Endowment Management: The Business of Independent Schools

June 22, 2022 |
4 minute read

Commonfund is proud to contribute a chapter to NBOA’s new book “The Business of Independent Schools – A Leader’s Guide” – a new edition of “By the Numbers and Beyond.” This publication provides education to the independent school business officer community on topics such as operations, enrollment, budgets, etc.

The Commonfund chapter, entitled “Endowment Management” is a comprehensive overview of investment governance practices for independent school trustees and fiduciaries. Provided here is a synopsis of key components of endowment management covered in the chapter. 


Endowments are the life’s blood of many nonprofit institutions, regardless of size. While some independent schools’ benefit from substantial endowments and others more modest, the purpose is clear: to support the school’s mission over the long term. This might seem like a simple task, but it requires extensive collaboration amongst school’s trustees, professional staff, and other members of the independent school community, in partnership with investment managers, who collectively oversee the endowment.

Intergenerational Equity

Unlike pension funds and other investment pools, endowments do not comprise assets that a school can set against future defined liabilities. Although business officers are often responsible for tracking endowment performance and interacting with investment managers, trustees play a special role as fiduciaries. As fiduciaries, trustees have a moral, ethical, and legal obligation to maintain intergenerational equity—the purchasing power of the endowment— usually in perpetuity. In partnership with business officers and other stakeholders, trustees are meant to fulfill this obligation.

Restricted and Unrestricted Funds

Donations to independent schools can take many forms, from cash and marketable securities to less liquid investments such as real estate. Donor’s intentions about the use of their gifts vary, from very specific to very general. Honoring donor intent is important and typically this intent provides guidelines for spending the money. For example in a permanently restricted fund a donor’s gift to a university will be held in perpetuity as principal in an investment fund while the accrued interest is spent at the donor and schools’ discretion. Unrestricted funds are not designated for specific purpose and therefore allow schools greater flexibility as they see fit.

The Board’s Fiduciary Role

An independent school’s board of trustees has many responsibilities, only some of which are financial. However, the board as an entity and the trustees as individuals bear both common-law and statutory responsibilities, chiefly their duties as fiduciaries. Legal language regards a fiduciary as someone entrusted with the property of another and charged with a high degree of responsibility in carrying out that trust. These laws capture three primary duties: 1) duty of loyalty, 2) duty of care, and 3) duty of obedience. Although the duty of loyalty and obedience are important and point to the fiduciary duties focused on staying true to the institution’s mission and following the laws and policies associated with it, modern fiduciary law has mostly focused on duty of care, often articulated in the “Prudent Investor Rule." Critical components of the rule include a standard of care, considerations on total return investing, and decision making within the context of the entire portfolio.

The Prudent Investor Rule has become part of various widely adopted statutes, including the Uniform Management of Institutional Funds (UMIFA) and the Uniform Prudent Investor Act (UPIA), applicable generally to trusts. The more recent Uniform Prudent Management of Institutional Funds Act (UPMIFA), which has been enacted in some form by all 50 states, unites UMIFA and UPIA and incorporates a broad, clear, and flexible formulation of the Prudent Investor Rule.

The Investment Committee

Most schools have a standing investment committee specifically established to oversee their endowment funds. Although some schools might consider endowment oversight the responsibility of the finance committee, a sizable endowment typically calls for a separate investment committee due to the complexity and scope of work, which requires specialized skills and expertise. The investment committee acts as the endowment’s fiduciary, with the goal to maintain intergenerational equity, i.e., the maintenance of the fund’s purchasing power over long (intergenerational) time periods. The investment committee’s work is anchored and guided by the Investment Policy Statement (IPS). The IPS is a written document, prepared and regularly reviewed by the investment committee and adopted by the full board.

You can learn more about the IPS, asset allocation, spending policy, risk management and other important aspects of endowment management covered in “The Business of Independent Schools” on Commonfund’s website.

Manager Selection and Evaluation

Some investment committees may spend too little time on investment policy and too much time on manager selection. Many governance experts share the sentiment that investment committees should not be making investing decisions, but strategic ones. In most cases, the investment committee should spend its time and capacity focusing on asset allocation instead of manager selection for example. An important UPMIFA rule states that delegation of these investment duties to third party investment partners is appropriate. With that said, it is important for schools to be able to discern the right investment governance structure for their institution.

Responsible Investing and Investing in Diverse Managers: New Thinking, New Flexibility

Terms such as responsible investing, socially responsible investing (SRI), mission-related investing, impact investing, and environmental, social and governance (ESG) criteria have been practiced in some form for many years but are now garnering more attention, as this has been a growing area of interest for many schools’ constituents. Additionally, there has been increased interest in investing in diverse managers in recent years. An ever-expanding research focus on the lack of investment in diverse managers has spurred deep analysis that explores the reasons for capital allocation to these managers, the universe of managers across asset classes, and the importance of sourcing and investing in diverse managers.

Read more diverse manager research and learn about investing in diverse managers here.

Gifts and Donations Can Spur Endowment Growth

Although investment policy helps the endowment fulfill its mission over time, it can be difficult for a school to maintain the real value of its endowment while spending 5% or more per year. In addition, most schools want to grow, adding new programs and expanding existing ones. A sound investment program demonstrates good stewardship to potential donors. Designated gifts are helpful but do not carry the same strategic advantage as unrestricted gifts, which can support the institution’s mission as it evolves. Although a school should position itself to receive many types of gifts, the best scenario for a school involves maximizing unrestricted gifts. Important note: As it pertains to gifts, a written gift acceptance policy is a necessary tool that outlines practices with respect to gifts.

The 6 Ps of Investment Stewardship

A helpful way of recalling the underlying fundamentals outlined above is what Commonfund calls the principles of investment stewardship, or the "6 Ps." To learn more about the "6 Ps," download the full brochure: Principles of Investment Stewardship for Nonprofit Organizations.

To purchase a copy of the full publication, click here.

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