If your association is lucky enough to have an investment portfolio, a discussion about risk has probably been on the board’s agenda. Financial managers make understanding the group’s risk tolerance a defining component of their strategy.
These conversations are limited to bottom-line issues. But risk doesn’t always come with a dollar sign attached. Although money may be the object of concern, the triggers for loss are frequently pulled by circumstances outside the finance committee’s scope.
There are multiple reasons to make both the upside and the downside of risk management a broader topic of board discussion.
The pandemic was a lesson in the democracy of danger. No one was exempt. For some groups that disruption also offered seeds of opportunity. In digital markets, circumstances can shift quickly toward the unexpected. We can’t predict what will happen, but we can gain an understanding of our organization’s ability to navigate the unknown and develop strategies to manage uncertainty.
Frame the Issues
Risk isn’t on most directors’ list of favorite topics for discussion. Highlighting organizational or project-related weaknesses can be confrontational and require a level of candor that may be outside the board’s comfort zone. Adding to the complication, unless you are currently facing a challenge, risk is abstract. The conversation can easily devolve into unproductive speculation.
Evaluating where the blind spots lie in your organization is one way to begin approaching these difficult conversations. It’s helpful to make the distinction between the things we can control and those we can’t.
In a Harvard Business Review Article, authors Robert S. Kaplan and Annette Mikes describe a framework for risk that I admire for its simplicity. They offer three categories of situations. These could be subdivided in multiple ways. But each slice of the pie shares a common point of origin.
Prevent Internal Injuries
The first category includes the situations that we can, and should, prevent. These are internal challenges that might be related to culture, human resources, or operations. They are activities that are frequently governed and controlled by policies and procedures, such as:
- Conflict of interest
- Sexual harassment
- Diversity, equity, and inclusion
- Whistleblower processes
- Employee behavior and performance
- Recruiting, onboarding, and background checking
- Mission and values
Internal risk should be managed on a daily basis. You don’t want to suddenly discover that you’ve hired an ex-felon to be your newest bookkeeper. Don’t laugh, I’ve seen it happen. Or that the director who is championing a lucrative collaboration with a corporate partner is also on that organization’s board.
Both directors and employees should know which policies the organization has in place and how they are enforced. If you’re wondering whether there are gaps in your safety net, ask your colleagues to share their documents to evaluate what you might be missing. Most professionals are happy to help.
There is no upside to this type of risk. So, limiting exposure is critical.
Evaluate New Initiatives
Strategic risk is a different story. In fast-paced digital markets, strategies that include both opportunities and challenges are essential to growth. Now that every business needs to reinvent regularly, associations are becoming more comfortable with the kind of risk/reward trade-offs that characterize start-up organizations.
When my business partner, Kevin Ordonez, and I wrote two books about the impact of the digital revolution on associations, we interviewed entrepreneurs both inside and outside our community. Everyone who participated was an experienced risk manager and offered advice for how association leaders could help themselves and their volunteers to become more comfortable with uncertainty.
Sig VanDamme, Co-founder at Gojectory, who has been an entrepreneur since he was old enough to mow lawns and shovel snow, had this advice.
“You have to be able to convince others that the biggest risk is in doing nothing. Preparing a board to tolerate risk is a sales process. To convince you to buy from me, you must believe that I can increase revenue, decrease costs, reduce cycle time, enhance the member experience, and finally, mitigate risk.”
Leaders, Sig notes, must be able to communicate each of those points to both staff and volunteers and to present risk within a cognitive framework. “I have a friend who is a scientist in a large engineering company,” Sig advises. “The organization has a multilayered process for innovation. The first step is intensive brainstorming. Hundreds of ideas are generated. Then each concept is tested against a series of predefined criteria until only the most viable remain on the table. I don’t see many associations doing that type of vetting.”
Sig is right. Association boards need to become more comfortable with rigorous evaluation. They also need to find the time and opportunities for these conversations to occur. A formal business meeting isn’t a venue that is conducive to debate. Strategy sessions, workshops, or committee meetings are better choices.
Consider the MVP
Getting the board comfortable with imperfection is another strategy for mitigating the risk around new initiatives. Volunteers enjoy being responsible for bringing innovation forward. It’s human nature to want perfection on the first try. But a slower launch, which includes time for experimentation and customer feedback, is an opportunity to discover flaws.
Take a tip from entrepreneur Tracy King, Chief Learning Strategist at InspirED, and learn to love the minimum viable product. Smart innovators, like Tracy, begin with a prototype, a product with just enough features to be attractive, allowing customer response to guide the final design. This often means recalibrating to meet evolving conditions. You don’t jump to commitment; you wait for feedback to put a ring on it.
Making time to evaluate the risk/reward proposition for the goals in your strategic plan is another good way to introduce the board to this type of evaluation. Tracy advises thinking about goals in the same way as you consider investments.
“When you discuss retirement with a financial planner you evaluate your tolerance for risk against the possibility of achieving your goals,” Tracy notes. “This kind of honest conversation should happen at the board. Similar to the funds in an investment portfolio, lines of business can be weighted differently. You don’t need to put all your resources in one bucket.”
Life’s unexpected curve balls are the third category of risk. These are the circumstances that arise outside the association and over which you have no control. Political, economic, and socio-cultural events fall into this area. You may not be able to prevent challenges, but you might see them coming and avoid the fallout.
Being alert to market and business trends is a good defensive strategy. I am reminded of the leaders who embraced digital transformation early on. As a result, during the pandemic, they were able to smoothly transition to remote work.
Gail Rutkowski, Executive Director of the National Shippers Strategic Transportation Council, represents an industry that has learned to live with disruption. Supply chains are unpredictable. Financial distress, operational mistakes, natural disasters, or an unexpected uptick in demand are among the many issues that can derail a shipment. Gail believes one of the key factors in managing the unexpected is to plan for it.
“You can’t divine every scenario, but you can identify the possibility of major disturbances and construct a response,” Gail says. “Having a sound business continuity plan helps. Creating tabletop enactments of those situations helps even more.”
Use Scenario Planning
Scenario planning and decision trees are useful tools for strategizing for the unexpected. Sharon Rice, .orgSource’s Managing Director of Business Strategy, describes the benefits of scenario planning like this.
“Scenario planning fills you with information and an understanding of the possibilities. It gives you some control when the external environment is rapidly changing, and people are looking to you for leadership. Understanding the potential futures steers decision-making away from reaction and towards positive action.”
Scenario planning can be quite complex. During the pandemic, Sharon created a “just in time” process which she explains in this webinar. This methodology can be used to quickly answer critical questions surrounding any pressing issue.
See Beyond the Challenges
Conversations about risk can be difficult, but more association boards are seeing through the challenges and toward the rewards. There is satisfaction in knowing that internal affairs are stable because there are clear policies and procedures that make day-to-day activities run smoothly.
Being prepared to confront the disruption you can’t control delivers confidence and a sense of security in a changing environment.
Lastly, the exhilaration of leadership comes from taking calculated risks to open new perceptions and possibilities. Although success isn’t guaranteed, learning, the greater reward, is the inevitable benefit.