Radical Philanthropy Takes a Risk

Gina Anderson, Philanthropy Fellow at the Centre for Social Impact, looks at the impact of endowed charitable foundations. This article is from the CSI blog. 

OPINION: We often talk about the role of philanthropy as ‘venture capital for the not for profit sector,’ able to take risks on new ideas, innovation and social change. However for many in the not-for-profit arena, the problem with philanthropy is the lack of ambition and lack of purpose.

A fascinating new report by The Resource Alliance, supported by the Rockefeller Foundation, entitled ’Risk and Philanthropy‘ 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, grant makers from leading international foundations and sector academics in April 2012.

The report argues that philanthropy needs to become better at understanding the relationship between risk and opportunity, cognisant of the distinctive contribution that effective risk strategies can play in creative solutions to the most intractable development and social problems. It also argues that philanthropists need to be much more accepting of failure and recognise that to achieve large-scale change much of the resource may be ‘wasted’ along the way. Occasional failure should be seen as the acceptable cost of innovation.

In the report they seek to understand more about why so many individuals and foundations are seemingly risk averse with their philanthropy. While the focus of the report is on international development philanthropy, their examination of risk assessment, risk management and how philanthropists and philanthropic institutions use different decision rules depending on categories of risks experienced, is very useful for understanding all types of philanthropy.

The report defines the two main risks that are of primary concern to philanthropists engaged in international development: Impact Risk and Operational Risk.

Impact Risk is most often cited as the critical risk and is defined as the risk of not achieving the required impact given a specified level of philanthropic investment – in short, is the money making a difference? There appears to be three drivers of impact risk in international development:

• It is often difficult for philanthropists to articulate how they define impact
• It is often difficult for philanthropists to decide a priori how to design an effective social innovation system to achieve the desired impact
• It can be difficult to establish meaningful metrics to measure success and/or to encourage those being funded to report on the impact achieved in a meaningful way.

Operational Risk often goes hand in hand with impact risk and is defined as not having the right operational approach to support sustainable impact – in other words, is the money being spent appropriately? As part of the discussion of operational risk, I particularly enjoyed their examination of the selection of appropriate business models and of the importance of developing a diversified risk profile, an organisational learning culture and adequate control mechanisms.

Other risks identified in their interviews were financial, reputational, political and personal risks. However, these were rarely considered as important and typically only became a concern when they were perceived as increasing either impact or operational risk.

The report also highlights the importance of trust on the part of both beneficiaries and funders. So much of risk is subject to trust with the corollary that little trust often means big risk. In most cases, the perception of risk is based on the philanthropist’s past experience. In reality the risk in philanthropy is often a lot less than imagined and the possibility of failure not as great as imagined. The onus falls to the not-for-profit organisation to manage and mitigate risks, while understanding the philanthropist’s biases and educating the philanthropist on the field of endeavour.

However, as learning begets learning, the pragmatists among us plead: don’t over intellectualise philanthropy – just do it!