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June 5, 2019

Nonprofits Need Careful Planning as Risk Profiles Expand

Posted by Restructuring Team

Risk Management
Risk Management concept image with business icons and copyspace.

Proactive crisis planning, rapid responses and understanding their financial options are among the keys that nonprofits should consider for their future planning processes in a quickly changing world.

California, for instance, has increased the statute of limitations for filing childhood sexual abuse-related civil suits from two years to 10. Washington state similarly extended the statute of limitations from three years to 20. New York has extended victims’ age limits for filing lawsuits alleging childhood abuse from 23 to 55, and other states are likely to follow suit.  

In several states, these new laws are accompanied by short “lookback” windows – typically two or three years – that allow past alleged victims to file litigation that would have been precluded by previous statutes of limitations.

This combination means nonprofits may have to address accusations for deeds that allegedly took place decades ago, and they could face financial exposures that exceed their ability to pay settlements or judgments.

The financial and reputational risk these past misdeeds pose can be seen, in part, by a number of prominent nonprofits filing for, or discussing, bankruptcy protection to pause litigation and give the organization time to negotiate settlements.

Bankruptcy is less common among nonprofits than in the commercial sector, but in certain circumstances it can provide valuable protections to a nonprofit organization. Depending on the organization, its assets, its risk profile and other considerations, a restructuring may be among the options nonprofits should discuss as part of their risk management planning.

Heightened Risks

While no organization wants to face allegations of misdeeds, the risk is heightened for nonprofits when the accusations contradict their social missions. Beyond the misdeeds, the alleged breach of trust can damage the organization’s reputation, as well as its ability to serve its clients or to attract donors, volunteers or grants.

In addition to the threat to their financial resources, nonprofits need to understand how allegations can harm their most important asset — the trust and credibility of clients, donors and board members.

The risks for nonprofits are exacerbated by the fact that they can no longer assume their reputation or the social benefits they provide will help shield them from public or donor disfavor if serious allegations become public.

Similarly, long-serving board members or managers need to understand that public and legislative sentiment can shift more rapidly than it did in the past, meaning past practices or responses to allegations may no longer be suitable for an era in which stakeholders demand rapid responses to emerging issues or allegations.

Given our 24-hour news cycle and the power of social media to amplify allegations, as well as a willingness to discuss issues that may have been addressed quietly in the past, the public is less trusting (and less forgiving) than it was as recently as a decade ago.

In this environment, the time for nonprofits to react is shorter than it used to be, and the consequences of reacting improperly are more severe. For instance, if a nonprofit is not able to serve its clients, or donors no longer see benefits to being associated with that organization, benefactors are likely to shift their support elsewhere.

Understand the Exposures

To address not only ongoing risks, but also the possible return of past issues the organization believes it has resolved, nonprofit boards need to hold regular discussions about the risks their organizations face and how those risks are evolving.

Boards and management need to consider, at least in general terms, what-if scenarios regarding issues such as allegations of sexual harassment or abuse, financial improprieties or other misdeeds that can threaten the nonprofit’s reputation or mission.

These discussions should include attorneys or other outside advisors to help the organization understand its potential options. These advisors can offer objective perspectives about emerging regulatory or legal trends and help nonprofit boards discuss contingencies without the high emotions that typically follow a serious allegation.  

It’s much more effective, and likely less expensive, to have these conversations in a hypothetical, dispassionate setting than during the heat of a crisis. Identifying options ahead of time can provide important advantages in making the best decisions and resolving a situation effectively.

Boards may also have to balance a need to preserve financial assets with the organization’s reputation or social mission. A public fight over allegations, for instance, can hinder the organization’s reputation along with its ability to retain donors.

It’s also important to address allegations quickly. Each situation is unique, but it’s common for organizations to misspend funds for legal fees fighting allegations. Often the money could be better applied to a settlement fund that provides faster compensation for victims as well as a less expensive resolution for the nonprofit.

Understanding risk and the accompanying financial obligations, and planning for negative events or allegations proactively, are among the routine practices that separate effective nonprofit boards and management teams from those whose organizations are crippled by unexpected crises.

To learn more about how to reduce your nonprofit organzation’s risk or protect your rights during a bankruptcy, contact our Corporate Finance and Restructuring Services team.

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