Endowments need good investment committees. What happens when governance goes awry? Whether your nonprofit is launching an endowment, changing advisors for the endowment or growing your Finance or Investment Committee, it is important to have an effective investment committee or sub-committee.
As we mentioned in our previous blog, your nonprofit should start with a strong foundation of financial policies. Much like a car needs a strong chassis, a nonprofit needs fiscal policies and procedures which describe the day-to-day governance of the organization. The liquidity or reserve policy can be viewed as the engine and the investment policy as the fuel.
Previously, we outlined the role of the Finance Chair, Treasurer and Investment Committee members. We also discussed what IS NOT the role of the board members and where the boundaries lie among leadership, board members and staff.
What does your Nonprofit Board do when governance goes awry?
First, let’s define what we mean by awry. After all, nonprofit boards are comprised of well-meaning and well-intentioned volunteers who are giving their time, talent and treasurer to ensure the organization delivers on the mission and provides impact to its community.
“a●wry: (adjective) away from the appropriate, planned, or expected course; amiss. out of the normal or correct position; askew.”
~ Oxford Languages Dictionary
The dictionary defines awry as “away from the appropriate, planned, or expected course; amiss.”. That is exactly what can happen on a nonprofit board if the board doesn’t maintain effective governance and clear role boundaries. In today’s article, we will stay specific to investment committees since there are a myriad of ways governance goes awry in other committees or at the full board level.
Some ways we see Nonprofit Board Governance go awry — up close and personal:
Lack of Engagement:
Investment committee members get busy in their work and personal lives and do not engage or show up for board business. This can leave nonprofit leadership and staff stymied with the inability to make decisions or move forward. This is especially challenging when there are clear decisions the board must vote upon but the committee or board cannot obtain a quorum for meetings.
Micro-management:
Some nonprofit boards become so cautious and risk averse, that they do not allow nonprofit leadership to approve decisions internally. For example, one organization we worked with required the board to approve ALL money movement among the organizations operating, reserve and investment accounts. This meant that the Executive Director could not move reserve funds from the operating account which was yielding less than 1.0% to a higher yielding money market account which was yielding 4.0% at the time.
Lack of Proper Reporting / Resources:
Some nonprofit organizations lack resources and expertise to prepare financial reporting clear decision-making at the board level. Finance and Investment Committee members don’t recognize the need or don’t advocate for more resources. For example, one nonprofit lacked a full-time, trained staff member to focus on the organization’s financials despite their $5.6 mm budget. This led to incorrect and inadequate reporting resulting in the board uncovering a big deficit at fiscal year-end.
Conflicts of Interest:
When a Finance or Investment Committee Member works for or is a business referral partner with the nonprofit’s endowment advisor, this presents a conflict of interest. Is the endowment advisor a fiduciary? Are the fees reasonable and competitive? Has the nonprofit engaged in an RFI / RFP review every five years?
UPMIFA:
For nonprofits with true endowments, the finance/investment committee must follow the Uniform Prudent Management of Institutional Funds Act. There have been some high-profile lawsuits where nonprofits did not follow proper governance. See the most recent case (albeit extreme) from Minnesota.
Lack of Transparency & Innovation:
Some nonprofit boards may have the same set of directors for ages with little to no turnover, especially at the officer level. This leads to a lack of transparency and innovation around the investment process and policy. For example, we spoke to a nonprofit board member several years ago who had joined the board of a public foundation with little board turnover. He was appointed to the investment committee, but they never met separately. The full board only met 5 times per year and this board director felt frustrated at the lack of transparency on how the money was managed and who managed it.
What are ways that you can ensure your finance or investment committee doesn’t go awry? How can you develop best practices on governance?
Engage Your Committee:
Whether you are the Board Chair, Treasurer or Executive Director, figure out ways to ensure your finance / investment committee meets. Some examples are:
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Provide Flexibility: It may be as simple as publishing a schedule at the beginning of the fiscal year, providing zoom meetings or appending the committee meeting to the full board meeting.
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Listen / Use Talents: It may be a complex issue such as having committee members feel their skills are being used and their voice are heard. If the committee is more than 5 people, create an anonymous survey about the current culture of the committee, skills they want to use, engagement needs, etc.
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Appoint Appropriately: As we have stated in previous articles, we recommend a diverse committee, which may include those whose professions are not financially focused. However, it’s also important to ensure your board member wants to be on the committee and is willing to learn. Provide an onboarding session for your new member and be willing to offer an extra training session through your endowment advisor or another board member. Offer online resources for the new member to read and learn.
Create and Review Boundaries:
Create fiscal, reserve and investment policies so your nonprofit leadership feels empowered to make decisions internally without committee or full board approval. Some examples are:
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Authorizations: The fiscal policy can include signing and disbursement authorization levels and the reserve policy can establish reserve target thresholds allowing leadership to transfer among accounts at a pre-established level.
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Review: Review your policies annually, especially if your budgets are changing more than 10-15% annually. You may need to increase or re-establish your thresholds.
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Cybersecurity: Ensure your organization is protected against cyber threats to your organization’s financial infrastructure. Engage a cyber consultant, your banker and your investment manager to ensure staff and officers are briefed and trained on key issues. Ensure you have cyber insurance to protect your nonprofit.
Resources & Reporting:
Ensure your board has both timely and transparent reporting on its fiscal status. As a finance or investment committee member you don’t feel informed or understand the content, SPEAK UP! There may be other members feeling the same way. Some suggestions are:
Resource review: If you feel the nonprofit doesn’t have adequate or trained resources, discuss with your Executive Director and ask her or him to share the number of employees who focus on financials and their backgrounds.- Analysis: Empower and fund the Executive Director to perform analysis on process improvement for the financials. Some foundations provide grants and some accounting firms will do a pro bono analysis.
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Reporting: Depending on which sub-sector your nonprofit resides within, you may be able to obtain “best practice” sample reports and methodology from membership organizations or from training organizations that specialize in your sub-sector.
Manage Conflicts of Interest:
Most boards have a conflicts of interest policy. This should be signed annually at the start of every fiscal year. Your nonprofit can still conduct business with an organization that may have a conflict with a board member, but this conflict should be transparent to the full board and organizational leadership. The board member who has a conflict must not be involved in the hiring or firing decision of the vendor. We also suggest:
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Fees: Documenting that the current fees for the endowment manager or consultant are reasonable by doing a simple industry comparison. Checking with NACUBO on endowment fees or searching for firms that manage nonprofit investments, then checking their fees through the public SEC database here.
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Fiduciary: Ask the endowment manager to confirm they are a fiduciary.
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RFI/RFP Process: Ensure your nonprofit includes a process in the investment or fiscal policy to review their endowment manager every 5 years much like it does for the audit / CPA firm.
UPMIFA Training:
To strengthen your nonprofit’s governance, train the board or investment committee AND development committee on UPMIFA and review your current investment policy statement and portfolio against its main elements. Some additional actions:
Gift Acceptance Policy: If your organization receives gifts in excess of $100k, endowed gifts or more complex planned gifts, you should ensure you have a gift acceptance policy and review it periodically. It should align with UPMIFA.
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Donor Agreements: It is best practice and prudent to have a strong donor agreement signed when donors give large or complex gifts. This will ensure your nonprofit has transparency over handling and monitoring the gift. You may need to share aspects of his agreement with your endowment advisor.
Increase Transparency & Innovation:
Some nonprofit boards can become set in their ways, especially when there are no terms limits and/or little turnover. A few suggestions on ensuring your board continues to innovate as well as provide transparency:
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Term Limits: Ensure your organization has terms limits and adheres to them.
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Diversity in board membership: Recruit new members from cultural, socio-economic, geographic areas that are different from your current organization. Some nonprofits even make it a point to reserve a position for someone from the communities they serve. As an example, a nonprofit may serve foster children and the board recruits a former foster child (now adult) who can represent the community with new ideas through diverse thinking.
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Advisory committees: Recruit prospective board members to sit on an advisory committee to specific projects or sub-committees. You can invite the advisors to sit on the investment committee or provide their expertise to the finance committee. This allows you to bring in new ideas and experts who understand the most current investment approaches, products and considerations.
Do not worry if your investment committee has gone off-track or “awry”. You can quickly course-correct by implementing some sound policies, training board and staff and having an open discussion of the issues at your next board meeting. Turning to an expert for guidance helps too.
Fairlight Advisors
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