This article is reprinted from the Summer 2017 edition of the Nonprofit Quarterly, “Nonprofit Graduation: Evolving from Risk Management to Risk Leadership.”
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As [Frank] Knight saw it, an ever-changing world brings new opportunities for businesses to make profits, but also means we have imperfect knowledge of future events. Therefore, according to Knight, risk applies to situations where we do not know the outcome of a given situation, but can accurately measure the odds. Uncertainty, on the other hand, applies to situations where we cannot know all the information we need in order to set accurate odds in the first place.
—Peter Dizikes
The distinction vis-à-vis for-profits, described by MIT News staff writer Peter Dizikes, above, can also be applied to the nonprofit sector—except that in the non-profit sector, risk is not measured so much against reward as against organizational harm prevention. And therein lies a profound attitude problem.
The Nonprofit Quarterly has always engaged in the risk management conversation a little half-heartedly—there was something about the way this exciting topic has tended to be addressed that struck us as far less than inspired or inspiring. And then we decided to do an edition on risk and uncertainty, and we were forced to delve in. That is when we realized that what we didn’t like was the caution-based framework that pre-dominates. It limited not only our conversations but also our organizations—which are, of course, the product of our conversations.
We cannot argue that caution is unimportant in a sector that is, in large part, based on notions of responsible stewardship—but is it the be-all and end-all of how we should be approaching risk? Without an enthusiastic embracing of risk, there is no advancement or societal leadership, so maybe the questions lie in how we approach and interact with risk—which, due to factors beyond our control, can never be completely managed.
This takes the discussion to an acknowledgment that there is a big difference between risk that is relatively predictable and risk that is far less so. Relatively predictable risk often lies in our financial structures. Unpredictable risk lies in such things as weather patterns—as nonprofits on the Gulf Coast and in New Jersey can tell you—and in other cataclysmic events like 9/11. And then there are many situations in the middle—such as presidential and local politics—that may threaten your community. (You cannot really manage these last two categories, although you can certainly participate in trying to mitigate harm when it looms on the horizon.)
Unpredictable risks and those that lie in the middle of the continuum often pose choices between types of risks that can be taken rather than choices that offer a path to no risk. So, if we spend a good deal of time and energy just trying to avoid risk rather than learning what protects us from it—and projects us forward, even—then we are missing all the fun and potential on the horizon.
Predictable Risks
When businesses talk about risk management, they are discussing (amongst others) it in terms of financial and liability risks—and as complex as these can seem, they may actually be the tamest of the risk categories. Problems in these areas are often self-inflicted, in that one has usually chosen to ignore something that is commonly recognizable. That does not mean that these problems are easy to solve but rather that they can, in fact, be managed.
The lack of a thorough understanding of one’s business model and its drivers is a very common welcome mat for unnecessary (because it is so predictable) risk.
When the risk you take is measurable—because there are known formulas that could have advised you, and you ignore those formulas—then you have acted imprudently and exposed the organization to preventable risk.
Unpredictable Risks
Hurricane Katrina is a good example of an unpredictable risk, and the Coastal Family Health Center’s (CFHC) experience during the onslaught and aftermath of that storm is illustrative of how organizations can survive and even thrive in the face of this category of risk. CFHC could not possibly have thoroughly planned for what occurred, but some of its preexisting characteristics ended up working in its favor. Some of these characteristics lay in the networks in which the organization was embedded, some lay in the purposefulness of its members, and some lay in the ability to respond quickly to create pockets of order amid chaos.
Rikki Abzug, who also studied businesses in the aftermath of 9/11, wrote: Any organization exists within concentric circles of stakeholders/environmental forces that act upon it, and upon which the organization acts. For any organization, a shaky ring—whether it is a global crisis, a national economic downturn, governmental retrenchment, unstable local politics or climate, or even wayward board members or staff—can lead to service and security disruption. When a crisis impacts a series of these concentric rings, the impact on the core organization may well become amplified. This is part of the story of CFHC.
Risk is a byproduct of our work, and, as such, we need to get good not only at managing it but also at using it to launch ourselves to the next level of effective and powerful practice.
Downloaded and adapter from https://nonprofitquarterly.org/2017/07/25/sorting-nonprofit-risk-and-uncertainty/ (26 July 2017)