Is Your Investment Committee in Shape?

The start of a new year tends to be a time of reflection, resolution, and planning. Are you out of shape? Is your house outdated? Are you stuck in a rut, doing the same old things yet expecting different results? No, we’re not talking about your personal life here! This is about your organization’s finance and investment committee.

Now is an ideal time for key executives and board members of nonprofits and foundations to reflect on what’s working, and what’s not in their investment program—from the investment policy statement to decision making and execution—and set a plan for improvement.

At Bernstein, we manage close to $6 billion for hundreds of nonprofits and foundations across the country. We’ve witnessed the practices of investment committees across organizations of varying size, scope, and mission—the good, the not-so-good, and those in dire need of a makeover. Even in an ever-changing economic and market environment (did someone say “volatility, redux?”) certain practices make sense for most entities. Below we share insights to help facilitate effective financial stewardship, thereby supporting and furthering the institution’s mission.

Top Five Best Practices

1. Start on the same page—Each new committee member should begin with a clear understanding of what’s in store for him/her. One way to ensure this is to provide new member orientation. This should include the roles and responsibilities of all the committee members, as well as the broader board, staff, outside advisors, and signatories. Orientation should also outline expectations including meeting frequency, preparation, attendance, and participation requirements. It should include procedures for decision making and a brief history of policy decisions, so new members understand the context of the current modus operandi. This orientation should be documented so that all members can engage in a periodic review of the roles and responsibilities.
   
   Importantly, members should understand their fiduciary duty to act prudently and in the best interest of the organization. In our white paper Balancing Structure and Flexibility, we highlight the path to building a solid fiduciary foundation. Educating committee members is an essential component.
   
   
2. Embrace diversity of perspectives—Committee members are often selected due to their inimitable and distinct backgrounds and expertise, from across the personal and institutional financial and investing universe. It’s not groundbreaking to suggest that diverse perspectives lead to more robust and comprehensive decision making; it is far less common, however, for committee leadership to consistently and effectively draw out, actively listen, and truly embrace participation and inclusion across all members. Too often the loudest voice drives a disproportionate share of decisions. The greatest benefits of diversity only become apparent when coupled with active inclusion.
   
   So, what’s the optimal committee size? It depends. We’d argue that there should be enough members to foster a true dialogue with different opinions and perspectives, but not so many that gridlock occurs or decision making becomes inefficient. Usually five to seven members does the trick.
   
   And, should non-board members be included on the investment committee? Maybe. If there is a gap in investment expertise among board members, or if this could be used as a recruiting tool for future board membership, then outside individuals might be nice additions to the committee, if the majority remain board members, and all sign confidentiality and conflict of interest statements.
   
   Finally, it’s important to institute term limits and ensure that members’ terms are staggered. This fosters a continuity of institutional memory but also maintains that hard sought pool of fresh perspectives and energy.
   
   
3. Establish meeting rigor… and stick to it! Committee members tend to bring the blessing of great ideas and the burden of busy schedules. Advance notice, adherence to agreed-upon time frames, and swift and consistent execution is critical for optimizing the committee’s time. This begins with strong leadership (in this case, from the chair of the committee) who sets priorities and expectations.
   
   Meetings should be scheduled regularly—quarterly is common—established well in advance. Four weeks post quarter-end provides investment advisors ample time to distribute fulsome results for committee members to review and prepare in advance of the meeting. Agendas should be thorough but limited enough in scope to encourage holistic and active inclusion as discussed above, and to ensure each agenda item is given the necessary time and consideration for a thoughtful discussion.
   
   Active participation during meetings is critical. For geographically dispersed groups where in-person attendance is not always practical, we’ve found video conferencing, rather than connecting via phone, is a good substitute for in-person attendance. Why? By audio only, participants may fall victim to multi-tasking and not give their full attention. On a video conference, it’s harder to stray. (Side tip for committee members: just keep in mind that everyone can see you eating that sandwich, spinning in your chair, or playing the air drums!)
   
   All action items should come with a plan to execute in a timely fashion, and a designated committee member—staff or non-staff—should document minutes for each meeting. At the start of the following meeting, this individual will confirm that all items from the last session were completed, and/or question why open items are still incomplete. Without this rigorous follow-up process, action items tend to fall through the cracks.
   
   
4. Communicate across board committees, between board and staff, and to external stakeholders. Organizations typically have two to three basic financial levers at their disposal: 1) (for fundraising institutions) inflows through fundraising, tuition, earned income, and other means; 2) outflows for programs and/or grants, operations, debt service and the like; and 3) investments, cash, and other assets. None of these operate in isolation. Consistent communication and coordination across other committees, specifically fundraising/development and program-related teams, is key to setting realistic expectations and keeping track of progress for the benefit of the broader institution.
   
   During meetings, the perspective of all members and operating staff needs to be heard. Between meetings, where 95% of execution happens, continued communication is critical. Web portals or other means of securely sharing data and documents work well. The best committees are accountable to the executive team to ensure that decisions are informed by the reality of the work being done on a day-to-day basis; likewise, the executive team is accountable to the committee to execute in a timely and effective fashion on decisions made.
   
   The strongest institutions are transparent on their financial decisions and position to stakeholders, and the public. It’s a given that the most productive committees communicate clearly with auditors and other external stakeholders.
   
   
5. Check Yourself—So, you’re three, or even 12 months out from your initial New Year’s resolution to get your investment committee house in shape. How are you doing? Performance of the portfolio should be analyzed in the context of the organization’s stated goals, in addition to comparing returns to relevant benchmarks. If external financial partners are utilized, the service level agreement, including communication, reporting, and any other aspects of the relationship, should be evaluated on an annual basis. The committee should clearly spell out expectations, provide specific feedback, and encourage outside advisors to share insight on improving the process.
   
   

Committees should also review internal processes annually, to maintain pace with external issues that may affect nonprofits generally, or their institution specifically. This review should ensure the effective stewardship of funds critical to their mission.

Finally: review the investment policy statement (IPS), spending policy, and signatories on an annual basis (and please update signatories in between, if necessary). The IPS should have structure, but also flexibility to accommodate a range of market environments. As the organization’s model and goals evolve, so should the IPS.

 

How Does It Feel?

The responsibility that the finance and investment committee has in both protecting and advancing the goals of any given mission-driven organization is awesome, but it should also feel very rewarding. By incorporating key practices for an efficient and effective team, this group will instill the confidence necessary for the rest of the institution’s key stakeholders to focus on what’s important—fulfilling the ultimate mission.