A Prudent Approach to Non-Profit Investment Policy Review

An effective Investment Policy Statement (IPS) guides non-profit boards in their fiduciary duty and oversight of endowment and foundation assets. It should provide clarity around roles and responsibilities as part of their overall governance and set expectations that protect and ensure the proper use of the investment portfolio in support of the organization’s mission and operations. A critical characteristic of non-profits is their mandate to deliver on their mission in perpetuity. While these guidelines should provide sufficient flexibility to invest throughout a market cycle, the IPS should promote a long-term perspective and discourage reactive decision-making in response to short-term market fluctuations.

Not a “Set It and Forget It” Exercise

Although an IPS should be considered an evergreen resource for the organization, that does not mean it should sit on the shelf collecting dust. It is critical that the document is continually reviewed to ensure the policies and procedures outlined within continue to support the long-term needs of the organization. There should be a process for ongoing review in addition to standard procedures for recommended policy changes presented by the investment committee or manager to the board for approval.

The below examples speak to common periods of transition for non-profit boards and their effect on the IPS review process.

• Board and committee member turnover. 

  Board members play an invaluable role in the success of non-profits through the sharing of their experience and expertise. While their insight and counsel should be brought to bear across all aspects of the organization, their fiduciary obligation demands that they focus on protecting the purchasing power of the portfolio and forego individual investment preferences. The IPS serves as a helpful tool to facilitate new board member orientation and align all members in the organization’s investment objectives and methodology. In this way, board and committee member turnover is not an impetus for policy changes, but rather an opportunity to reorient the organization’s leaders in the strategy. Through a more formal annual review process, all board members should affirm the investment guidelines, policies, and procedures continue to meet the organization’s needs based on analysis and guidance from the investment manager or advisor.

• Changes to operations or long-term assumptions.

  The IPS is created and maintained by the board to set guidelines and strategies aligned with the long-term goals of the organization. As such, the strategy or approach of a potential investment manager cannot conflict with the organization’s IPS. An investment manager with discretion is bound by fiduciary duty to abide by the policies and procedures outlined in the IPS. For this reason, it is critical that the onboarding of a new investment manager include a detailed review of the IPS, followed by a presentation of recommended adjustments to the board to ensure alignment. Instances like this are a reminder to balance the long-term, evergreen nature of the document with the need for flexibility. In some cases, the organization may enlist the use of appendices within the IPS to maintain a core, central document supported by supplemental information that is more likely to be adjusted over time.

For more detail regarding the structure and components of effective investment policy, download our template Investment Policy Statement.