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How Nonprofit Organizations Use Reputational Risk Management

How Nonprofit Organizations Use Reputational Risk Management

For nonprofits, reputation — theirs and their private-sector partners’ — is everything. Managing it has become a key strategic goal.

When an organization’s mission and message are about “doing good” — helping those in need or tackling an important social or environmental problem — it may be hard to imagine any reputational risk associated with their enterprise. Isn’t reputational risk management something that only private-sector, for-profit corporations need to be concerned with?

Although it might come as a surprise, the reality is that nonprofits — whether they’re development organizations, charitable bodies, or advocacy groups — have started to build fully-fledged reputational risk management systems similar to those employed in the private sector. Why? Because they meet challenges to their missions very similar to those faced by private-sector companies. First and foremost, they want to avoid a relationship with a controversial donor that might jeopardize their reputation.

Reputation as an Asset

A friend who advises the nonprofit sector recently explained it like this: “Companies have products and services. Even if a company is criticized, selling products and services will continue to generate revenues. Nonprofits, on the other hand, depend on donations that are primarily given on the basis of the organization being an honorable and effective one. Put simply, their reputation is really all they have.”

Here’s an example of the harm that comes from an attack on a nonprofit’s reputation. In 2011, the World Wildlife Fund (WWF) was criticized for its partnerships with industry in a German documentary with the audacious title, Der Pakt mit dem Panda — Was uns der WWF verschweigt. This roughly translates as “The Pact with the Panda: What WWF isn’t telling us,” but it was recast in English as The Silence of the Pandas, a reference to the thriller The Silence of the Lambs, insinuating that WWF was involved in an awful crime. The title alone was damaging in either language because it cast WWF as manipulative and dishonest; the film’s content itself, which according to WWF contained a number of significant factual errors, was even more so.

In its press release addressing the issue,WWF was able to prove that most of the claims made in the documentary were unfounded. However — and this is again similar to the situation of private-sector companies — dealing with the controversies absorbed valuable time and money. WWF Germany also lost members and donations. The drama of a message often overshadows a rational, point-by-point refutation; WWF may have had the last word, but it didn’t necessarily reach the ears of donors (or potential donors).

Furthermore, the Internet is an unforgiving archive of allegations, regardless of whether they are true or false. The undesirable effects not only last over time, but also spread across borders. Incidents that occur in a specific region can affect other countries’ offices and the organization’s headquarters as well. WWF Switzerland, for example, felt the ripple effects of the controversies in Germany.

Managing Risk in Corporate Partnerships

Completely avoiding partnerships with private-sector companies would be an effective way of mitigating the corresponding reputational risks. Some nonprofit organizations do exactly that. Think of Greenpeace, an organization active on the very front line of corporate criticism. The last thing it wants is to be accused of taking money from controversial companies or supporting “greenwashing” by partnering with them.

But this strategy comes at a price. First, private-sector companies are an important source of revenue. Donations from private individuals have not grown for many years, but there is still an untapped potential among corporates. “Although only 5% of donations come from companies, the volume of corporate income among Swiss nonprofits grew by 7% last year. However, the more funding nonprofits receive from companies, the more tough questions they will have to answer. The best way for them to avoid controversies is to agree with the partner on a truly transformational agenda. The positive impact of the partnership should be the primary reason to engage with the private sector,” says Michael Arnold, head of corporate partnerships at WWF Switzerland.

Second, as highlighted by Arnold, private-sector companies can play an important role in projects themselves. They have much-needed knowledge and resources. Many subject matter experts at nonprofit organizations believe that it will not be possible to solve today’s challenges without the involvement of the private sector. From the opposite perspective, private-sector companies are more often seeking partnerships with nonprofit organizations as part of their corporate responsibility and sustainability strategies.

With this in mind, donor organizations have also started to think about how they can manage the corresponding reputational issues. Jean-Christophe Favre, in charge of private-sector partnerships at the Swiss Agency for Development and Cooperation (SDC), says that the SDC needed a system “that allowed them to have a good enough understanding of the potential partner so that they could feel comfortable about the partnership.

Not having a reputational-risk framework and clear criteria also made it very difficult to discuss partnerships in a productive manner and to ensure institutional coherence. Every office would make decisions differently. And, in the worst case, SDC would not be able to explain how the partnership was assessed and why SDC came to the conclusion that this partnership was beneficial to SDC’s mission.”

Christian Görg, responsible for the reputational risk process used to assess private-sector partnerships at Germany’s largest development organization GIZ, has had similar experiences: “At GIZ, we wanted to avoid inconsistent decisions in different areas of the organization. The most important benefit of our reputational risk process is that we think about ways to mitigate risk from day one. The process sharpens our senses and makes sure that we don’t enter into partnerships hastily.”

Looking at potential partners, nonprofit organizations need to be able to answer the same questions as private-sector companies in the same situation: with which companies do you want to work? Or, in other words: with which companies is it better not to have a business relationship — and if you embark on a partnership anyway, what should be your terms?

While businesspeople tend to see reputational risk management as an obstacle to business, it is an enabler of business in the world of nonprofits. Understanding the issues a potential partner is exposed to and identifying risk-mitigating measures are essential to doing business. This enables nonprofit organizations to frame the discussion, to evaluate risks and options, and to overcome internal concerns.

Source: MITSloan

Author: Olivier Jaeggi