Commonfund recently hosted roundtable conversations in San Francisco and Los Angeles focused on governance and best practices for nonprofit institutions. The discussion focused on several key themes:
Good governance sounds lofty and aspirational; it shouldn’t. There are tangible upsides, and corresponding downside impact to governance practices. Consider a large legacy gift that can be transformative if there is a strategic plan and vision in place, or it can be a lost opportunity if a plan and vision are absent. Likewise, a cyber-security breech, a headline risk from a major donor, or an on-campus incident can be detrimental to the organization. While we cannot insolate ourselves entirely from the possibility of risks, organizations can mitigate their impact and one of the best ways to do that is through effective governance.
In 2021 Commonfund conducted a study1 in partnership with Fund Governance Analytics that validated our own research and findings. Good governance can positively impact portfolio returns; it’s impact can also be quantified.
Below are a few examples of best practices in governance for your consideration:
Studies conducted by Fund Governance Analytics concluded strong governance can add an additional 25-35 basis points to performance over time2. That can be motivating enough to encourage your board to consider other adjustments, such as a self-assessment, a review of the Investment Policy Statement, or the addition of a policy for recruiting diverse board candidates. For more examples and data around the impact of good governance on endowments click here for the 2021 Commonfund-FGA Benchmarking Study of Governance in Higher Education.
Good committee decisions are rooted in good governance structures. In general, each component of the investment policy should be reviewed annually to ensure it’s still appropriately aligned with the strategic direction of the organization.
Spend calculation is often the most critical and overlooked part of a spending policy and is the only permanent link between a nonprofit and those it supports. The 2022 Council on Foundations-Commonfund Study of Foundations (CCSF) reported 84 percent of private foundations and 94 percent of community foundations had a spend policy in place. However, of those with a spend policy, only 66 percent and 72 percent respectively, reviewed their policies each year. The policy defines how market risk (volatility) is translated from the investment portfolio to the organization’s operating budget and spend. The most important question to ask, is “what are we trying to solve for?” A well-crafted spend policy can reduce sensitivity to market value of the endowment, allowing your endowment increased exposure to growth assets. For more information on spending methods and questions to consider, access our Research Center.
Most organizations are focused on risk, however few actually define what it means for their organization. The CCSF also revealed that only 56 percent of private foundations and 50 percent of community foundations define risk4 in their investment policy statement. Risk needs to be tangible and quantifiable to hold investment managers accountable. Ideally, risk could be defined, with appropriate targets and measures, in three ways in your investment policy statement:
These four policy levers are often the most meaningful an organization has at their disposal. However, other considerations - the type of investment partner an organization chooses active or passive investments implementation, return target, appropriate inflation measure, and many more - are further topics that we continue to partner on with our clients at Commonfund to ensure these factors are reviewed and aligned with each organization’s mission.
Commonfund OCIO is on the road meeting with institutions to discuss the topics above and more each year. Interested in being a part of the conversation? If you are interested in attending a regional roundtable in your area, please complete the form with your details. A member of our team will reach out to you with dates and locations of where we will be next.