Four Critical Practices for Non-Profit Endowments in the New Year

A new year provides non-profit board members the opportunity to set new goals, realign strategic priorities, and fine-tune the pursuit of their organization's mission. It is also a time of intentional learning. The start of a new year is often when new board and committee members begin their terms of service, and it is necessary to learn more about the unique skillsets they bring to their leadership positions in support of the organization’s mission and operations.

The key to such learning lies in understanding board members' essential role in organizational governance. All board members, regardless of tenure, should be reminded and educated of their roles to set expectations and ensure understanding. Bold headlines and frequent attention are paid to instances in which governance fails but less time is spent focused on developing and following the right strategies that can help non-profit boards avoid and manage potential challenges.

Such practices and strategies are especially significant as organizations ensure the oversight and management of their endowments. Non-profit endowments are critical long-term assets entrusted to the care and cultivation of the board. Following high standards of governance is crucial in maintaining and growing these assets to build trust in the organization, its management, and its leadership.

Four Critical Governance Practices for Non-Profit Endowments:

1. Understand and mitigate conflicts of interest.

Trust is an essential factor in the long-term success and ongoing support of a non-profit's endowment. Stakeholders need to trust that the assets are being effectively and appropriately managed and administered for the sustainable support of the non-profit and its mission.

The organization should establish and annually review a conflict-of-interest policy signed by the board, committee, and staff members. Such a policy is both a requirement of the IRS Form 990 and a business best practice. In addition to all real conflicts of interest, the board, committee, and staff must be thoughtful of perceived conflicts of interest, especially regarding the non-profit's endowment. For example, it is common to populate boards and investment committees with individuals who are professionally engaged in the investment management industry. While their knowledge and experience are helpful in oversight of the endowment portfolio, conflicts of interest may arise if any portion of its portfolio is “board-directed,” particularly if these investments are with a board member’s firm or to their personal benefit. While typically legal, these types of investments are best avoided so there is no conflict of interest, perceived or otherwise.

2. Protect personal liability through robust financial oversight.

For the health of the organization and the protection of board members, it is critically important for the board to be actively engaged in financial reviews and setting organizational policy.

Non-profit boards are not intended to be the proverbial rubber stamp of staff or volunteer decisions. Board members must understand the policies and procedures the organization has developed and put into practice to ensure appropriate financial controls. Failure to do so can lead to grave consequences with board members held personally liable and the organization at risk of losing its tax-exempt status.

Thankfully, proactive work between board members and staff can mitigate such risk. From a simple annual review of policies and practices to a more thorough enterprise risk management plan, putting the proper steps in place to ensure the board is engaged and informed will keep the organization on a successful path forward.

3. Ensure best practices in investment management.

Fiduciaries and administrative staff are critical to successfully managing the organization’s assets, and non-profit board members carry a heavy workload while often serving in a voluntary capacity. Therefore, many organizations have turned to the services of a trusted partner, such as an Outsourced Chief Investment Officer (OCIO). An OCIO works alongside the investment committee, board, and staff in providing fiduciary oversight of the portfolio. In addition to providing customized solutions and potentially improved performance, an OCIO can streamline governance by taking on the day-to-day management of investment portfolios, allowing staff to focus on core operations and board members to focus on oversight.

By enlisting an expert dedicated to the organization's goals, the investment committee and the board have put a safeguard in place to mitigate risk associated with personal investment bias, potential conflicts of interest, ineffective benchmarking, and more. They also avoid incurring the expense of hiring a full-time staff person to take on such a role and the added risk of staff turnover in the position.

A successful partnership between an organization and its external partner requires that expectations are clear among all parties, checks and balances are in place, and reporting requirements are being met. These roles and responsibilities should be clearly outlined within the organization’s Investment Policy Statement (IPS) alongside investment objectives and allocation targets.

4. Measure what is meaningful.

Increasingly donors and grant makers want to understand the impact of their financial contributions and how their dollars are making a difference.

Board members must ensure the metrics and dashboards developed are accurate and meaningful reflections of the work. Stories of how the organization meets its mission are essential, but non-profits must also have strong data to extrapolate the experience of one story across entire populations served.

Likewise, the management, performance, and impact of non-profit endowments must also be shared through meaningful reporting. For example, don't be hesitant to share the process in which the board, committee members, staff, and the OCIO come together to consider market factors and determine annual spend rates to protect the long-term sustainability of the endowment or other investment practices. Donors want to see they can trust the stewards of both their individual contribution and the organization's long-term resources. By preparing and sharing such information, boards fulfill their fiduciary responsibility at a high level of excellence.

Non-profit board governance is a big job, but when executed properly, its rewards far outweigh the challenges. By building the right team of experts and being proactive in mitigating risk, governance can quickly become a manageable process that brings improved oversight and strategic leadership to your institution. Thoughtful planning and positioning today will strengthen the organization for years to come.

Subscribe to Monthly News & Insights