Enterprise Risk Management in Non-Profit Organization

Enterprise Risk Management in Non-Profit Organization

Selçuk Bali (Giresun University, Turkey) and Yeter Demir Uslu (Giresun University, Turkey)
DOI: 10.4018/978-1-5225-0731-4.ch004
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Abstract

Prior studies indicate that enterprise risk management has a vital role on firm performance. Enterprise risk management system helps organizations to reach their goals by reducing uncertainty of their operating environment. In this context, this study aims to discuss and analyze the concept of enterprise risk management in non-profit organizations. The term “risk” for non-profit organizations is defined and different types of risk are examined. The significance and need of managing risk in non-profit organizations are revealed.
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Introduction

The number of non-profit organizations is increasing on a yearly basis. This increase in numbers has also been accompanied by increased scrutiny and increased demand to operate with greater board engagement and transparency (Bennett et al., 2006). It is also worth noting that the expectations of non-profit organizations and non-profit boards keep evolving, a fact that has seen more focus being directed towards enterprise risk management. A structured approach helps align strategy, processes, people, technology and knowledge in order to assess and manage the uncertainties facing an organization, aimed at creating value. Structure of efficient Enterprise Risk Management (ERM) provides accurate information for decision of sound decisions in business risk management. ERM is the tool for Comprehensive Management Risks of Organizations providing a holistic view that allows the sound decision making, proper prioritization and allocation of more efficient capital, increasing effectiveness of corporate management and becoming a fundamental to the creation of value for an organization component. Non-profit organizations have realized the important role that enterprise risk management plays in effective governance of an organization (Brown & Iverson, 2004). Leadership in non-profit organizations is now determined to identify high risk areas within and without the organization and come up with appropriate strategies to mitigate these risks. This has led to increased interest in enterprise risk management from these organizations. Enterprise Risk Management needs proper communication throughout the nonprofit organizations. Executive management is responsible for implementation and education (Herman, 2011). They must assemble the proper staff, develop a comprehensive program, and educate the staff on how to implement and use the ERM. Reckless risk-taking will occur if staff is not properly trained, and the ERM becomes standard operating procedure. Through the effective ERM, management can mitigate future risk by training and management levels are responsible for communicating the ERM and ensuring their direct reports are adhering to same. Management is ultimately responsible when infractions occur. The current global economic climate has exerted a lot of pressure on organization boards, management as well as audit committee, requiring them to have an understanding and be in a position to address organizational risks that are more prevalent in the present climate.

Organizations are facing increased risks, meaning that organizations have to protect their important assets including their reputation and good name. Effective and proper management of risks is crucial for proper functioning of an organization. The environment in which non-profit organizations operate in is uncertain and unpredictable, meaning that these organizations are exposed to a wide array of risks. Segal (2011) defines enterprise risk management as a process by which an organization identifies measure, manage and disclose all key risks to increase value to the stakeholders. Non-profit organizations encounter risks in many ways including financial risks, program, and capital expenditure as well as personal risks (Brown & Iverson, 2004). Determinations of these risks is difficult to be determined as it involves the interaction of different organizational factors within the complex, changing and volatile economic, social and political environments (Bennett et al., 2006). This study discusses and analyzes the concept of enterprise risk management in non-profit organizations.

Key Terms in this Chapter

Strategic Planning: Identifies external threats and competitive opportunities, along with strategic initiatives to address them.

Hazard Risk: Liability torts, Property damage, Natural catastrophe.

Strategic Risk: Competition, Social trend, Capital availability.

Customer Service: Ensures customer complaints are handled promptly and root causes are reported to operations for resolution.

Treasury: Ensures cash is sufficient to meet business needs, while managing risk related to commodity pricing or foreign exchange.

Compliance and Ethics: Monitors compliance with code of conduct and directs fraud investigations.

Enterprise Risk Management (ERM): The methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives.

Financial Risk: Pricing risk, Asset risk, Currency risk, Liquidity risk.

Operational Risk: Customer satisfaction, Product failure, Integrity, Reputational risk; Internal Poaching; Knowledge drain.

Marketing: Understands the target customer to ensure product/service alignment with customer requirements.

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