Risk and Philanthropy: Systemisation, Education and Professionalisation

Oct 1, 2012

This paper examines how risks in international development philanthropy are defined, assessed and managed. It reports the conclusions from a series of 27 interviews conducted with development philanthropists, philanthropic intermediaries, grantmakers from leading international foundations and sector academics in April 2012. It recommends ways through which risk that promotes innovation and expands opportunities might be optimised. Our findings will be of interest to philanthropists, grantmakers and those they seek to benefit. Our interviewees were primarily concerned with impact risk (i.e. the risk of not achieving a specified impact goal with a given level of philanthropic investment). Our report begins by defining the two main risks that were found to comprise this overall impact risk, namely: strategic risk and operational risk. Strategic risk is most often mentioned as the critical risk and is defined as the risk of not having an accurate strategic perspective on the social problems at hand. Operational risk, by contrast, is defined as not having the right operational approach or plan to support sustainable impact. Other risks include financial risks, reputational risks, political risks and personal risks. These latter risks are all of concern because they increase strategic or operational risks. We then explore how risks are assessed. We apply academic principles relating to anchoring (i.e. reference points based on prior experiences or contexts) and under-adjustment and Prospect Theory to the context of the philanthropic interventions our interviewees shared with us. We explain how risk perception is formed based on a philanthropist's past experience and the context of the risk assessment process. We discuss how philanthropists and philanthropic institutions use different decision rules depending on the categories of risks experienced and offer a range of recommendations for how risk taking might be facilitated. We then examine the critical topic of risk management, examining both impact and operational risk. In respect of the former we focus on the identification of appropriate beneficiary groups, additional special interest groups that may need to be considered and the selection of appropriate processes through which change might be bought about. In respect of the latter we examine the selection of appropriate business models and the importance of developing a diversified risk profile, an organisational learning culture, adequate control mechanisms and trust on the part of both beneficiaries and funders. The final section of the report draws together the thinking from previous sections and offers a series of recommendations, notably the need for the development of a professional support infrastructure that would expose new philanthropists to a body of knowledge designed to improve their chances of achieving sustainable impact. It could also facilitate the development of support networks to help philanthropists more accurately assess/manage risk and thereby optimise their decision-making.

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