CAIS Trustee/Heads Conference Managing Financial and Operational Risk in Independent Schools

1. CAIS Trustee/Heads ConferenceManaging 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

2. 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

3. 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

4. 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.

5. 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

6. 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”

7. 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

8. Responsibilities forRisk Management • Board of Trustees • Head of School • The Business Officer • Human Resources • Other Operational Personnel • Outside Consultants

9. 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.

10. 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

11. 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.

12. Internal Risk Management AuditTEN KEY AREAS • Board Oversight on Fiduciary Matters • Operating Policies • Student Programs and Activities • Facilities Management—maintenance, safety, security • Human Resources—employment practices, handbooks, records management

13. Internal Risk Management AuditTEN KEY AREAS • Legal compliance—report filings, contracts • Technology—internal controls, safeguarding data & assets • Admissions—services, activities and policies • Fundraising—services, activities and policies • Environmental—indoor air quality, noise, lighting hazardous materials

14. The Risk Management Committee

15. Risk Management Audit • Identify potential risks in each area • Understand degree of risk exposure: • Likelihood of exposure • Extent of Potential Loss • Type of exposure that could occur

16. Responsibilities of The Risk Management Committee • Identify and analyze loss exposures • Examine alternative risk management techniques • Select Risk Management techniques • Implement Risk Management techniques • Monitor results

17. 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

18. 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

19. 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

20. 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

21. Recommendations for Best Practices

22. Risk ManagementBest Practices • Place on the Board’s strategic agenda • Employ long-term thinking—proactive not reactive • Establish an Audit Committee or Clarify Audit Committee’s Role in Risk Management Oversight • Conduct Internal Risk Management Audit and Update Annually

23. Risk ManagementBest Practices • Implement critical policies and update regularly • Conduct Insurance Risk Management Audit • Review and benchmark results on a “peer to peer” basis • Review and benchmark employee benefits/retirement plans

24. Policies Schools Should Have • 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

25. Current Critical Issues in Risk Management“Hot Buttons”

26. 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.

27. 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

28. 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

29. 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.

30. 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

31. 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

32. 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

33. 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

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