The 5 Top Stewardship Imperatives

July 17, 2019 |
2 minute read
|

Christopher K. Merker, PhD, CFA, is a financial advisor and director of Private Asset Management at Robert W. Baird & Co. and an adjunct professor at Marquette University. He is also the co-author of The Trustee Governance Guide. The following are highlights from his presentation at the recent Commonfund Investment Stewardship Academy at the Yale School of Management.

There are five imperatives for trustees of nonprofit organizations. Although governance has been my area of research for the last decade, I write this not only as an academic but also as a practitioner having hands-on experience with many of the issues that trustees confront today.

1. Be well governed

Fiduciary effectiveness is built on Structure + Process + People. The key elements of Structure are board professionalism, board composition, the level of board engagement and how transparent the organization is to its constituencies and beneficiaries. Process takes place within the Structure and comprises the tasks the board must perform and the decisions it must make. People inhabit that Structure and here the keys are leadership, culture, competency, experience and diversity.

2. Be knowledgeable

How much knowledge do board members need? The same financial literacy of the general population—budgeting, savings, investing and credit—plus the competency to understand the time value of money, probability theory as it relates to risk management and the fiduciary duties of a trustee. Not everyone needs to possess the specialized knowledge of investment professionals, but they should be aware of two forms of potential human shortcomings in investing—operational errors and behavioral biases—and how to safeguard against them.

3. Be diversified

Everyone understands diversification. But we should also acknowledge the challenge of over-diversification. There’s a universe of 100,000 stocks, a million-plus bonds, myriad private investments and countless derivatives. Investments are conveniently packaged into mutual funds, ETFs, managed accounts, hedge funds and other structures. What trustees should be focused on is optimal, well-timed, not overly complicated and based on the simple proposition that the institution needs to generate cash flow to fund future obligations.

4. Be disciplined

We can segment discipline into two buckets: governance functions and investment functions. The list of governance functions is longer and should come first. These include goal-setting, reviewing and updating policies, rotating the board and board self-assessment, and occasionally changing consultants. Investment functions include overseeing the portfolio and rebalancing, avoiding market timing, and controlling costs.

5. Be impactful

There is a list of the risks to global development as identified at the annual Davos World Economic Forum. The most likely are extreme weather events, natural disasters, cyber security and data fraud or theft. The most impactful include weapons of mass destruction, extreme weather, natural disasters and water crises. Why should these matter to investors? Many of the corporate scandals or bankruptcies in recent decades can be traced to environmental, social or governance (ESG) risk factors, e.g. corporate governance failures at Enron or environmental management failures at PG&E, more recently, creating a detriment to the environment or to society at large and most certainly to investors.

Conclusion

I challenge nonprofit investors to “invert the pyramid”. By that I mean three key topics: mission and governance, asset allocation and manager selection. We generally spend too little time on mission/governance and asset allocation and a too much time on manager selection. I say, go for it, invert that pyramid. Spend more time on mission and governance, more time on asset allocation and less time on manager selection. By refocusing their orientation, organizations that do, should see much better results over time.

 
Christopher K. Merker

Author

Christopher K. Merker

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.