How Foundations Are Transforming Risk Into Opportunity

At the downtown Los Angeles office of Southern California Grantmakers, dozens of leading thinkers from philanthropic organizations recently gathered for a Rockefeller Philanthropy Advisors' "Theory of the Foundation Seminar." The lively discussion addressed philanthropic time horizons, ways to achieve greater operational effectiveness, and driving strategic impact.

Eventually, the conversation turned to risk: the multitude of risks associated with operating in a world increasingly characterized by growing instability and need; and the importance of taking and absorbing risk as a philanthropic actor. Underlying the conversation were a number of current global trends, including:

• growing populism and socio-political instability;
• a backlash against private philanthropy in part based on the belief that the growing concentration of wealth is a main contributor to societal problems;
• the expansion of what philanthropy entails to include impact investing; and
• a renewed interest in advocacy, capital aggregation, and partnerships in philanthropy.

As the discussion revealed, risk is often believed to be innate to philanthropy, deeply tied to the sense that a philanthropist should also be an innovator, and that philanthropic giving is synonymous with risk capital. Many philanthropic organizations with sizable resources (both financial and non-financial) and the will to confront global challenges welcome this idea — in theory. In reality, however, many see risk as a barrier to strategic philanthropic giving. In part, this is because the meaning of risk itself isn't always adequately unpacked across programs, governance, and staff. As one attendee stated, "We are using the word 'risk' as if we all...agree on its meaning, but we…are not all using it the same way."

To overcome this lack of clarity, donors need to develop a clear strategy around risk. This first requires an understanding of the different types of risk and an awareness of their sources and triggers. The next step is to define specific risks for the donor or community served, as well as the sector at large, as well as methods and remedies for mitigation. Based on discussion at the seminar, generally agreed-upon types of risk fall into six main categories.

1. Investment/Financial Risk: potential financial loss and uncertainty of "return" when engaging in economic development of communities, impact investing, or investing in a new field or project.
2. Operational Risk: potential financial or social loss resulting from insufficient or failed human resources, procedures, systems, or policies.
3. Grantmaking Risk: potential failure of grants, particularly when granting to new issues or people with little track record or history.
4. Political Risk: potential adverse impact of policies, governmental decisions, political events, or conditions.
5. Reputational Risk: damage to an organization's reputation through action deemed controversial or politically sensitive.
6. Innovation Risk: potential failure when adopting, supporting, or creating new approaches, solutions, or technologies.

These risk types are interwoven through a range of risk determinants, influences, and considerations, which can include:

1. time-horizon: the philanthropic lifespan of an organization, whether limited or in perpetuity, impacts intrinsic risk tolerance, as well as other related considerations including donor intent, collaboration, and resource allocation.
2. organizational culture and values: the values and culture of an organization playa a key role in shaping its organizational approach to risk, as well as levels of risk-aversion or risk-taking among its individual staff members. 
3. social bias vs. diversity, equity, and inclusion: the internal biases projected toward marginalized social groups can influence to whom philanthropic organizations give grants, who they employ, and the voices they seek to amplify. In many cases, organizations committed to DEI internally as well as externally will act to balance the social biases that make them risk-averse.

There was broad consensus in the room that foundations should not shy away from risk. Indeed, a better solution to enhance strategic effectiveness and impact is to address it head-on. Actionable suggestions to mitigate risk included:

• collaborating with like-minded partners to build legitimacy and increase opportunity;
• encouraging an internal culture of experimentation and failure;
• explicitly devoting a designated percentage of funds or funding to higher-risk activities or investments;
• allocating discretionary funds to risky investments;
• building trust with the communities being served;
• shifting hiring practices to recruit staff representative of the communities served, and with skills and knowledge to effectively address risk; and
• creating and sharing knowledge around risk.

Within each organization, there are risk takers or owners of the various types and levels of risks outlined above. The risk takers include: 

• philanthropies and funders
• leaders (i.e., CEOs, executive directors)
• staff (i.e., program officers)
• grantees and communities served

While each of these groups absorbs a different form of risk depending on the role they play in decision-making and the philanthropic funding cycle, they, too, are impacted by the risk determinants noted above. Moreover, some groups —particularly Funders and Leaders — bear responsibility for all or most risk types. Accordingly, it falls to them to actively work to define each type of risk, develop strategies, and advance solutions designed to minimize the identified risks.

Philanthropic organizations are uniquely positioned to embrace risk and identify solutions to the world's most pressing challenges. This includes taking part in more conversations around risk and viewing failure as a learning opportunity, building an a knowledge sharing ecosystem of peers and practitioners, and taking on risk collaboratively. As one attendee noted, "Risk is about being more nimble, more reactive to the environment, and creating a platform that allows for transformation to happen, and it is the work of foundations to keep pushing these things forward."

Olga Tarasov is director, knowledge development at Rockefeller Philanthropy Advisors, where she oversees and advances research, publications, and both internal and external programs. She previously worked at the National Endowment for Democracy and also has served as a spokesperson on issues affecting the region and the field of international philanthropy. 

Kalyah Ford is a senior researcher at Rockefeller Philanthropy Advisors, Kalyah previously worked as a research and policy specialist with the World Bank Group, and drove advocacy communications at Human Rights First, developed public diplomacy policy at the United States Department of State, and worked as the Research Lead on a pan-African study for the Open Society Foundations West Africa Initiative (OSIWA).