Governance. Never before has a single word represented such risk and such reward that it is at the top of every board’s priority list. It is not something that can be addressed quickly or easily; boards are constantly being challenged to find synergy between management and governance, especially in the nonprofit sector.
The challenge is not in defining management and governance. The challenge instead lies in determining who is responsible for managing and for governing. The nonprofit organizations that correctly make this determination reap significant rewards in achieving their goals, while those who do not see their reputations deteriorate, along with their funding and volunteer support. Additionally, the inclusion of the personal assets of directors and officers, in newsworthy cases such as WorldCom, underscores the high level of personal liability shouldered by the board of directors.
According to annual surveys conducted by Tillinghast-Towers Perrin, directors and officers (D&O) insurance claim frequency, severity, payments, and defense costs have increased steadily since 1999, and will likely increase further as stakeholders continue to hold directors and officers accountable for the actions or inactions taken by or on behalf of the organizations they represent. Although D&O insurance is important, it cannot fully mitigate the risks an organization and its board face if poor governance exists. It is impossible to avoid all risk. The only solution, therefore, is effective risk management.
Risk management is a thorough process of identifying, sourcing, measuring, prioritizing and managing the risks faced by an organization. This discipline supplements other disciplines, such as strategic planning and financial management. It deserves the attention of the board and senior management because it can help meet objectives common to most nonprofit organizations, such as improving asset stewardship, demonstrating accountability, attracting stakeholders, freeing up resources for mission accomplishment, and governing effectively. As described in this article, the board and management can develop an effective framework to mitigate the risks to their individual and organizations’ reputations in this new era of governance.
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