From time to time, I have the great good fortune to train foundation staff on the art and science of grantmaking. At some point, the discussion will turn to the topic of risk-taking. Foundations are notorious for being risk averse; preferring not to engage in activities that may be deemed controversial or in any way compromise their reputations as generous benefactors of an organization, field, or community. Activities related to community organizing or advocacy, for example, have long been especially avoided by foundations due to their potential to expose the foundation to accusations of rabble-rousing or challenging other important and high-profile community leaders. While it is true that some foundations have become more risk tolerant in recent years, by-and-large, most still hold to a fairly conservative risk profile.

I always counsel my clients to treat their grant investment portfolio the way they would their 401(k) account. That is to say, foundations should allocate their grant portfolio across a broad spectrum of risk in order to maximize their long-term returns, and minimize sudden or precipitous declines. How does this work in practice? Foundation program managers should determine their risk profile at the beginning of an initiative or strategic plan and then make individual grant decisions to match this profile. Thus, when a “high-risk” proposal comes over the threshold, it should be assessed for its potential to make high returns if it is successful, but only in the context of a balanced portfolio that minimizes the risk if it fails. And, if it does fail, it should be mined for the lessons learned in order to inform their future practice.

Unfortunately, while most foundations and their boards of directors use risk as a factor in their decisions, most also never take the step of having a formal discussion about their risk profile, and then of creating policies and practices to monitor their portfolio relative to that profile. Rather, they use informal means, like “the front page of the newspaper” test, to assess risk. I think if they did take these extra steps, most foundations would find that they are more risk tolerant than they think, and could enable their grantees to experiment more, promote innovation, and see “failure” as a valuable learning tool.