Insights Blog

Endowment Management and the Three Primary Responsibilities of a Board

Written by Commonfund Institute | Jun 28, 2021 8:08:25 PM

The fourth blog in the “Six Ps of Investment Stewardship” series addresses People, specifically how boards function within an organization. To learn more about the first four principles in the series involving effective endowment management read our blogs on – Purpose, Policy, Process, and Portfolio 

Trustees are no longer passive participants outside of mainstream decision-making and policy formulation. The bottom line is simple: How well boards function will make a big difference in the fortunes of the organizations they guide. 

The board’s role is strategic, not tactical. The board’s three primary responsibilities are to: 

  • establish and clearly articulate the mission of the organization, 
  • hire a management team to run the organization in accordance with policies and objectives that further that mission, and 
  • monitor progress toward the mission’s fulfillment. 

On an ongoing basis, the board’s role is one of oversight, in which it reviews and assesses management’s success in carrying out its job. Indeed, once the mission of the organization has been defined in its charter and bylaws, fiduciary principles require that the board guard that mission as it has been defined.  

The board engages in active supervision of management and staff: this means setting standards that are clear and objective, being sure that position descriptions are known and understood, and ensuring that the actual running of the organization is well-supervised by senior staff members. It is in this role of defining the mission and monitoring progress that the board provides purpose and direction for the staff, while in its oversight duties it remains focused on governance and avoids becoming involved in operations. 

What about the investment committee? 

The investment committee, found at organizations that possess endowments or other long-term pools, is charged with fulfilling the intentions of donors with respect to donor-restricted funds and maintaining the endowment fund’s purchasing power, often for perpetuity. The primary responsibility of the investment committee include: 

  • creating and maintaining an investment policy 
  • setting the investment portfolio’s policy asset allocation,  
  • developing an appropriate spending policy,  
  • rebalancing the portfolio on a regular basis, and  
  • providing an annual report to the board on the state of the endowment.  

The investment committee should work in close coordination with the finance committee and the organization’s senior staff; at smaller nonprofits, the investment committee is often a subcommittee of the finance committee. Together, these two groups should determine and recommend to the board a sustainable spending practice for the endowment. 

In terms of size, an average of six to eight members is common. That makes it large enough to benefit from a variety of perspectives, have a healthy mix of generalists and specialists, and spread the workload evenly.  

Additionally, investment committees have long retained consultant organizations to help them with various aspects of endowment management. Consultants may deliver a range of services, from performance attribution and measurement to manager selection and policy review. 

In addition to traditional consultant relationships, the practice of delegating the bulk of the investment office function to a third-party provider has increased steadily over the past decade. Outsourcing, as it is broadly known (the terms “outsourced chief investment officer” or “OCIO” are also used), encompasses a wide range of models depending on the degree of portfolio delegation the institution prefers and the operational methodology it employs. 

Volunteer boards and investment committees, meeting only a few times a year, have been challenged to construct and monitor these complex portfolios. New legal and regulatory requirements, too, have placed a heavier load on fiduciaries. Taken as a whole, the investment process is far more time- and resource-intensive than ever before. 

As a legal matter, the extent to which fiduciary responsibility is delegated by the institution’s board of trustees to the outsourcing provider depends upon the model selected and the preferences, needs and capabilities of the trustees, the investment committee and the OCIO provider.