When establishing an endowment, it is critical that the board, in its role as a fiduciary, executes an Investment Policy Statement (IPS) to establish clear objectives and management policies. In essence, the Investment Policy Statement sets out standards for the endowment that are maintained throughout the life of the endowment, keeping fiduciaries accountable for its supervision.
Why does the organization need an Investment Policy?
While all nonprofit organizations have Corporate Bylaws that outline the board officers and members roles within the organization, they don’t identify the specifics on “how” things should be carried out within the organization.
For example, the Corporate Bylaws described the Board Treasurer Role as follows:
Duties of the Treasurer:
The Treasurer shall keep and maintain, or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the corporation, including accounts and assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and other matters customarily included in financial statements. The Treasurer shall send or cause to be given to directors such financial statements and reports as are required to be given by law, by these bylaws, or by the Board.
In addition to describing the board members’ overall duties, titles, officer roles, and committees, the Bylaws generally describe the board’s overall fiduciary responsibility for the stewardship of the organization’s money.
Yet, the Bylaws don’t go into the detail of how duties and responsibilities should be managed between the staff and the board as well as among board members. Since the Bylaws usually require a board vote to change or update them, organizations must have policies that go into more detail on both operational and strategic fiscal management. The policies should be living documents of the organization, reviewed annually and updated every 2-3 years based on changes in the organization.
What financial policies should an organization have?
Depending on the size of your organization, you may or may not need the following policies which can be combined into one large fiscal policy with chapters or separate policies that are reviewed and evaluated by different combinations of staff and board members.
- Fiscal Policy and Procedures: This document should govern the day-to-day fiscal operations of the organizations from budget development to banking arrangements, contracting authority, banking arrangements, etc. Please visit our checklist here for a full list of areas a robust fiscal policy should cover.
- Liquidity and/or Reserve Policy: This document governs the organization’s cash management and reserve practices including how money flows between the operating accounts, short-, medium- and long-term funds. If the fiscal policy does not contain disbursement limits and practices, then this policy can address these guidelines.
- Investment Policy Statement: This document governs the organization’s long-term endowment, quasi-endowment, or board-designated funds. It should govern the spending policy on an annual and long-term basis, investment allocation guidelines, performance measurement, and staff/board roles.
- Gift Acceptance Policy: While it may seem strange to have the gift policy under “fiscal policies” it is important that an organization have one if it is doing a fair amount of fundraising and donor outreach. It is a must if the organization has a planned giving program. The policy should be reviewed by the Board’s Development and Finance Committee and engage with both the Finance and Development directors since the types and manner of gifts are important to both roles.
For now, we’ll focus in more detail on the Investment Policy Statement or IPS for short. It can be broken into two major parts.
INVESTMENT POLICY STATEMENT (IPS) Part 1:
The introduction spells out the purpose of the endowment, the roles, responsibilities and standards of conduct expected of the board and any hired investment professionals. The Introduction also sets out the investment goals and the return expectations of endowment as well as the spending needs.
The roles and responsibilities section will vary depending on the size of your organization’s board and the various roles within your organization. The larger the board, the more specific roles you may choose to have stated within the investment policy.
For example, if you are just launching your endowment and your organization is under $5 million, you may just have the Executive Director or CEO and Director of Finance Roles as staff identified in the IPS. You may delegate authority to the Finance Committee in the IPS rather than creating a separate Investment Committee. The Treasurer and Director of Finance may be the primary contacts for the endowment until the organization grows larger.
It is important to spell out the responsibilities of hiring an outside manager as well. We strongly recommend the Board give formal approval to the Finance or Investment Committee to source and review advisory firms to manage the organization’s endowment. Depending on your bylaws, your board may require final approval before an Investment Management or Consulting Agreement is signed with the advisor.
We also recommend the Board Treasurer sign the IPS once it is finalized and approved by the full board. The IPS should indicate the meeting date when the full board approved the policy so it can be referenced.
If your organization is subject to an independent audit, the step of gaining full board approval on the IPS becomes more important as your auditors will want to see evidence of your endowment complying to its policy on an annual basis.
INVESTMENT POLICY STATEMENT (IPS) Part 2:
The Investment Management Principles stipulate how much risk the endowment will accept as well as the time horizon for the various investment goals. As stated above, we recommend having fiscal and reserve/liquidity policies in place as well as the IPS. For smaller organizations, they may combine the Liquidity/Reserve and Investment Policy into one. The IPS covers the Endowment and any temporarily or board-restricted funds. Some organizations create a separate reserve policy if they need to maintain a large and complex set of reserve funds.
The IPS should also include permitted investments for each of the time horizon categories. The table below illustrates the permitted investments across each time horizon category:
Table 1.0 – Permitted Investments
| Short-Term (Reserves) | Medium-Term | Long-Term |
| Time Horizon: 1 month to 1 year | Time Horizon: 2 to 7 years | Time Horizon: Greater than 7 years |
| Commercial Paper | Equities | Equities |
| Certificates of Deposit | Mutual Funds | Mutual Funds |
| Instruments issued by the US Treasury or US Government Agencies | Bonds or Bond Funds | Bond or Bond Funds |
| Money Market Funds | Alternatives: REITS, Commodities, Venture Capital / Private Equity / Debt | |
| ETFs representing short-term Government Bonds or Agencies |
The IPS should also include asset allocation ranges for the nonprofit’s endowment. The asset allocation ranges do not need to go into depth yet should provide acceptable risk tolerance ranges for the organization as a guideline. For example, if your organization is not comfortable with a portfolio that is more than 70% equities, your asset allocation range should reflect that. Table 2 below is an example.
Table 2.0 – Asset Allocation Ranges
| Asset Class | Allowable Range |
| Equities | 50 – 75% |
| U.S. Equities | 25 – 50% |
| Non-U.S. | 25 – 40% |
| Fixed Income | 25 – 50% |
The IPS should also include a robust spending policy. We discussed the various spending policy formulas and the time frames in an earlier article here. However, the following sample language is how you might reference the spending in the IPS:
The amount appropriated from the Fund for expenditure in a given fiscal year (the “Annual Distribution”) shall be 0-5% of the average of the quarter-end fair market values of the Fund’s assets over the preceding 12 calendar quarters [three years], starting from December 31st of the Distribution year, working backwards in time. If the Fund has not been in existence for 12 calendar quarters, the fair market value shall be calculated for the period from December 31st of the Distribution year to the Fund inception.
Lastly, you’ll want to ensure your IPS states when regular reviews and evaluation of the portfolio will happen and by whom. Typically, this is the Investment or Finance Committee who meets at least semi-annually with the investment advisor and then an annual report is made to the board. For endowments that are just getting started, the board may want more frequent reports to the full board.
The next chapter in our Endowment Series will be on hiring an advisor for your endowment.
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