How well is your nonprofit managing investments? A board with a modest portfolio might manage them directly, but most nonprofits with larger portfolios delegate this important job to a committee. If your nonprofit doesn’t have such a committee, consider forming one.
Whether you’re assembling an investment committee or already have one, some best practices can help it deliver more value. These measures can make the difference between investments that significantly advance your mission and those that merely stumble along.
The Board’s Role
Final accountability for investments and results rests with your board. It can organize, delegate and outsource investing tasks, but the board is ultimately responsible for growing your nonprofit’s assets through prudent, legal and ethical investing.
The most important element in success is an investment policy. This will help keep your mission and goals front and center and establish clear guidelines for all. It also permits the board to supervise at a leadership level, while confidently delegating day-to-day management to others with more time or expertise.
Some nonprofits make their investment policies public, so look over a few used by groups similar to yours. Your investment policy should address these main issues:
• Assets available to invest
• Acceptable levels of risk
• Reasonable expectations for returns
• Timeframes for results
• Conflicts of interest
• Limitations entailed by your mission or ethical obligations
• Procedures and arrangements necessary to implement these parameters
Investments take time to bear fruit, but don’t let your policy drift. Revisit it as part of your annual investment reviews.
Structure Your Investment Committee
Your investment committee should include some board members, but it can also draw in staff or volunteers.
Nonprofit leaders often seek financial or investment expertise for such committees, and that’s clearly helpful. But also reach outside this world to bring in others. The most effective committee chair, for example, might not be a stockbroker but a board member known for organizing productive meetings and following up on decisions.
A committee with diversity in its members’ backgrounds, outlook and skillsets, meanwhile, will be more likely to avoid the confirmation biases that creep into groups of like-minded people.
Educate the Committee
Both the longest-tenured and newest members of your committee will benefit from occasional informational programs and reading material. In addition to your all-important investment policy, these programs might cover such topics as:
• The fiduciary obligations of membership: What does it mean to exercise diligent care, understand regulatory developments, remain informed about relevant matters and put the organization’s interests first?
If every committee member has a clear understanding of these duties, this can greatly reduce the chance of improprieties — like the temptation to steer investments toward a relative in a brokerage firm.
• The organization and its mission: These can change over time. But even when they remain steady, a lunch-and-learn discussion can keep them concrete and uppermost in the committee’s thinking.
• The portfolio: The better committee members understand your assets, the better they can oversee the investing process. Ask investment managers or advisors to explain the portfolio’s current risk profile and the rationale behind its mix of asset classes.
Educate the Board
While your board supervises the investment committee, don’t let it descend into the weeds of micromanagement. To achieve a proper balance, the board needs a solid grasp of the challenges the committee faces and how it’s meeting them.
Encourage board members to read the investment committee’s minutes and quarterly financial statements. Meanwhile, schedule regular presentations to the board to put these documents in context and explain changes in the broad investment direction.
Hire an Investment Advisor
Some nonprofit boards or investment committees may include financial professionals who can advise on investing, but most won’t have that luxury. For them, hiring an expert advisor is necessary to make wise investment choices. The committee should devote some time to discussing how to choose an advisor and monitor his or her performance.
The investment advisor needs to know the organization’s risk tolerance and plans for the monies invested, over both the long and short terms. Only then can the advisor be evaluated fairly.
Stay the Course
Working with your advisor isn’t a one-off task. Your board or investment committee is responsible for regularly reviewing and approving your advisor’s work and its conformance with your investment policy. Conscientious professional advisors include timely reviews in their offering.
Successful investing takes time. Don’t measure your investments by the daily churn of the markets.