15 Apr Mitigating Information Risk in An Unprecedented Time
As the world wages war on the novel coronavirus that causes COVID-19, we hear the word “unprecedented” used time and time again: We are confronting an unprecedented health crisis; countries are experiencing an unprecedented economic contraction; researchers are working at unprecedented speed to produce a vaccine. And, we may be faced with unprecedented damage to the charitable sector, with predictions that as many as half of Canadian charities may face permanent closure without government intervention.
When we look for a precedent to provide us with some insight into how the charitable sector will be affected by the current economic disaster, our thoughts initially turn to the 2008-2009 Great Recession. Yet, looking in that direction may not be as instructive as we would like. Even though total donations from Canadians declined from $10.4 billion in 2007 to $9 billion in 2009 (The Giving Report 2020), it is difficult to segregate the impact of economic factors from longer-term giving trends. Using percentage of aggregate income donated to charities as a measurement of generosity, giving has been declining steadily among Canadians since 2006, and is at a lower level today than during the last recession. At the same time, predictions that the economic slowdown of 2009-2009 would result in a winnowing of the sector with a rebalancing toward larger, richer, and fewer organizations proved to be unfounded. The total number of registered charities in Canada increased from something more than 82,000 in 2008 to more than 86,000 in 2018. My own experience as a senior leader at International Justice Mission Canada during the Great Recession is not very helpful (except to suggest that not all charities will endure hardship in the coming years): Due to a one-time foundation grant and two highly-successful third-party fundraising initiatives, our total revenue grew by 85% and 80% in 2008 and 2009—although, granted, our total annual revenue in those years was less than $1.5 million.
Even if predictions of calamity for the charitable sector once again prove to be overly dire, there is no question that leaders need to be prepared for some difficult months and years ahead. In the realistic scenario proposed by the Conference Board of Canada (which assumes that the effects of the pandemic will likely endure until a vaccine is available, even if physical distancing measures are slowly relaxed over the spring and summer), Canada’s GDP will contract by 4.3% in 2020. By comparison, Canada’s economy shrank by 2.95% in 2009. While current public health restrictions (which forced the cancellation of all fundraising events for the next few months) have resulted in an immediate decline in revenue for organizations like Heart & Stroke (resulting in the layoff of a large percentage of the charity’s workforce), other organizations may not feel the full effects of the economic downturn until the third or fourth quarter of 2020 or perhaps not even until 2021. Although some jurisdictions are beginning to discuss an easing of the COVID-19 restrictions, the epidemiological and economic effects of those measures will be understood only in hindsight. If, as some are suggesting, we are confronted with a resurgence of the virus in September, the path to recovery may be W-shaped rather than U or V-shaped.
Operating in this environment of uncertainty calls for flexibility in the collaboration between management and board and a high level of trust…
The unknown contours of the next 12 to 18 months (and the absence of precedents to rely upon for guidance) are requiring charities to engage in scenario planning in a way that is atypical for the sector. These operating scenarios may, for instance, contemplate a 10, 25 and 50 percent year over year decrease in donation and related business revenue, and the associated reductions to staff and services provided. As management pulls together these planning options, boards are engaged in testing the models, confirming the protocols that will guide decision-making in each case and identifying the triggers that will determine when to move from one scenario to another. Operating in this environment of uncertainty calls for flexibility in the collaboration between management and board and a high level of trust—particularly when it comes to identifying, communicating and interpreting the critical pieces of information which will guide the leadership team (board and management) in making the key decisions that will ensure the organization’s survival and continued provision of service to its beneficiaries. In this unprecedented time, information risk needs to be carefully managed.
Information risk is the risk that the right information—in terms of the quality, quantity and timeliness of the information—will not be presented by management to the board. In their white paper on the topic “Mitigating Board Information Risk“, the National Association of Corporate Directors states, “If a gap and/or bias consume this process, it can quickly create hazards and missed strategic opportunities”—and never more so than in this current environment of uncertainty. Information asymmetry is always assumed: “Due to their full-time roles, senior-level executives will unavoidably have much deeper knowledge about the organization’s operations and risks than the board. Therefore, any information presented to the board will, by necessity, have been filtered by the C-suite.” If a board is overloaded with information, it will not not likely assess the information with the same critical judgement. But in this unprecedented time, a board must have confidence that it has access to the quality and quantity of information it needs to provide effective fiduciary oversight. If, for instance, a board is considering making a change to its cash reserve policy to enable management to retain staff members who would otherwise be laid off, it must be able to rely upon the CEO’s real-time knowledge and reporting of the size of reserve—especially as legislation in Canada provides that directors can be held personally liable for up to six months of unpaid wages should the corporation become insolvent.
A CEO’s mantra needs to be “Decide, but substantiate,” and a board’s mantra needs to be, “Trust, but verify.”
How, then, can charity leadership teams (board and management) work together to mitigate information risk? By pursuing three priorities, which are in fact expressions of healthy organizational culture: extending trust, identifying relevant indicators, and maintaining real-time reporting.
- Trust: In a context of rapid change and an unpredictable future, a high level of trust is required between the board and CEO. If the culture of the organization does not support management’s reporting of less-than-positive issues or risks to the board, they may not be reported at all. At the same time, the CEO must allow the board to ask tough questions and challenge her assumptions without becoming defensive. A CEO’s mantra needs to be “Decide, but substantiate,” and a board’s mantra needs to be, “Trust, but verify.” As board and management work through various planning scenarios, guardrails need to be put in place to allow management to move quickly from one scenario to another in order to protect cash flow and maintain essential programs and services, without waiting for board approval. Over-involvement by the board during this season could divert resources from management that are needed to address rapidly-changing operational issues.
- Relevant indicators: Simply reporting on revenue on a year-over-year basis will not be adequate to alert leadership teams to impending challenges. Each organization will need to identify the set of relevant indicators that correspond to its particular blend of revenue streams and thereby provide the insight on which to base planning decisions—without throwing a mass of charts and graphs at the board. If board members are swamped with information, they may overlook critical risk factors. Glenn Waterman, vice-president of development and marketing at International Justice Mission Canada (an organization which is not reliant on any single revenue stream) tells me that he is currently monitoring major gifts, mid level giving, monthly giving and very specifically, online activity and gifts. On the other hand, for an organization heavily dependent on revenue from child sponsorships a key indicator may be the delta between new signups and cancellations—which, if that number grows in the negative, could point toward a cash crunch a few months in the future.
- Real-time reporting: During the current public health and economic crisis, the cadence of reporting by management to the board needs to ramp up. Quarterly meetings will not be adequate for the board to maintain its risk oversight. When I served as executive director of IJM Canada, I submitted a monthly financial report to the board no later than 15 days after month-end. My report to the board was informed by a month-end P&L report from our director of finance and revenue projections by stream for the current month from Glenn, both of which were due on my desk no later than the 10th of the month. If such a reporting schedule was beneficial at the best of times, nothing less would be adequate today. While it may not be necessary or practical to assemble the entire board on a monthly basis, an ad hoc executive committee can be empowered to meet on short notice to interpret the implications of the latest reports and provide guidance on urgent matters.
During this unprecedented time, directors have a key role in helping management think about medium- and longer-term challenges, while management is focused on short-term operational and service-delivery issues. For this partnership to be effective, managing the flow of information from one level of leadership to another and mitigating information risk are of vital importance. Trust and flexibility are needed to buffer against shortcomings and misunderstandings. As we are reminded so often, we will get through this together. And perhaps, as we emerge into the “new normal”, charities will be poised to innovate and mobilize more flexibly in the delivery of services to communities which themselves have grown in their appreciation for the vital contributions of the sector.
For more on the topic of mitigating information risk, contact Ed at email@example.com. All text © 2020 Ed Wilson. Photo by Francesco Ridolfi used by permission of iStock.