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 chief executive officer or president 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 should engage in active supervision. This means setting standards that are clear and objective and ensuring that the actual running of the organization is well-supervised by management. It is in this role of defining the mission and monitoring progress that the board provides purpose and direction, while in its oversight duties it remains focused on governance and avoids becoming involved in operations.
Often, the board will delegate its oversight and management of the organization’s endowment to an investment committee. The committee is typically made up of board members (and sometimes non-board members) who are appointed because they have expertise in finance or investment management, as well as the capacity to actively engage in the management of the endowed portfolio.
What are the responsibilities of the investment committee?
The investment committee 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 responsibilities 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. Together, these two groups should determine and recommend to the board a sustainable spending policy (the amount drawn each year from the endowment) to support the operations and mission of the organization.
In terms of size, an average of six to eight members is common. That makes the committee 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 term “outsourced chief investment officer” or “OCIO” is 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 the institution’s board of trustees delegates fiduciary responsibility 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.
Download our complete white paper, Principles of Investment Stewardship for Nonprofit Organizations, to learn about all six of the essential principles (the 6 Ps) and key issues.
Opinions expressed in AGB blogs are those of the authors and not necessarily those of the institutions that employ them or of AGB.