Investment Committees Should Be About Stewardship and Not Just Market Performance

Investment committees are often judged by how well the investment portfolio performed as compared to the market. However, investment committee responsibilities are much broader than just monitoring market performance. Nonprofit organizations will be better off if they design and focus investment committee protocols, policies and working rules around the primary role of stewardship of the organization’s long-term investment assets.

“Stewardship” has been defined as “the careful and responsible management of something entrusted to one's care,” and “the acceptance or assignment of responsibility to shepherd and safeguard the valuables of others.” These definitions resonate because of the tone reflected in the words: responsible planning, management of resources, shepherd, and safeguard.

Maintaining optimal long-term investment growth is one of an investment committee’s key goals. However, a narrow focus on this one metric can lead organizations and investment committees to lose sight of the broader set of principles inherent in the stewardship role, such as safeguarding the organization’s investment assets, maintaining open and active communication channels, and establishing responsible asset allocation and spending guidelines.

Nonprofits should periodically step back and assess how their investment committee has been operating and consider amendments and additions to policies and procedures that would enhance stewardship. This assessment should cover protocols, policies and working rules, and address any slippage into bad habits (inconsistent meeting schedules, failure to fill open committee positions, poor communication with investment advisors, etc.) that may have developed over time.

Protocols cover the governance side of investment committee stewardship and include how the investment committee is structured, how many members will be on the committee, eligibility qualifications, who will serve as chair, and other related governance aspects.

Investment committees are often established through an organization’s Bylaws as a required standing committee. Bylaws tend to go long periods of time without updates so take a fresh look with an eye on how the organization has changed related to its mission and whether the portfolio has changed in size and/or long-term purpose. For example, consider upgrading the committee’s eligibility requirements to require prior professional investment management and/or investment committee experience. Changes here will directly impact stewardship by improving the quality of future investment committee oversight and discussions.

The two key Policies for any investment committee will be the Investment Policy Statement (IPS) and Spending Policy. These polices should be on regular review and update cycles.

The IPS will always include market performance benchmarks but this is only one aspect of a strong IPS. The IPS should also cover asset allocation classes, asset allocation percentage (minimum, maximum, and target) benchmarks, special purpose funds compliance, investment advisor guidelines, Board reporting, transaction authority and other compliance guidelines.

The Spending Policy will define targets for annual budget support, special purpose project support, endowment disbursements, and other disbursements from long-term investment funds.

These IPS and Spending Policy components will change over time. The investment committee will need to regularly recommend amendments, additions, and deletions to meet changing circumstances.

Working Rules bring the protocols and policies together. They should include a description of the investment committee’s purpose and oversight responsibilities, expected meeting frequency and schedules, and how and when the committee will communicate with professional investment advisors. The Working Rules should also include sample agendas for meetings, separate job descriptions for the chair and other committee members to help them better anticipate how to fulfill their roles and address how key policies (IPS and Spending Policy) and authorities (Board of Directors and senior management) are interconnected with the investment committee.

Planning Tip – Schedule a separate annual investment committee orientation meeting. This is important even if there is little to no turnover of investment committee members. Use the annual orientation meeting to set goals, discuss challenges, and provide education experiences that will help the committee to re-focus on their stewardship role.

Related to investment performance, be upfront with your communications and guidance on this individual stewardship metric. Explain that performance compared to the market is just one of many metrics. Remind the committee that safeguarding the organization’s investment assets, providing resources in alignment with the organizations mission and best interests, honoring donor restrictions, and staying current on budget support guidelines (Spending Policy) and Board requests for support for unusual funding are all equally important stewardship metrics that will need to be addressed each year.