As Americans consider whether to vote for Hillary Clinton or Donald Trump for president, we've also put the Clinton Foundation and Trump Foundation under the microscope, peppering both organizations with accusations of self-dealing, conflicts of interests and questionable charitable purpose. These stories provide a great opportunity to reflect and refresh ourselves about the risks we should all be thinking about when managing a family foundation.

Private foundations, unlike most charities and commercial entities, operate generally in a lower risk environment. They typically have strong management, don’t need to raise funds, don’t compete for customers, receive little media attention (unless from self-inflicted behavior) and aren't accountable to a group of stakeholders outside of their own founders. However, these same factors that insulate private foundations from risk and the outside world may very well expose them to a fundamental risk of not having to be accountable nor to perform regular self-assessments.

Based on my 30 years of providing tax, financial statement and consulting services for over 100 foundations, primarily family foundations, here are the top five risk areas I encounter most often:

1. Compliance with laws and regulation. The rules for private foundations are so complicated that compliance tends to be a concern with all aspects of what you do: which nonprofits should receive our grants (prohibition on earmarking and lobbying activities), where we invest (jeopardizing investments and excess business holdings) and with whom we do business (self-dealing rules), just to name a few. These special regulations are in addition to the numerous other reporting requirements such as payroll taxes, and city and state regulations. Boards, at least annually, should receive a summary from management of their reporting requirements and assurance that all regulatory requirements have been fulfilled.
2. Investment management and acceptable returns. A combination of factors portray a challenging investment environment in the coming years due to continued low interest rates, stagnant corporate earnings and currently lofty valuations for U.S. stocks driven by the lengthy bull market since 2009. Generally, the return on its investments is a foundation’s sole source of revenue. In an economy with historically lower returns, it's a challenge to earn enough for making the required annual payout (5%) and maintaining the purchasing power of inflation (2%) without taking on additional risk in your portfolio. A foundation should ensure it has a strong investment committee, a well-thought out investment allocation policy and a highly regarded investment consultant.
3. Doing something that damages your reputation. In today’s environment, all organizations, including foundations, are facing unprecedented scrutiny from the public to provide greater transparency and board engagement. Your reputation could easily be damaged by funding a program that turns out be something other than what you thought. After philanthropist Greg Mortenson's bestselling Three Cups of Tea account of building schools in Afghanistan and Pakistan was exposed as a series of fabrications by a 60 Minutes broadcast, contributions to his Bozeman, Montana-based charity, Central Asia Institute, dropped from $22 million to $2 million in one year! There's also the cautionary tale of the Livestrong Foundation and its chairman, Lance Armstrong, who in 2012 was banned from professional cycling and stripped of his Tour de France victories after being found guilty of doping during his career. In 2013, the foundation received half the contributions it had received in the previous year and Nike announced it was cutting ties with the foundation. Reputation can also be damaged by staff or board misconduct. Foundations should annually update their ethics, conflict of interest, whistleblower and other policies related to employee and board behavior.
4. Making grants that have an impact. Sometimes, new programs may be ill-conceived or lack coordination with other funders; other times, grantees may fail to deliver or may even misuse your funds. These program risks are always present, but generally kept to a manageable level because of strong due diligence steps carried out by program staff, requirements for annual progress reports and appropriate oversite of grantee’s work. There are many resources, including sample checklists, available for program staff through Philanthropy Northwest and other philanthropy-serving organizations that can help with this process.
5. Succession planning and governance structure. Every day, another 10,000 Baby Boomers turn 65. As they reach retirement age, more family foundation founders are also turning over governance to the next generation. Too often, however, succession plans are poorly thought out, or turned over with little training or experience to those new leaders. Boards should strive to adopt best governance practices including accountability, training and expectations for both themselves and professional staff. National Center for Family Philanthropy (NCFP) and GMA Foundations offer several articles on successful succession planning on its website.

All entities, whether commercial companies, public charities or private foundations, need to follow good risk identification and management practices. Developing and following a program, within the frame of your foundation’s risk tolerance, is one of the keys to achieving high performance. Without a risk management program, you may find yourself taking on too high a level of risk. On the other hand, having a risk profile that's too conservative may result in foregoing innovative projects and rejecting new approaches, resulting in a mission that becomes paralyzed by fear of embarrassment or failure. Strong risk management programs can reduce this fear and put your foundation on the road to success.

Robert J. Fleming, CPA, is a shareholder with Clark Nuber PS, a Bellevue based accounting firm specializing in foundations and other tax exempt organizations.