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