CAIS Trustee/Heads Conference

Managing Financial and Operational Risk in Independent Schools

January 23, 2010

Presented by:

Bolton & Company Insurance Brokers— Ronald Wanglin, Chairman/CEO, and Cheryl McDowell, Vice President, Education Practice Group

DKG Consulting—Denise Gutches, Business Management Consultant

Session Overview

Financial Risk Management – What Does This Mean and Who Is Responsible for What?

Board Oversight and Operational Risk Management

Recommendations for Best Practices Current Critical Issues – Hot Buttons! Resources for Financial Risk Management

School Risk Management

Risk brings opportunity as well as potential harm to an organization.

Managing financial risk means maximizing opportunities and minimizing harm.

Risk permeates every function within the organization:

Strategic Legal/Fiduciary Financial Operational Reputational/Political

Risk Management

What is risk management in an Independent School?

It is a discipline that should be practiced at all levels and functions.

It is a continual process in the school’s management and methods of operation.

It is proactive, not reactive.

Risk Management and Board Governance

"There is no way a board can establish sufficient policies and procedures in order to eliminate all risk and resulting law suits, but risk can be managed in order to keep litigation to a minimum. 

The board's role is to assure that the appropriate policies--such as personnel, student activities and behavior, crises management, and financial management--are in place and that the school is following those policies and the resulting procedures every day in a consistent, fair manner“**

**NAIS Trustee Handbook – Chapter 2 – Keeping the Mission and Serving as the Fiduciary of the School

The Board’s Work*

Fiduciary—protecting the school to ensure achievement of mission

Strategic—thinking about strategic and tactical moves to make the school sustainable

Generative—visionary thinking

*Dick Chait—”The New Work of th Board”

Managing Financial Risk

Strategic Planning/Financial Planning

Tactical moves in the midst of economic uncertainty

Re-think the financial model

Freeze the size of staff and grow the size of student body

Adopt discipline that won’t add new program without subtracting old program

Marketing Ensure the price value proposition is clear—

make your school a necessity for families not a luxury

Responsibilities forRisk Management

Board of Trustees Head of School The Business Officer Human Resources Other Operational Personnel Outside Consultants

Financial Risk Management and the Board’s Role

Place on the school’s strategic agenda. Make a commitment to risk management oversight. Integrate into all areas of operations. Make a part of every decision making process. Support the Head of School in efforts to manage

risk. Make professional expertise available as

appropriate.

It is difficult to figure out the questions you are not asking, so ask lots of questions and pull on every thread you can.

The Board’s Role

Financial Risk Management and the Audit Committee’s Role

Determine whether the school has the appropriate policies and procedures in place to minimize risk?

Assessment of financial risk and exposure Assure adequate funding for staffing, and

facilities maintenance/repairs to minimize risks Require annual reporting updating risk

management program

Conduct a Risk Management Audit

Risk Management and the Head’s Role

Promoting risk management throughout the school community.

Ensuring that risk management is delegated to the appropriate individuals within the organization.

Monitoring the program and keep the Board apprised of its implementation.

Internal Risk Management AuditTEN KEY AREAS

1. Board Oversight on Fiduciary Matters

2. Operating Policies

3. Student Programs and Activities

4. Facilities Management—maintenance, safety, security

5. Human Resources—employment practices, handbooks, records management

Internal Risk Management AuditTEN KEY AREAS

6. Legal compliance—report filings, contracts

7. Technology—internal controls, safeguarding data & assets

8. Admissions—services, activities and policies

9. Fundraising—services, activities and policies

10. Environmental—indoor air quality, noise, lighting hazardous materials

The Risk Management Committee

Risk Management Audit

1. Identify potential risks in each area

2. Understand degree of risk exposure:

Likelihood of exposure

Extent of Potential Loss

Type of exposure that could occur

Responsibilities of The Risk Management Committee1. Identify and analyze loss

exposures

2. Examine alternative risk management techniques

3. Select Risk Management techniques

4. Implement Risk Management techniques

5. Monitor results

Select & ImplementRisk Management

Technique

Monitor Results

Identify Exposures& Examine Risk

Mgmt Techniques

Risk Management: Insurance

Audit Existing Insurance and Risk Management

Program Benchmark Existing Coverage and Limits Evaluate Assumption of Risk

Self Insurance Deductibles Risk Retention Groups

Risk Management: Insurance

Understand:

insurance policy structure – what claims reduce what limits

incident/claims reporting requirements how specific coverage works relative to

other coverages covered/excluded perils, including

catastrophic

Risk Management: Insurance

Don’t “shop” on price alone; know what you are buying

Don’t use multiple insurance brokers; use a broker selection process (RFP/RFQ)

Address “Key Person” financial exposure

Be informed of new insurance products that may cover uninsured exposures

Risk Management:Integrity of School Financial Affairs

School stakeholders want the assurance and confidence that financial affairs are handled ethically and with integrity

Legislation of the past 5 years highlight the need to implement the appropriate policies and procedures to eliminate risk of financial misstatements

Recommendations for Best Practices

1. Place on the Board’s strategic agenda

2. Employ long-term thinking—proactive not reactive

3. Establish an Audit Committee or Clarify Audit Committee’s Role in Risk Management Oversight

4. Conduct Internal Risk Management Audit and Update Annually

Risk ManagementBest Practices

5. Implement critical policies and update regularly

6. Conduct Insurance Risk Management Audit7. Review and benchmark results on a “peer to

peer” basis8. Review and benchmark employee

benefits/retirement plans

Risk ManagementBest Practices

Annual Audit Policy Conflict of Interest Whistleblower Document Retention/Management Banking and Cash Management Policies Fundraising—Gift Acceptance and Gift Management

Policies Endowment Investment Management and Spending

Policies Employment Policies and Practices Financial Aid and Tuition Assistance Policies Facilities Management Policies and Practices

Policies Schools Should Have

Current Critical Issues in Risk Management

“Hot Buttons”

Ethics and Risk Management Tone at the Top—management’s ethics and

integrity are unimpeachable and tone permeates organization

Conflicts of Interest Policies to safeguard against actual and perceived

conflicts—how transactions identified and brought to the Board; process to identify “excess benefits.”

Contemporaneous discussion and documentation is critical.

Hot Buttons

Regulatory Compliance Awareness of breadth and nature of regulations the

school is subject to and protocols for compliance: IRS—990’s; 403(b) retirement plan changes OSHA Federal funding

Hot Buttons

Financial Misstatements and Risks Assessment of risk of material misstatement Identification of major risk areas (i.e. debt covenants) Management incentive to distort reported results

Occurs due to ethical tone, control environment and staff training and capacity

Financial fraud and exposures Check forgeries Credit card usage

Hot Buttons

Fundraising Collectability of pledges Events yielding budgeted net revenue Capital campaigns and impacts on related projects

Admissions and Student Retention Understanding impacts on student enrollment and

external environment. Goals regarding student enrollment realistic to trends. Strategies to address declining enrollment.

Hot Buttons

Employment Risks

Impacts of compensation decisions on employees

Increased incidence of workers’ compensation claims

Increased employment practices liability claims Increase in premiums and experience modification

factors

Hot Buttons

Investment and Debt Management Ensure clear understanding of investments and debt

covenants and how they work. Multiple revenue streams creates complexity in

control structures requiring skill-sets staffing may not possess.

Investment policy—acceptable investments, asset classes, etc.

Changes in investment managers. Comparison of investment returns to industry, to

budget expectations, etc. Debt capacity. Credit rating/Letter of Credit renewals

Hot Buttons

Checks and Balances

Recognition of risks and exposures Implement systems and controls to ensure

compliance and risk management is working Monitor regularly: policies, procedures and

practices

Keep the Risk Management Program Dynamic

Remain alert to developing risks. Adapt the risk management program and plan

accordingly. Be flexible to keep pace with ever-changing

environment. Tap available expertise and resources to stay

apprised of the risk environment: Trustees Insurance brokers Professional associations

Resources

Insurance Broker Insurance Company Loss Control Dept. Outside Consultants Police Fire Health Inspector Utility Company OSHA Inspector Physicians Lawyers Architects Investment Manager