How Foundations Can Develop Policies to Embrace Risk

For several months, a coalition of nonprofit leaders called the Commons has been examining ways for grant makers to be more aware of, and open about, their tolerance for risk.

We believe a foundation’s willingness to tolerate risk is integral to its culture, not separate from it. In fact, culture informs how an organization approaches risk.

When grant makers view risk management as a component of culture, they can readily communicate, internally and to grantees, how they like to prepare for and respond to unanticipated issues that inevitably arise while projects and programs are underway.

The coalition has been sharing and developing sample procedures, policies, and practices to help foundations determine and communicate their tolerance for risk and integrate these attitudes into their cultures. Here are some steps foundations can take to assess and encourage risk tolerance.

1. Determine your appetite for risk.

Foundations fall into three broad categories on this score.

High: These groups seek to learn from financial losses and programs that have flopped. They tend to invest in newer ideas, less-experienced leaders, and earlier-stage projects and organizations. They accept that their approach might require more time and they may encounter failure along the way. Implicit in this approach is the idea that higher risks result in higher returns.

Moderate: These foundations occasionally make bets that have long-term potential payoffs, albeit involving proven organizations or established projects. However, they prefer sticking with projects that have already demonstrated a likelihood of success than taking a chance on a first-time grantee.

Low: Such groups rely more on proven methods and stable organizations with well-tested leaders. They tend to give to the same grantees repeatedly and favor projects that they can track within a short period of time. They prefer not to risk their reputations on complex or controversial programs, especially when safe and straightforward opportunities exist to accomplish their goals.

2. Create a risk-profile statement.

A risk-profile statement communicates the organization’s attitudes about how much risk it is willing to take on when making grants. The statement may cover:

• How much proof the foundation needs of the charity’s experience before it will make an initial grant.
• The foundation’s willingness to be the first or majority funder of a given program or organization.
• Anticipated failure rate of funded projects or programs, and the grant maker’s usual response to missed outcomes or unexpected challenges.
• Availability of contingency funding for unforeseen roadblocks during a project or program.
• The desired mix of high-, medium-, and low-risk grants in the foundation’s portfolio.
• Circumstances and types of risks considered least tolerable (e.g., poor governance, unwanted publicity, or missed deadlines).
• Expectations of the grant maker and its grantees about informing one another of unexpected developments, and about how to handle them.

Large or complex organizations may find it valuable to develop additional risk guidelines for specific projects.

3. Integrate risk into your culture.

To fully integrate attitudes about risk into a foundation’s culture, leaders should:

• Circulate your risk-profile statement internally and externally and post it on your website.
• Schedule regular conversations with trustees, staff members, and grantees to see how well your organization is following its guidelines.
• Periodically analyze the mix of low-, medium-, and high-risk grants you make.
• Offer incentives to staff or others to ensure that the organization takes smart risks in line with its profile and embraces full or partial failures as learning opportunities.

Darin McKeever is chief program and strategy officer at the William Davidson Foundation and a member of the Commons, a coalition of nonprofit leaders working to produce practical methods for assessing and planning for risk.