What to Consider Before Joining a Nonprofit Board: Three Steps to Weigh Your Risk

Written by Kevin Duke, Divisional Senior Vice President – Underwriting, Risk Management, Sales and Marketing, Specialty Human Services

Sitting on the board of a local or national nonprofit organization is a great honor and can be an incredibly rewarding experience. It’s an opportunity to help improve your community and leverage your strengths and experience. As a business and community leader, it is likely that you’ve been asked to take on such a role. While you may be tempted to agree immediately, it is important to take a moment to consider the duties, responsibilities, and potential risks of joining a board.

Do Your Research

Does the mission align with your personal beliefs / goals?

It’s likely the overall mission of the nonprofit you’re considering being a part of is close to your heart. However, as a potential board member, there is more to consider. Are you aware of and aligned to the strategic decisions the board is considering? Do you know the direction in which the nonprofit is heading? Are you familiar with the full suite of services that they offer? These are important questions to ask because when the organization enters into new financial arrangements, signs contracts, undertakes new donation campaigns, or offers new services, it can put itself at greater risk of mistakes and, therefore, lawsuits. This extends not only to financial decisions made by a board, but also to special events, general services, and to other activities carried out to fulfill the mission. In the instance something goes wrong – be it a cyber-attack, a lawsuit against the board for decisions, or the actions of an employee or volunteer that result in harm – will you be dedicated enough to help steer the nonprofit through the reputational damage, financial loss, and other negative implications that may arise? Consider this when making your decision.

Calculate Your Risk

What are your responsibilities and liabilities?

As an executive or community leader, your schedule is already jam packed. Layering on additional responsibilities could be a challenge. You’ll want to carefully consider what kind of commitment you’re entering into from a responsibility standpoint, and from a liability perspective. You may know that your commitment involves donating your valuable time and energy to the noble pursuit through standard meetings and events, but have you considered the financial and reputational commitment? As a board member, all organizational decisions and activities are a reflection on you as well. If the organization finds itself in a difficult position whether as a result of poor performance, fiduciary trouble, bad press or otherwise, it could have financial or reputational implications for you personally and professionally.

Protect Yourself!

What measures can you implement to protect your personal assets?

Did you know, that as a board member you can be sued personally for decisions of the board and may have to hire your own attorney to represent your interests? Or that your personal assets could be at risk based upon the decisions of the board? Consider whether or not you want to invest in additional protection for yourself. With the right insurance policy, you can transfer many of the risks to your personal assets and serve the board with peace of mind that your private property is safe.

Serving on the board of a nonprofit organization and working to improve your community is a beautiful way to use your talents and experience for the greater good. As you contemplate an opportunity to serve, ask questions and do your research to gain a deep understanding of your commitment. Remember, it is important that you not only believe in the mission, but also understand the responsibilities and duties of the board. If any of these are misaligned with your beliefs, you may want to reconsider the position.

Are you ready to jump on the Board? Learn how to use your decision-making power to effectively take-on or transfer risk.

Risk Tolerance and Decision-Making for Board Members of Nonprofit Organizations

Once you’ve decided that you believe in the mission and you accept the responsibilities associated with being an active board member, there are a few other areas to analyze specifically related to insurance and risk management. All board members should have working knowledge of a nonprofit’s risk tolerance, risk profile, risk transfer and risk management practices to effectively serve and fulfill their duty to the organization.

Identify Risk

It is important that you gain an understanding of the risks your nonprofit faces on a daily basis, which could include business, insurable, financial, or reputational risks. To do this, the board should put together a risk profile, or an exhaustive list of the potential risks that threaten the organization at any moment. To do this properly, identify all of the different services, events, and various interactions with clients or the general public that your nonprofit may have, and then identify all of the possible examples of what / how they could go wrong. From there, assess the likelihood of each event occurring and the impact that it would have if it did. Compiling this information allows you to develop a thorough risk profile. Some organizations use a heat map or similar tool to track this information. There are many resources available to an organization looking to increase their risk awareness. In some cases, it may make sense to engage a professional organization to help complete your review, such as the Nonprofit Risk Management Center (NRMC), which specializes in this type of consultation for nonprofits.

Once you complete the risk profile and identify the most likely and largest impact risks, you can define your organization’s risk tolerance level. Risk tolerance refers to how much risk, financial or otherwise, an organization is willing to accept. This level varies for every organization. Take a look at your risk profile and consider: Are the risks your nonprofit faces acceptable to your organization? Are any of the services provided riskier than your organization is comfortable with? Defining your nonprofit’s tolerance for risk allows you to take the next two steps: transferring risk and implementing a risk management plan.

One important note: Depending upon the number of services, staff size, and maturity level of the organization, board members or employees may conduct this exercise. Regardless, it is ultimately the board’s responsibility to approve risk-related decisions and ensure they lead the organization in the right direction.

Transfer Risk

There is some level of risk that an organization is comfortable with having. The organization identifies these risks by calculating their risk tolerance, and further acknowledges the risk(s) exists and are willing to self-fund any financial ramifications as a result of said risk(s), thus retaining the possible harm. There may also be risks identified that the organization is not comfortable retaining. Any risks that cannot be outright avoided and that the nonprofit does not want to retain should be transferred.

One way these undesirable risks can be transferred is through a contract with another organization wherein the other organization agrees to indemnify and hold harmless your nonprofit for claims or suits related to the risk. When transferring risk in this manner, be sure to require a Certificate of Insurance from the transferee to show that they are financially well-positioned and can afford to take on your risk. It is also smart to request Additional Insured status from the transferee. Reach out to your insurance broker for assistance with such requests.

The second means of risk transfer is the purchase of insurance. An insurance policy can transfer the financial risk to an insurance carrier up to a specified dollar amount, or limit. Since this form of transfer does not cover all risks such as reputational risk, a diligent nonprofit considers the insurance purchase to be one component of a robust risk management strategy, and not the sole means of dealing with risk. In selecting an insurance carrier, it is important to ask exhaustive questions surrounding coverage (and whether it is appropriate for your risk profile), claims-handling service and knowledge and expertise of the carrier. Remember, insurance is merely the purchase of a promise to adjust future claims that fall within the contract. Specialty carriers exist for nonprofits and are most likely to have the appropriate coverage, expertise, and claims-handling to suit a nonprofit’s unique needs.

Manage Risk

After having identified the risks faced and transferred the risks you are not willing to maintain, the nonprofit must decide how to manage the remaining liability. If a risk has a high likelihood of occurrence, is high impact, and it is NOT central to your mission, it may make sense to practice risk avoidance and discontinue the “risk” (service, event or other practice) altogether. However, if the risk is key to the operation, you should research all possible management techniques and controls to ensure that the services are rendered in the safest manner possible. When evaluating financial risks, review the decision and authority controls in place to ensure they are proper for the persons involved. Again, you many consider working with an organization like NRMC, your insurance broker, or the risk management department of your insurance carrier, to assist you in developing an appropriate risk management strategy.

Being an active member of a nonprofit organization is a wonderful way to give back and improve your community. Remember it is important that you not only believe in the mission of the organization, but that you also execute effective decision-making on your nonprofit’s risk tolerance, risk transfer and risk management practices, and ensure its success and sustainability in the community.