The risk business

Andrew Milner

Donors work in a context where it’s often impossible to measure success in numerical terms, and where assessing impact at all can be problematic. Taking risks is intrinsic to grantmaking. But if the outcomes of a decision are uncertain, how do you assess the risk involved? Can better outcome measurement offset risk or does an obsession with measurement make funders too cautious and risk-averse? Alliance asked a selection of funders how much risk they are prepared to run, how they assess it, and what methods they adopt to minimize it.

What’s at stake – and for whom?

Perhaps the first thing to say is that it is not just money that foundations stand to lose. The cost might sometimes be damaged reputation for the foundation, the loss of an opportunity, or, in extreme cases, harm to the property or persons of their grantees or their own agents. For Ila Hukku of CRY India, ‘the question of risk revolves around the understanding of whose interests are represented by the foundation and how much power these interests exercise on the foundation’s decisions.’

It is not chiefly the funders themselves who are likely to suffer adverse consequences if grants go wrong, Hukku points out. The highest degree of risk, she feels, is run by the intended end beneficiaries – what she calls the reference groups or communities: ‘Whether the reference groups/communities will be left better off or worse off than when the grant was made is the risk that they take each time they allow externally funded and/or directed interventions in their lives. The impact of the grant should be evaluated on this basis, keeping central the feedback of the communities/groups themselves.’

As Paul Shoemaker of Social Venture Partners Seattle points out, risk is not an easy thing to assess: ‘Everybody knows what success and failure look like in the business sector … the service or product either makes money or it does not. In the non-profit world, we aren’t as sure what failure is because we don’t have as clear a method to measure success. If we are unsure of how to measure success, it is difficult to assess risk.’

He makes another point worth mentioning here. ‘The end goal is better outcomes for the clients our non-profits serve. We need to be wary that we don’t become enamoured with risk for the sake of risk. Some established, “low risk” programmes help us meet our goal of improving lives. The clients served don’t care if a programme is cutting edge, revolutionary or “high risk”. They just want a better life.’

Tade Aina, Ford Foundation representative in East Africa, produces a whole typology of risk: ‘political risks, programmatic risks, physical risks and risks that are not only threatening to the foundation but also to the grantees and the foundation’s constituencies.’ Crucially, though, he believes that ‘the variety of risks and the willingness to take them create the special distinction between social justice foundations, whose risk-taking can lead to real and far-reaching consequences for the foundation, its grantees and constituencies, and others whose risk-taking is defined by programmatic innovations or entrepreneurship.’

The latter, he believes, ‘are not terribly costly as they are about breaking boundaries, trying out creative and unprecedented strategies, methodologies or approaches. These work or do not work. There is always an error margin and the damage is often more to individual and/or institutional egos and results of evaluations.’

Ila Hukku adds that ‘the risk exposure of communities (and, by association, the grantmaking foundation) is highest when it comes to political issues (here, by political, I mean to do with the prevalent power equations in society – who has power and who doesn’t – and challenging this status quo in favour of the relatively powerless).’

Part of the business

The people we talked to all see risk-taking as integral to funding. ‘These risks are part of the business,’ says Tade Aina. ‘They are necessary if solutions to the larger problems and issues are to be found.’ Emilio Rui Vilar of the Calouste Gulbenkian Foundation agrees: ‘By nature, foundations must be risk-takers, particularly in comparison with governmental institutions and market players. This means that foundations have to accept potential failure as part of the process of their long-term intervention.’

Moreover, in some cases, risk-taking is not simply unavoidable, it is to be sought because it offers opportunities. Oxfam Novib’s Conny Hoitink says the mission of her organization is ‘to support people in their struggle for justice and a life without poverty’. It works in an environment that is subject to constant change. ‘In what we plan to do, we cannot just rely on what went well in the past, because it may not work in the future as the situation has changed and will continue to change.’

This uncertainty, she says, ‘provides us with opportunities for social change while at the same time we are faced with the danger of negative results or even failure. This is what we understand by taking risk and it implies that we deliberately seek to take risks.’

At Social Venture Partners Seattle, says Paul Shoemaker, ‘grant committees within the organization constantly ask how much “risk” is tolerable when it comes to giving grants. They ask is it better to fund fledgling organizations that teeter on the fiscal edge but offer innovative ways to reach clients or organizations that are run well and well funded, yet it’s less clear if they are making big changes in the lives they touch.’ He adds: ‘The board looks across the portfolio of investments and asks if we have the right mix … and which investments are at risk and which are on solid ground.’

How are risks assessed and offset?

‘Our strategy,’ says Daniel Dickens of HelpArgentina, ‘is to be open-minded and sceptical in attitude, empirical in decision-making and unafraid to tinker in practice. We aim to be prepared for the consequences of negative, unforeseen events while at the same time putting ourselves in a position to benefit from positive, unforeseen ones.’

He explains that HelpArgentina’s member organizations ‘all pass through a rigorous screening process, similar to the due diligence done in the private sector, ie analysis of financial records, tax statements, solidity of institutional structures (board, staff and volunteer), site visits, as well as testimonials and interviews with previous investors, stakeholders and beneficiaries.’

‘Assessing risks deliberately allows us to manage them as effectively as possible,’ says Conny Hoitink. ‘An example of a risk that we take is the likely upsurge of armed conflict in regions where we operate, the potential consequences being loss of life and property of our grantees and the impossibility of achieving the expected results. Another risk is potential financial mismanagement by grantees that operate in the absence of banking systems and with little access to independent auditors. This could lead to damage to our reputation as a donor.’

For financial risks, Hoitink explains, Oxfam Novib has a system ‘whereby we score our financial risk exposure, followed by a system of risk mitigation measures such as closer monitoring through more frequent reporting, extra audit assignments and/or involvement of management, Quality & Control and the Communications Department.’

Another means Oxfam Novib uses to assess risks and offset them as far as possible is its Strategic Portfolio Management Plans (SPMs) for the countries and regions where it works. ‘The SPMs present an analysis of opportunities to contribute to social change, and risks that, if they become problems, might undermine the success of the strategy.’

In respect of potential opportunities, each SPM asks: ‘What is the uncertain future event: what is Oxfam Novib’s strategy for change? What are the positive consequences if the strategy is successful: the expected results? What is the probability of the strategy being successful? Do we internally have demonstrated capacity? What external actors support the strategy? What are favourable external factors?’

A corresponding set of questions is posed in regard to potential risks: ‘What is the danger that could undermine the successful implementation of our strategy? What would be the negative consequences, the losses, if this danger materializes? What is the probability of this danger becoming a problem?’

For individual grants, she says, the real question is not whether there is a risk, but ‘the answer to the question: Is the opportunity worth running the principal risks? …

The acceptable level of risk, or what we sometimes call our risk appetite, is determined on a case-by-case basis and principally depends on judgement. Logically, in volatile environments, a relatively (to the opportunity) high level of risk will be accepted but that will go with more intensive risk mitigation measures … but in some cases this cannot be more than intensive monitoring and being prepared for the consequences.’

Ila Hukku believes that ‘in the case of foundations working with a justice agenda in particular, risk minimization lies in ensuring that the reference communities’ voice is well represented and given importance in their decisions.’

‘In the long-run,’ says Emilio Rui Vilar, ‘a clear and sound vision based in a creative and sustained action will always be the appropriate answer to risk management and impact achievement. We must face present circumstances with realism, but we must avoid the pure metrification of philanthropy.’

Setting aside a risk budget

Do the funders we spoke to have a designated fund for their higher-risk ventures? In some cases, yes. ‘In the Gulbenkian Foundation,’ says Emilio Rui Vilar, ‘we allocate a generous part of our annual budget for innovative projects, to which both our staff and third entities may present proposals. We conduct several projects that can be considered “risky” from the Foundation’s point of view, mainly because of the uncertainty of outcome.’ He gives as an example a three-year pilot project to investigate the molecular and genetic bases of the immunobiology of malaria in mouse and man. ‘This proved very successful, with outside institutions matching our funding to follow up the research.’

‘Accepting that some opportunities emerge,’ says Conny Hoitink, ‘where we know very little and have no experience’, Oxfam Novib has set aside ‘three special budgets, amounting to 6 per cent of our total grantmaking budget’: an innovation fund for initiatives that ‘challenge traditional beliefs and practices around the combined fields of gender justice, sexual health and education of young people’; a diversity fund to foster investment in China and the Arab world; and a third ‘for the creation of knowledge in the form of “good, innovative and new practices” that will be shared with all our grantees’.

Tade Aina makes the point that programming in some areas of work can be inherently risky, ‘for example freedom of expression in authoritarian regimes, or sexual and reproductive rights in religious fundamentalist and conservative contexts’. In such cases, a decision to fund in that area is in effect a decision to allocate funds for higher-risk ventures.

Venture philanthropists and risk

You might think that venture philanthropists would demonstrate a greater appetite for risk than (so-called) traditional donors. Our respondents were divided on this, however. Tade Aina feels that this is not the case since they ‘hardly tackle fundamental social justice issues’. Emilio Rui Vilar agrees that ‘at first sight, they should, but if by venture philanthropy we refer only to short-term and measurable interventions, I would argue that venture philanthropists are less able to take risks. Venture philanthropists will always prefer short-term to long-term actions, which involve more resources and are clearly more “risky”.’

But HelpArgentina takes the opposite view – 20 per cent of their social investment is made through what Daniel Dickens describes as venture philanthropy: ‘Venture philanthropists have indeed proven to be more open to taking greater risks in their social investment.’

It can also be a vital corrective measure against what he calls ‘the clubhouse mentality of international aid and the idiosyncrasies of traditional grantmaking schemes. It tends to identify organizations that don’t have access to traditional social investment because of barriers to entry such as extreme rural location or limited access to the internet or sometimes simply because they haven’t been around long enough.’

For Ila Hukku, such a debate is misplaced. ‘The issue of “risk”,’ she thinks, ‘should be seen not on the basis of the typology of private, community and venture philanthropy foundations, but based on the interests represented by the foundations; and within those, too, which stakeholder’s interests carry the highest weight in decision-making processes.’

Being faithful to the mission

All grants, then, involve some element of risk, and innovation is necessary if you want to produce change. What other considerations might induce funders to take risks? In the end, says Paul Shoemaker, ‘we believe it does boil down to the idea that risk and risk tolerance are tightly tied to your mission.’

Tade Aina agrees, talking of ‘adherence to your fundamental mission, values and principles; being present where others are absent.’ He gives an example of a society where illegal abortion is the cause of a significant number of teenage deaths but discussion of how to deal with the issue is not acceptable. ‘If you have a reproductive health programme in that society, then you need to take the risk of beginning conversations to address the issue.’

Another consideration is urgency, says Conny Hoitink. ‘Increasingly, change happens fast and is influenced by innumerable actors and factors and we simply cannot know all of them in the limited time we have for our analysis. We must accept that we have to make decisions based on information that is incomplete, perhaps even contradictory, and that in the end our decisions are well-reasoned judgements. We must decide whether or not to take an opportunity when it presents itself and cannot afford to wait too long.’

Measurement and innovation

There is a persistent idea that preoccupation with measurement is detrimental to a foundation’s capacity for innovation and risk. None of the people we talked to take this view, however. Ila Hukku believes that ‘performance/impact measurement per se does not limit innovation or risk taking. It’s chasing targets that does.’ Daniel Dickens feels that ‘instead of limiting innovation or risk-taking, performance measures should empower both social investors and practitioners to modify their strategy if needed.’

Paul Shoemaker makes even more explicit the potentially positive relationship between measurement and risk. ‘We cannot truly assess risk,’ he suggests, ‘until we understand outcomes.’

But Conny Hoitink admits to a possible tension between measurement and risk-taking. Oxfam Novib has to be accountable to its stakeholders and donors. Consequently, ‘there is a demand to demonstrate results and explaining failure is sometimes difficult. So there is a tension between the fundamental need to take risk and the pressure to demonstrate results.’ Because of this, ‘risk aversion such as postponing decision-making does occasionally happen,’ she acknowledges.

In the last analysis, believes Emilio Rui Vilar ‘the buzz about “measuring impact” and the “new” and “old” philanthropy can be misleading. In philanthropy we will never eliminate failure as a possibility. Perhaps more important than the risk-taking is the foundation’s process of risk-absorbing or learning from failure. If we learn something, failure is not 100 per cent.’

What do they measure, and why?

What did the funders we spoke to measure, and why? Tade Aina offers a comprehensive list of things to measure: ‘Whether we are making progress in reaching the goals we set ourselves in a grant. The goals can be tactical or strategic … short term, intermediate or long term. There is also the issue of cumulative achievement, leverage, or just opening minimal spaces for others or ourselves to build on. Or we could be testing issues and trying to see whether a context is ready for the work.’

‘Foundations should focus on learning, not only from success but also from failure,’ feels Emilio Rui Vilar. At Gulbenkian, he says, ‘we basically measure to learn but also to move forward. It’s all part of the risk-absorbing process that we have to master.’

For Ila Hukku measurement is important ‘insofar as it lets one assess the distance travelled, the milestones crossed, the challenges on the way and the learning from all these, as they help prepare everyone – the foundation, the partner NGOs, the communities – for what lies further ahead in the struggle for social change and justice.’

‘We will never eliminate failure as a possibility’

Emilio Rui Vilar’s remark, above, reminds us that, however much funders might try to ensure that the odds are in their favour, there is always a possibility of losing the gamble. Tade Aina recalls a conversation he had with Ford President Susan Berresford soon after he joined the Foundation, in which she told him that ‘we should always make allowances for failure when we venture into new and often uncharted zones.’

Finally, whatever precautionary measures we take, sometimes an investment remains a leap in the dark. As Conny Hoitink says, ‘we accept that sometimes we can do very little to mitigate the danger and we simply have to decide whether the opportunity is worth running the risk for or not.’

Alliance would like to thank the following for contributing to this article:

Tade Aina Representative, Ford Foundation East Africa

Ila Hikku Director, Development Support, CRY – Child Rights & You, India

Conny Hoitink Quality and Control Advisor, Oxfam Novib, Netherlands

Daniel Dickens Advisory Board member, HelpArgentina, Argentina

Paul Shoemaker Director, Social Venture Partners Seattle, USA

Emilio Rui Vilar President, Calouste Gulbenkian Foundation, Portugal

Andrew Milner is Alliance Associate Editor. Email

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