the founder of Presidential Leadership Associates.