Non-Profits: Meeting the "Fiduciary Gap"

Many non-profit organizations rely heavily on their investment portfolio(s). The vast majority of endowments and foundations do not employ in-house investment expertise and rely on
volunteer investment committees (ICs). Lack of dedicated resources is even more challenging because of the changing investment and regulatory landscape, which has led to an expertise (or “fiduciary”) gap. Some of the key areas where we have witnessed changes are highlighted in the table below:

In the following, we summarize responsibilities, expectations and give guidance on actions to improve governance functionality.

Separate the Responsibilities of the Board/Trustees and the Investment Committee

• The board/trustees cover all topics related to the non-profits enterprise. The board typically allocates limited time exclusively to investments.
• The investment committee focuses on the investment portfolio(s), drivers of performance, potential new opportunities and utilization of risk budget and represents the long-term objectives of the organization while understanding the short-term needs.

Investment Committee Composition and Expectations

• Target 5-9 voting members with an odd number of voting members.
• Have limited overlap, e.g. 1 or 2 people, between board of trustees and IC should facilitate communication and alignment.
• Focus on creating a repeatable process, covering the items below:
  • Governance (roles, responsibilities, decision making and information/ resources required).
  • Asset allocation, risk budgets/ranges.
  • Execution / implementation of decisions.
  • Assessment of decision and implementation.
• Criteria for IC members:
  • Attend meetings (in person if possible)
  • Prepare before meetings (review materials in advance)
  • Engage in discussion.
  • Skills/expertise IC members bring to the discussion.
  • Focus on the organization’s needs/tolerances and how it relates to the overall mission.
  • Understand the organization’s history (investment and financial) and how it impacted the organization (good or bad).
  • Investment experience (preferred but not required).
• Skills/experiences are beneficial but not required. Partners affiliated with the organization (in- house investment staff, consultant or outsourced chief investment officer (OCIO) are responsible for educating, coaching, training, informing and orientating IC members.

Recommended Actions for Improving Governance Functionality

• Structure agenda with governance in mind: create good habits
• Adoption of an annual work plan: Recurring topics (e.g. review of asset allocation or IPS) should be scheduled for same quarter each year and educational topics should be identified in advance.
• 20/80 rule: Spend 20 percent of the time reviewing historical performance and 80 percent of the time being strategic and planning ahead (e.g. policy, asset allocation, where is the world going, identifying risks, education on new investment opportunities/strategies).
• Keep the focus on achieving the long-term goal, but with an awareness of short-term needs. Resist short-term disruptors.
• Employ tools that aid in communication and create a collaborative and inclusive decision-making culture
  • Governance “Tools” include:
    • Provide orientation for new IC members.
    • Document every meeting.
    • Use term limits prudently – allow for flexibility.
    • Communicate with consultant/OCIO/staff to ensure materials, level of detail, expectations and contribution are as expected.
  • Content tools include:
    • Host a “blue sky meeting” or brainstorm once a year, outside of the normal meeting cycle. Focus on broad discussions such as education on new investment or governance ideas, IC/board and organization priorities and best practices; consider external speakers.
    • Conduct an investment belief survey, which covers biases, preferences and priorities.
    • Create a dashboard covering performance over multiple timeframes, the portfolio’s current allocation versus policy, risks that could impact the ability to achieve objectives, forward-looking expectations and progress toward the organization’s objectives.
    • Connect the investment results back to the organization’s spend and longterm mission.

We encourage you to review your governance structure, composition and expectations to ensure you are best aligned for success.

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