Once your organization has established the appropriate spending policy for your endowment, it is time to decide who will oversee it. Even if your organization hires an outside firm to manage the endowment investments, the nonprofit corporation and the board are the stewards of the endowment and must form a committee to enact those responsibilities.
Larger nonprofit boards may form an Investment Committee and delegate to those members to oversee the endowment and report back to the board on a regular basis. Smaller nonprofit boards or startup endowments may choose to delegate the authority to the Finance or Audit Committee to reduce the number of meetings or board members needing to be involved in multiple committees.
Forming an investment committee to oversee the endowment is one of the most important steps toward effective financial planning and long-term sustainability. Not every nonprofit will have a large selection when it comes to finding willing and capable members, but there are certain qualities that could be indicators of a strong investment committee.
Who Should Be Part of the Investment Committee?
Forming an investment committee can be a great tool for the potential growth of an endowment. Committee members will play a vital role in overseeing the endowment’s investments, and their decisions can have long-term impacts. It’s easy to make a list of desirable resume qualifications, but the process of finding suitable volunteers is more complicated. Not everyone will have the necessary skills like a deep understanding of investment strategies, asset allocation, or risk management, but there are other skills that could be equally valuable.
Skills like negotiation, collaboration, and flexibility are incredibly important for any board, but especially when working with an extremely diverse set of expertise and backgrounds. Even if the board members don’t have a working knowledge of investment strategies, their willingness to learn and contribute can provide unique perspectives that benefit the overall mission. Members who are willing to invest time in training and staying updated on best practices could end up being the committee’s strongest asset.
You may also consider creating an “advisory” committee member role which is not a fiduciary member of the organization’s Board of Directors but is someone who has an interest in helping the organization, has an investment background and is prepared to guide and share knowledge with board members and staff. The advisory role is also a great opportunity to recruit future, prospective board members or it’s a way to recruit specialized skills and knowledge to your organization without requiring the time commitment from the volunteer that a full board member’s role may require.
Training & Education
Even if some committee members have a long career in working in the financial sector, it’s still important that everyone undergoes the necessary training to enhance their understanding of investment principles and endowment regulations. Having the expectation of self-study may not provide consistent results, so developing a robust set of outside resources like workshops, seminars, or continuing education programs can build knowledge and rapport. When members have prior negative experiences with investments, it may be more challenging for them to work with the group to come to a consensus. Informed committee members are better equipped to follow through with their strategies and feel confident that their choices are aligned with the organization’s goals.
Time Commitment & Expectations
Managing an endowment and being actively involved in the relevant training that accompanies it requires a significant time commitment from each committee member. Before asking someone to dedicate their time to the committee, expectations, roles, and responsibilities need to be clearly and realistically defined. Many people may feel excited about contributing to the organization’s mission without fully understanding that regular attendance and performing due diligence as committee members are critical to the success of the endowment and the organization. Activities like board meetings, creating reports, and monitoring investment performance can be extremely time consuming. Establishing a culture of accountability, professionalism, and transparency will increase the effectiveness of the committee and ultimately make more efficient use of everyone’s time.
Manage Conflicts of Interest:
Many investment committees are comprised of former or current financial advisors as they have the training and background to understand the investment policy, strategy and implementation. However, this can also present a conflict in some cases, especially when the organization decides to outsource the investments to a manager. It’s inevitable that a Board or Advisory Committee Member “knows someone” or “knows a firm” that could manage the investments.
Some Board or Advisory Committee members might even propose they manage the endowment for free. This inevitably produces a conflict of interest and should be addressed annually. Most boards have a conflicts of interest policy. Be sure to have Board Members sign a conflict-of-interest form 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.
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 the Investment Committee Chair, figure out ways to ensure your finance / investment committee meets. Some examples are:
- 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.
- 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.
- 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:
- 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.
- 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.
- 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. Complete a security assessment for your organization.
Resources & Reporting:
Ensure your board has both timely and transparent reporting on its endowment. Your outside advisor should be delivering performance reporting quarterly and your Director of Finance or CFO should have access to monthly statements from the endowment’s custodian. If 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.
- 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.
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:
- Term Limits: Ensure your organization has terms limits and adheres to them.
- 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.
- Advisory committees: As mentioned above, advisory roles can be another way to recruit prospective board members. Ask them to sit on the Investment Committee or engage them in a specific project around the endowment, such as hiring an investment advisor or educating new staff and board members on the endowment. This allows you to bring in new ideas and experts who understand the most current investment approaches, products and considerations.
In the next article, we review the key provisions of UPMIFA, the Uniform Prudent Management of Institutional Funds Act and why they are important to your endowment.
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