NFP Investment Committees Are Vital in Today’s World
I belong to a not-for-profit organization (NFP) that recently merged and sold off some excess real estate. For the first time in the history of either legacy organization, or the combined organization for that matter, there are real funds available for investment and the board is debating what to do with them. In my mind, the answer to this is crystal clear, regardless of the inevitable debate. We finally have the beginnings of an endowment fund and we should treat it as such. Of course, the combined history of the organizations argues against the swift adoption of this optimal result and pretty much guarantees a prolonged, difficult discussion about it. Over their lifespans, the institutions essentially operated the way many families do – they lived “hand to mouth” barely making ends meet and had trouble doing all the things they wanted, let alone needed to do. Unfortunately, and probably because they are made up of individuals, institutions are not unlike individuals and can have similar irrational reactions. It is said that individual lottery winners, who never had two dimes to rub together but all of a sudden find themselves rich – “yeah, that kind of rich” – often find themselves several years later right back where they started. As irrepressible bus driver Ralph Kramden, played by Jackie Gleason on the classic TV series The Honeymooners, once accused his long suffering wife Alice: “You don’t know how to handle money.” To which Alice (Audrey Meadows) replied, “Of course I don’t! I never had any practice!”
So it goes with NFP’s, which is why they are regulated by the various states’ attorneys general as to their actions and why laws like UPMIFA (the Uniform Prudent Management of Institutional Funds Act) have been enacted. All the states (except for Pennsylvania, Florida and Mississippi) and the District of Columbia have enacted some form of UPMIFA. In New York, we call it (guess why) NYPMIFA. Regardless of which version of alphabet soup it is, the law essentially requires NFP’s to manage their investing and spending at a rate that will preserve purchasing power over the long term. In other words, it enhances and further codifies the concepts of investment prudence and fiduciary responsibility.
fi-doo-shee-er-ee) (1) n. from the Latin fiducia, meaning “trust,” a person (or a business like a bank or stock brokerage) who has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty
Investment committees of the board can help tremendously in this regard. Acting prudently, as reasonably intelligent and informed investors armed with appropriate information, is difficult for a full board to accomplish without having the heavy lifting done first by committee. Such committees can be made up of investment professionals, but I would caution against using only investment professionals. Other smart folks with a bit of a financial IQ can breathe some common sense into the proceedings. The investment committee’s first charge should be to develop an investment policy statement (IPS), which details such things as the organization’s time horizon and investment philosophy, its payout requirements and definition of income, its asset allocation constraints, and its overall risk profile. Such a statement must be ratified by the board and made part of its permanent operating procedures before implementation. When acting prudently, it is important to remember that PROCESS is far more important than RESULTS. Occasional losses will occur, particularly in bad financial times; how asset allocation and investment decisions are debated, decided, documented, deployed and deconstructed will go a long way to shielding the organization and its committee and board members from legal liability. More importantly, the prudent process sets the table for a far greater probability of success than a nonexistent policy or haphazard implementation.
Wherever and whenever possible, I believe that the actual implementation of the investment policy (i.e., the actual investing) should be delegated from the committee to a professional investment advisor. There are many types of such advisors, some better than others, but a good one will help keep your organization on track with its stated policy; in other words, acting prudently. The investment committee should oversee the process and review the results, and make changes as necessary, but they should not take charge of the day-to-day investment decisions. From a practical point of view, it is too much to ask of volunteers – it takes too much time, it is too easy to “screw up”, and it is too easy to be misunderstood by the board. Delegation of the day-to-day to an investment advisor clears the way for the committee to act, on behalf of the board, as overseers of the process.
If your organization has money to invest, it is in an enviable position. Don’t allow your board to blow it – safeguard your NFP’s investment assets using a prudent process, quarterly oversight, and reasonable asset allocation. Remember that it is neither your money nor the board’s – it belongs to the cause for which it was donated or raised. As a committee or board member, it is your obligation to protect and grow it.
