The governance framework of an institution plays a significant role in its overall success. Based on our work with hundreds of higher education institutions over the past 50 years, we believe that good governance is critical to the health of the institution and the positive performance of the endowment. Most people intuitively agree that “good” governance is imperative but currently there is a dearth of quantitative research available that defines and measures the difference that it can make. To rectify this and help to move the industry forward, Commonfund Institute is embarking on a new research project titled, The Commonfund-FGA Benchmarking Study of Governance in Higher Education.
The Study is the first of its kind and is being done in conjunction with Chris Merker and Fund Governance Analytics (FGA). FGA is a pioneer in the field of empirical governance research and evaluation of asset owners and operates in partnership with Marquette University. Their governance diagnostics are derived from decades of research and evaluation and have been used extensively to analyze the governance practices of public pension funds. This is the first time that these tools will be applied to higher education endowments.
FGA has developed an assessment tool, the FEQ (Fiduciary Effectiveness Quotient®) that taps into the critical factors that drive board success and provides the analytics to understand a board’s structure, processes, and levels of engagement amongst its members. As an emerging field of study, the work surrounding quantifying governance spotlights a correlation between good governance and investment performance; FGA’s research demonstrates that the best-run organizations outperform their peers nearly 2 to 1.
It is the fiduciary duty of the board to conduct self-assessments and according to BoardSource’s Recommended Governance Practices they should be done “approximately every two years to evaluate its own performance. Only through structured self-reflection can board members judge their own collective performance and understand the extent of their individual responsibilities.”¹ These reviews should examine the board’s long-term strategic plan, the IPS and investment performance, the effectiveness of the committees, board diversity, confidence in organizational leadership, amongst other things.
The FEQ takes a different approach, and looks at the value of the endowment assets, asset allocation, consultant use and board composition, along with other factors that boards understand to be important. Using a system developed by Chris Merker and his colleagues, these 4 data points, combined with 29 other relevant pieces of institutional information collected in the assessment, are analyzed to provide the institution with a report of how their board’s practices contribute to the performance of their portfolio. This cutting-edge research could help institutions uncover issues that, if resolved, may contribute to its longevity and may be especially helpful in times of unforeseen challenges like the COVID-19 pandemic and escalating issues of racial justice, which are currently affecting higher ed and the entire nonprofit community.
In our whitepaper, “Strive for the Best: Building and Maintaining an Excellent Board” we state……“It is essential to create a measurement system for the board that is comprehensible, relatively simple, and not susceptible to manipulation. While overall organizational success can be measured in relation to the organization’s mission as well as in financial terms, boards need reasonably objective methods of assessing their own accomplishments, recognizing areas for improvement and developing appropriate action plans.”² These words may be truer now than ever. Seeking out different ways to measure the effectiveness of your board is a crucial undertaking and will only add value (and perhaps basis points) – not subtract from it.
We look forward to sharing the data from this study of governance trends in higher education with you when it is released later this year.
