In a recent Journal of Accountancy article, I came across a survey on board members of U.S. entities who rated the top non-financial risks that they were most concerned about. The number one non-financial risk identified was reputation. The survey was directed at U.S. public companies, but knowing my clients and serving on various boards, I believe that board members of tax exempt organizations feel the same way. So what exactly is reputational risk?

Reputational risk is defined as a threat or danger to the good name or standing of a business or entity. Reputational risk can occur a number of ways:

• Directly, as the result of the actions of the entity itself.
• Indirectly, due to the actions of an employee or employees; or
• Tangentially, through other peripheral parties, such as donors or suppliers.

In addition to having sound governance practices and transparency, nonprofit entities also need to hold themselves socially responsible and environmentally conscious to avoid reputational risk. Let’s take a closer look at the definition of reputational risk and how this concept can be applied to nonprofit board members.

1. Directly as the result of the actions of the entity itself. One of your responsibilities is to protect the organization’s public standing. For example, we have not-for-profit clients whose mission includes the well-being of children and families. The reputation of these not-for-profit clients would be severely damaged if there was an article in the Boston Globe or local newspaper that the organization, whose mission focuses on children and families, was investing in tobacco or alcohol investment strategies.
2. Indirectly due to the actions of an employee or employees. Recently we have witnessed the negative impact on the reputation of the owners of two NFL teams as a result of the conduct of some of their players. As a board member, one of your responsibilities is selecting the chief executive (your coach), who in turn is responsible for hiring employees (the team). In many cases, the face or your organization is your employees. Your employees work with your donors, organize your events, and work closely with the board and related committees. You can start protecting your reputational risk by ensuring that there are hiring policies and procedures in place and that the chief executive of the organization is adhering to these policies, to ensure that the right people are put in situations to succeed and promote the organization.
3. Tangentially through other peripheral parties, such as donors or suppliers. You can’t control a news story after it’s published but you can take certain measures to protect yourself against the risk of negative press. Without its donors a not-for-profit organization would cease to exist. That’s why it’s important to incorporate reputation risk into the day-to-day operations of your organization and make smart business decisions when selecting suppliers. Credible and reliable business partners are a reflection of your organization, choose wisely. Understand your responsibilities as a board member and what your actions mean to the organization remember: “it takes twenty years to build a reputation and five minutes to ruin it. If you think about that you’ll do things differently.” – Warren Buffett

For more information on how to protect the reputation of your nonprofit organization, read our Board Development blog series: Ten Basic Responsibilities of Not-for-Profit Board Members or contact and member of the KLR Not-for-Profit Services Team.