Non-profit institutions are complex organizations that require diligent care and strategic guidance from the boards that are responsible for prudent stewardship of the organization. An even more nuanced microcosm of the board-institution relationship lies within the investment committee-endowment relationship.
The SEC states that the “primary responsibility of the Investment Committee is to oversee the Company’s evaluation of contemplated investment and portfolio companies on behalf of the Board and report the results of their activities to the Board.” The immense duty of guiding financial and investment decision-making for the institution requires committee members to align themselves with the perpetual nature of the organization’s endowment. A common challenge to this is that committee members’ tenure in this role is not endless.
Individuals accept tremendous responsibility as board members and often have specific and unique ideas about how to achieve organizational goals and how to best serve the institution. However, given that a board member’s tenure isn’t directly aligned with the time horizon of the institution’s endowment, there can be misalignment between what is best for the organization during the board member’s tenure and what may be best for the organization in the scope of a perpetual time horizon. How can committee members ensure that the actions taken in their time leave a lasting impact while still ensuring long-term benefit for the endowment or foundation? There are multiple strategies institutions should consider to address this dichotomy.
Focus on the Investment Policy Statement
While a non-profit’s mission statement unites the organization in a shared purpose, the investment policy statement guides an institution’s investment management approach. An effective IPS will clarify the board’s overall governance expectations for managing the endowment to support the perpetual nature of the organization’s mission. This statement should establish clear practices around potential policy changes, proxy voting, conflicts of interest, and other factors that may affect or inhibit prudent investment policy creation. These guidelines are put in place to reinforce long-term thinking and set parameters around the duties of board members and investment management partners.
Think Through the Lens of Perpetuity
The IPS is created to provide guidance at an organization-wide scale, but it relates to an individual level as well. The IPS can be utilized as a tool to provide necessary context and fully grasp the scope of a perpetual investment horizon. Undoubtedly investment committee members will have initiatives that they feel may benefit the endowment and organization. Reviewing the IPS and viewing endowment management through a lens of perpetuity can realign individuals with the full scale of their decisions and help them avoid short-termism.
Board members are encouraged to bring individual experiences to the table; members were, after all, selected due to their unique backgrounds and history. Personal objectives, however, should never outweigh the objectives or values of the institution. Reviewing the investment policy statement can reframe thought processes and align the scopes of short-term committee members with the endowment’s long-term aspirations. At the heart of non-profit governance is the desire to provide guidance that will serve to better position and sustain the organization in perpetuity.
Lean on Partners
Periodically, individuals will transition on or off boards and investment committees. During these transitions, institutions should lean on the experience and institutional knowledge of their external partners as a resource. These external partnerships are typically longer-term than the tenure of most board and committee members, so their familiarity with the institution and its history can be invaluable. New leaders, especially investment committee members, must use these resources and understand how the institution’s assets are managed and the risk tolerance framework in which the organization operates.
An investment management partner should be able to act as a resource to both the institution and those individuals who lead through board and committee service. The right investment partner will help institutional leadership fully understand the role of the endowment and its importance in fulfilling the institution’s mission and long-term needs. The investment partner will also provide rationale and context for board members around the long-term decisions that have been made outside the scope of the individual’s limited term. Leveraging the knowledge of a strong investment partner is a great strategy for new board members to quickly understand current investment positioning and grasp the larger context of why decisions have been made as they seek to better support the institution through their service and input.
Board members have both an opportunity and responsibility to lead their organization. As these individuals seek to affect change and drive specific initiatives, it is important to consider the impact of their decisions across the entire organization and examine them through the lens of a perpetual time horizon. Thus, board members must focus less on their individual term and more on the long-term scope and impact of the role and how it impacts the institution’s future. Reviewing the organization’s investment policy statement and relying on partners to provide context and recenter decision-making on the non-profit’s goals and values are great strategies to ensure that long-term factors are considered when driving board decisions.
For more considerations surrounding non-profit investment management and non-profit board governance, please explore our whitepaper, “Return of the Prudent Investor: Why Endowment Funds Should Manage Risk as Well as Return.”