Time to Re-Assess

As observers of investment committee behavior for more than 20 years, we have been surprised at how few committees take time to look back, especially after periods of extreme stress, and assess what they could have done differently to achieve better outcomes.  In the words of Sir Winston Churchill, “Never let a good crisis go to waste.”  To us, this means that committees can take advantage of lessons learned through the COVID crisis and make adjustments to guard against the recurrence of costly mistakes.

As committees engage in this soul searching, here are a few potential areas of focus.

Liquidity Planning

• Conduct stress tests that include operational budget shocks.
  • Make sure that, even during extreme scenarios, the institution either maintains or has access to adequate liquidity.
  • A rule of thumb we often hear is that one should ensure that there is a sufficient reserve or access to cash to provide for two years of endowment spending.
• If you did not have enough liquidity and had to tap the endowment for additional funds, consider creating a three-tiered structure (operational/cash, intermediate, endowment) to preserve liquidity and maximize return within the endowment. We heard of too many institutions who had to draw liquidity from their endowments during the challenging events of fiscal years 2020-2021 forcing suboptimal investment actions.

Donor Engagement

• Do not forget to engage with your donors.
  • Based on research we conducted with CASE, a disappointing number of colleges and universities cut staffing levels in development and did not proactively engage with donors during COVID to seek additional gifts, even when there were compelling fundraising stories to tell and the donors’ portfolios had more than recovered.

Governance Lessons

• Examine your committee’s behavior during the COVID crisis
  • Did you deviate from your long-term policy (for example by selling equities in March 2020) in a way that was suboptimal?
  • Did committee turnover leave you with less institutional memory and less buy-in on your long-term plan?
  • Does the committee have a different risk tolerance or investment horizon than previously thought?
  • Did louder than expected voices drown out others and lead to rash actions?
  • An affirmative answer to one or more of these questions may mean that the roles, responsibilities and governance framework of your Investment Policy Statement (IPS) were not clear, or were not sufficiently socialized with all committee members, and may necessitate revisions to the IPS or formal committee member orientation.

The items highlighted above barely scratch the surface of what can be learned through careful self-reflection.  If you serve on an investment committee, please initiate this conversation.  It may be the most valuable contribution you can make to the institution you serve.