Risk Management and the Performing Arts?

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risk management
Sure, but maybe not so much for a performing arts organization.

I’ve just read a great report called “Risk Management for Nonprofits,” written and published by SeaChange Capital Partners and Oliver Wyman, a management consulting practice owned by Marsh and McLennan.

The paper opens with stories of recent nonprofit bankruptcies in New York City and other indicators of the fragility of the sector. There are some excellent statistics on the relative solvency of nonprofit organizations and a review of the structural challenges faced by nonprofits. But the heart of the paper is an outline of concrete steps that organizations can take to better manage risk, adapting private sector risk management practices to nonprofits.

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Those outlined steps, including the introduction of scenario planning and the establishment of financial stability targets — are great. But the more I read, the more I wonder and worry about the implications of bringing for-profit risk management practices to my corner of the nonprofit world: the performing arts.

The path forward — those steps designed to bring robust risk management to the sector — are all about building stronger organizations better able to predict, plan for and deal with things going sideways. It’s another step in institutionalizing arts organizations. Certainly that makes sense in other sectors, but the ephemeral nature of art and creativity is such that I worry about building strong, stable organizations that will, in many cases, tend to lose their creative vibrancy. Why should arts organizations with better risk-management skills but lousy work survive instead of those that invest absolutely everything they have into their creative output?

I also worry about limiting risk in performing arts organizations because the creative process is very much about risk-taking. I want to support artists who are out there on the high-wire. And I hope that those risk-takers will be provocateurs, too, shining bright lights back on our crazy world, and not being overly restrained by administrators.

The other related challenge is that all nonprofits should have an externally focused mission statement that is at least theoretically achievable. But there’s no way that a large institutionalized nonprofit will recognize or even be looking for the moment when they can celebrate the achievement of mission and close up shop. Organizations focused on risk management and financial stability are necessarily inward looking and thinking about long-term sustainability, which can lead to constraints and compromises in terms of the value delivered to the wider world.

What we really need to do is design a new type of organization better suited to creators and creativity. It’s too easy to become a 501(c)3 today, given the value of having tax-exempt status. Just about anyone can cook up a mission (don’t forget to use words like “enrich,” “educate,” “enlighten”), file the papers and start collecting donations. The even bigger problem is it’s so hard for a 501(c)3 to cease operations, with all sorts of legal and regulatory requirements beyond the resources of most groups.

Let’s also recognize the fact that technology is changing how organizations can be administered. There is less need for large offices and staffs. We can create virtual organizations for far less capital. And we’re trying to train young administrators who are keen entrepreneurs able to brand themselves as agents of change.

I’m not really sure what the new arts organization can and should look like. But the one thing I am certain of is the continuing importance of volunteer leadership. And here I absolutely agree with the SeaChange-Wyman paper on the importance of board composition, qualifications and engagement. Whatever the organizational structure, this is the group best able to monitor performance, manage risk and ensure that there is a reasonable balance between internal sustainability and external value delivery. I would contend that an effective board of directors should also be the ones to decide if and when the organization should shut down, not just when the bills can’t be paid but when the mission is achieved (or being ignored) or when the creative output of the organization has been largely spent.

The sad truth is that there are very few boards able and willing to play these important roles, even within the current structures. There are absent boards whose interests are limited to special treatment in return for the annual “give-or-get.” There are social boards only serving to mark the progress of ambitious individuals. There are toxic boards riven by internal conflict and politics. We have a lot of work to do here. In fact, the single largest challenge in the sector today is building better boards. Next month I’ll suggest an approach.