Investment Governance | Are You Asking These Three Questions?

December 11, 2020 |
2 minute read
|

In the midst of a global pandemic, many non-profit business models are being challenged which has put significant pressures on staff, governing boards and committees. These pressures on time and effectiveness have led many to question their investment governance models, specifically asking:

  • Do we have the right people making the right decisions on the right topics?
  • Does our Investment Committee focus on issues that can measurably impact our mission?
  • Who is accountable for performance?

Based on our work with hundreds of endowments, foundations and other philanthropic organizations, we offer the following insights on investment governance practices:

Question #1:
Do we have the right people making the right decisions on the right topics?

This question is at the heart of good governance and is arguably the most important question for fiduciaries to ask. High performing boards typically check each of these boxes, and boards and committees should ask this question of themselves in their annual self-assessment process. Of course, the right people must have the will, skill and knowledge for a board or committee role, but equally as important, strong boards and committees should bring diversity of thought through different backgrounds, life experiences and perspectives. There is increasing evidence that diversity and inclusion go hand and hand to drive results. Further, to foster such diversity of thought it is important to maintain term limits for boards and committees, and to recruit new talent, yet to do so in a thoughtful way to maintain institutional knowledge.

Question #2:
Does our Investment Committee focus on issues that can measurably impact our mission?

Typically, a Board will delegate fiduciary responsibility to an Investment Committee for the oversight of the endowment or other asset pools. And, such Committees typically engage a consultant or Outsourced Chief Investment Office (“OCIO”), to assist in that responsibility. Yet, depending on which investment governance model you select, the time you spend on different topics can vary, often at the expense of strategic considerations. For example, are you finding that a great deal of committee time is spent selecting asset managers or drilling into a hedge fund strategy, or wading through investment documents? Our experience is that Committee time is typically better spent on strategic discussions that directly impact the likelihood of achieving your mission. For a college or university this may include understanding how financial and operating metrics of the institution can inform asset allocation. And, for a community foundation or private foundation it may be weighing the impact of a change in spending policy in light of increased market demand for charitable services. Lastly, diversity is an important attribute for the Investment Committee, too, and may not be fulfilled by simply ensuring that you’ve included experts in various investments – the committee will benefit most from diversity of background, gender, race and experience.

Question #3:
Who is accountable for performance?

Finally, achieving your investment objective, typically some combination of your spending rate plus inflation and costs (and potentially a growth element), is a consequence of good investment governance. But who is actually accountable for the performance? If you have an internal investment office, the answer is easy. Likewise, if you have a discretionary OCIO model, accountability is clear. However, when the roles and responsibilities in the oversight and management of a portfolio are shared with some discretion with a consultant, for example, and final manager selection residing with the Committee, accountability can get murky. And when accountability is unclear, it is very difficult to make necessary changes in a timely fashion. Our experience draws from the old adage that “too many cooks spoil the broth”. In other words, decision making needs to be centralized and clear or you increase the risk of not achieving your long-term return objectives.

Keith Luke

Author

Keith Luke

Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.

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Disclaimer

Certain information contained herein has been obtained from or is based on third-party sources and, although believed to be reliable, has not been independently verified. Such information is as of the date indicated, if indicated, may not be complete, is subject to change and has not necessarily been updated. No representation or warranty, express or implied, is or will be given by The Common Fund for Nonprofit Organizations, any of its affiliates or any of its or their affiliates, trustees, directors, officers, employees or advisers (collectively referred to herein as “Commonfund”) or any other person as to the accuracy or completeness of the information in any third-party materials. Accordingly, Commonfund shall not be liable for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on any statement in, or omission from, such third-party materials, and any such liability is expressly disclaimed.

All rights to the trademarks, copyrights, logos and other intellectual property listed herein belong to their respective owners and the use of such logos hereof does not imply an affiliation with, or endorsement by, the owners of such trademarks, copyrights, logos and other intellectual property.

To the extent views presented forecast market activity, they may be based on many factors in addition to those explicitly stated herein. Forecasts of experts inevitably differ. Views attributed to third-parties are presented to demonstrate the existence of points of view, not as a basis for recommendations or as investment advice. Market and investment views of third-parties presented herein do not necessarily reflect the views of Commonfund, any manager retained by Commonfund to manage any investments for Commonfund (each, a “Manager”) or any fund managed by any Commonfund entity (each, a “Fund”). Accordingly, the views presented herein may not be relied upon as an indication of trading intent on behalf of Commonfund, any Manager or any Fund.

Statements concerning Commonfund’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Fund. Such statements are also not intended as recommendations by any Commonfund entity or any Commonfund employee to the recipient of the presentation. It is Commonfund’s policy that investment recommendations to its clients must be based on the investment objectives and risk tolerances of each individual client. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund. Commonfund disclaims any responsibility to provide the recipient of this presentation with updated or corrected information or statements. Past performance is not indicative of future results. For more information please refer to Important Disclosures.