A nonprofit board is a governing body responsible for strategic decisions and oversight at a charitable organization. One of the best-known duties of a board is to appoint a nonprofit executive director or CEO who will then keep the board informed about day-to-day operations and vital information needed to make decisions. 

Another key responsibility of nonprofit board members is to manage organizational risk. Nonprofits face some of the same risks that for-profit businesses do, but there are also some risks unique to tax-exempt organizations, and each nonprofit will have its own unique risk profile based on operations, revenue, location, and other factors. Risks are inescapable, but unmonitored risks can quickly go from bad to worse if nothing has been done to prepare for potential issues. 

In this guide, we’ll cover what board members should know about managing risk at the nonprofit they serve. Let’s dive in!

Who is responsible for nonprofit risk management?

For risk management to be effective, all staff and board members at the organization need to be involved. The proper policies apply to everyone, from staff members remembering to lock the office door at the end of the day to the financial team properly recognizing revenue to a volunteer properly reporting a safety incident. 

To ensure all stakeholders (employees, board members, volunteers, donors, etc.) are equipped to minimize risk, effective risk management begins with crafting policies and procedures that prepare for potential situations. Let’s take a look at each stakeholder’s role in risk management:

• As a board member, you will supervise and direct the creation and implementation of risk management policies and procedures.
• The nonprofit’s leadership team will create policies and procedures, then execute them.
• Your nonprofit may bring in external financial professionals to consult on the design of your risk management process, since many potential nonprofit risks impact your finances.
• Staff members implement the policies and procedures and ensure that the guidance is shared with other stakeholders (such as volunteers) who might be affected by the risk management policies.

While you may not have frequent interactions with all of the nonprofit’s staff as a board member, setting a culture of policy compliance and risk minimization begins with the board. By prioritizing risk management and making policies clear and achievable, you set the tone for everyone else’s efforts.

What does proactive risk management look like?

Policies and procedures are the first step in risk management, but they don’t fix everything by themselves. We’ll cover policy examples in more detail below, as well as two other ideas to evaluate as a board member.

Establish policies and procedures

As a nonprofit grows larger and more complex, there will likely be more and more policies that need to be established to account for new incidents that may arise. But every nonprofit board should consider the following areas of risk and corresponding policies and procedures:

• Financial management: Internal controls, which we’ll discuss in more depth in another section, fall into this category, but outlining how money is handled (where any cash is stored, who signs off on big purchases) and spent within the organization is crucial. A few financial policies to consider specifically are:
  • Gift acceptance so team members understand what monetary and in-kind contributions they can and can’t accept
  • Staff compensation so that all employees (especially leaders) are paid fairly but not excessively in the eyes of the IRS
  • Expense reimbursement so staff and volunteers know when they’re eligible to be paid back after spending their own money on your nonprofit’s behalf

• Data privacy: Outline clear guidelines for the collection, use, and storage of personal data. This is particularly delicate as nonprofits receive financial information from donors. A data breach could expose sensitive details and compromise supporters’ trust in your organization.
• Workplace harassment: Even if the nonprofit is relatively small, implementing workplace harassment awareness and prevention training is crucial. Boundaries can sometimes blur in smaller work environments, and communicating ethical and legal standards can mitigate harm to employees and stakeholders.
• Background checks: Particularly if your organization serves vulnerable populations, implement background checks for anyone who works with those groups. For example, you’ll want to run a check for a volunteer who helps in the nursery during a service at a faith-based organization or anyone who handles your nonprofit’s money.
• Conflicts of interest: This policy often applies to board member activities like voting. Your guidelines should require board members to disclose any potential conflicts of interest and outline next steps (such as that member abstaining from a certain vote or the whole board re-evaluating a decision).

This is not a definitive list of potential risk areas and mitigating guidelines that your nonprofit may face. Consulting with a nonprofit financial advisor can illuminate risks unique to your organization and provide guidance for how to begin preventative measures.

Diversify your nonprofit’s team

For both the board and staff, if everyone has the same set of skills, you’re exposing your organization to additional risks, because you’re not accounting for the diverse range of abilities that are required to successfully operate a nonprofit. Part of this is also staffing your nonprofit sufficiently. When employees are overwhelmed with tasks, things are more likely to fall through the cracks, especially tasks that employees don’t have the skills for.

When you’re recruiting new board members, keep in mind what skills and experience might be lacking on your board, but would help steer the nonprofit. A few skills or occupations that might be useful to have include a lawyer, a financial professional, and a development professional. 

Additionally, for your nonprofit executive team, you’ll want to make sure you have the right person in crucial positions, like a Chief Financial Officer role. Jitasa recommends working with a fractional CFO if your nonprofit doesn’t have the resources to hire someone full-time for this position. 

Across the organization, it’s a good idea to have a clear delegation of duties based on areas of expertise and clear training protocols for when team members take on new duties. Having owners of tasks holds team members accountable and increases the likelihood that they will be completed to the highest standard of quality.

Implement internal controls

Internal controls are policies and procedures that your nonprofit implements on top of legal and financial standards. Controls safeguard against intentional and unintentional fraud, like having two employees sign off on cash deposits, which can catch any counting errors. 

Some internal controls will affect day-to-day activities, like storing any cash in a locked drawer or safe, and some might occur less frequently, like conducting an audit or determining what percentage of reserve funds should be invested. As a board member, this is another area to review with financial consultants to make sure proper controls are in place.

How should you mitigate and respond to risks? 

A lot of the battle when it comes to risk management is planning for the worst, ahead of time. This includes being on the same page with the executive team about what board members’ roles are when it comes to a risky situation actually occurring. 

Outline who should be alerted to risks and within what time frame. Triaging the risk according to pre-determined categories, like the severity of consequences, can inform communication procedures. 

Once you’ve been informed of the risk, as a board member, it’s your responsibility to ensure that policies are followed, and you support the nonprofit executive team if complications arise. 

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Preparing for the worst might be uncomfortable, but implementing risk management is necessary for any organization’s health and sustainability. As a board member, your risk management leadership is crucial to ensuring that your nonprofit’s mission is carried out no matter what circumstances come its way.