Our experience has taught us that it is increasingly important to develop a thoughtful engagement strategy for the various constituents of your institution to ensure everyone is knowledgeable and aware of your investment objectives and understands the reasoning behind your key strategic investment decisions. Such a strategy helps foster the awareness, confidence and comfort that is critical to staying the course in the most difficult times—times when it could be most expensive to abandon the strategy you adopted. One constituent that is particularly important to cultivate is the institution’s full Board of Trustees. As fiduciaries themselves, they are obligated to be aware of financial decisions being made regarding the endowment and informed about the strategies being followed to produce return and mitigate risk.
We have heard the stories of investment committees meeting in private, deliberating behind closed doors, and sharing little information across the institution. Investment committees of independent institutions and many foundations are not subject to open meeting laws. Nonetheless, it is vital that the investment committee engage with board members in a consistent and structured way. This accomplishes several things.
- It provides the board members with the necessary understanding of the institution’s investment strategy, why it is being pursued, and the objectives and risks that it entails;
- It better positions the board to meet its fiduciary responsibility;
- It better prepares the board to weather any significant decline or volatility in the markets; and
- It builds trust and confidence in the prudence of the investment committee.
During the great financial crisis, some institutions whose board members had not been sufficiently informed about the institution’s investment strategy demanded that strategy be abandoned, leading to the destruction of a great deal of endowment market value as the markets began their extended rebound.
To avoid this scenario, we suggest that investment committees schedule a session with the full board at least annually to provide the Board with an in-depth explanation of the investment strategy and the context shaping strategic decisions about the endowment. That way, greater confidence can be engendered in the committee’s approach and stewardship. Ideally, this meeting would take place whenever a significant shift in investment strategy may be initiated, but otherwise, an annual board/committee joint meeting on the institution’s long- and near-term investment strategy is recommended. Given the opportunity to ask questions, probe details, engage in discussion, and become fully informed, the board will be well-positioned to support the committee’s strategy and – perhaps more importantly – stay the course when inevitable fluctuations in the market occur.
We often discuss the idea of “making deposits in the confidence bank.” Annual joint committee/board meetings, in addition to regular committee reports to the board, can go a long way to building up a surplus of confidence in the institution’s investment strategy. The committee chair also should report to the full board at its meetings actions taken in committee, such as rebalancing investments consistent with policy, and provide updated performance data using a standard set of agreed-upon metrics. These confidence reserves will provide a clear and steady path when markets decline or strategies underperform, and help mitigate the board’s impulses to initiate mid-strategy shifts when the institution would be best served by staying the course.