Key Points

In the pursuit of more effective giving, the nonprofit sector has been increasingly advocating for foundations to take on more risk in their grantmaking. This article investigates the risk experience in the charitable funding process and the approaches taken to mitigate unwanted risks. Failure to adequately manage such risks can negatively influence the legacy of a foundation and the effectiveness of the programs and projects it funds.

Particularly, this article contributes to the improvement of managing the risks that arise in the grantmaking process by identifying those key risks faced by different types of foundations, thus helping to prioritize the limited resources that many grantmakers have at their disposal. These findings are thought to extend beyond the Australian context to other jurisdictions with similar regulatory constraints.

This study addresses grant risk across various types of foundation settings and explores it across two common approaches to grantmaking: an open approach, whereby the foundations invite applications for funding; and a closed approach, whereby foundations conduct their own search for suitable interventions to fund. Findings are based on 34 interviews with Australian foundation directors and grant staff; 11 grant risk types are identified, grouped into four grant risk categories. While management or execution risks were seen to be of major concern to grantmakers, assessment risks and internal risks were also a significant source of decision uncertainty within most type of foundations. Furthermore, two main mechanisms — principal-agent theory and bounded rationality — are shown to dominate the causal link between varying foundation contexts and differing experiences with grant risks.

Overall, this article furthers the understanding of organizational risk by identifying and categorizing the risk types and factors that occur in the grantmaking process. This is a valuable contribution to both organizational risk theory and philanthropic risk theory: The research develops a framework for understanding risk beyond the for-profit space and into the nonprofit arena and serves as a guide for further exploration of risks in philanthropy, removing conflicts in terminologies and providing a structure for more in-depth analysis.

Open Access