I’m a huge fan of charities and an even bigger fan of our wonderful charitable sector. Charities always tr y to do the right thing and most of the ti me, they succeed. Where would our civil society be without food banks, shelters, hospitals, colleges and universities? Big charities and small charities all contribute to the fabric of our country.
But when it comes to the fiduciary oversight of their assets, especially their investments, I know that charities could be doing a better job. In the Canadian charitable sector, there simply isn’t enough attention being paid to fiduciary risk mitigation. Individuals who have a fiduciary responsibility to a charity must ensure that they are acting in the best interests of the organization. Without proper attention, these individuals could be exposing the charity to unnecessary risk.
If investments are not getting appropriate attention, the overall performance of the portfolio may suffer. Everyone knows how challenging fundraising can be. An inappropriate asset mix or a consistently underperforming investment manager invariably means that the charity is leaving money on the table, and that’s money that the organization will need to raise through other means.
How investment management works
There are essentially three different structures that charities use to manage their investments:
1. Do-it-yourself (DIY)
Each structure presents inherent advantages and disadvantages. Each comes with a fundamentally different approach. But, at the end of the day, when deciding on the best approach to use, ask
yourself the following question: If I were a member of a charity’s board of directors, which structure would provide me with the peace of mind of knowing that I have fulfilled my fiduciary duties?
There are two types of charities that typically follow the DIY investment model. The first is a charity with a very small investment portfolio (roughly $100,000 or less).
“An inappropriate asset mix or
a consistently underperforming
investment manager invariably
means that the charity is leaving
money on the table…”
Given the relatively small size of the portfolio, many charities will simply deposit these funds into a conservative investment vehicle such as a money market fund, Treasury bill or a conservative (i.e., balanced) mutual fund. As long as the investment isn’t overly aggressive, there isn’t much risk associated with this approach.
The second type of charity is at the other end of the spectrum. Charities with very large investment pools (typically $500 million or more in investable assets) can hire staff (like a Chief Investment Officer) to provide internal oversight, management and reporting. While the fiduciary responsibility still lies with the Board, the staff team is involved in manager selection, monitoring, reporting, asset mix and other management functions.
The volunteer model
The volunteer model is probably the most widely used by charities in Canada. In this structure, an Investment Committee (sometimes part of a broader Finance or Audit Committee) comprised of industry “experts” is involved in the process. This committee typically reports to the Board of Directors and meets several times per year to discuss the charity’s investments.
The organization’s Chief Financial Officer (or Finance Director) will often be part of this committee. During each meeting, the committee reviews the performance from the previous quarter and makes decisions for the coming quarter. The committee is also usually involved in the process of selecting the firm’s investment managers.
The professional model
In this model, the charity employs an Investment Consultant/OCIO to manage the entire investment process. The role of the OCIO is to assist the Investment Committee in setting the strategic direction for the charity’s investments with the goal of managing fiduciary risk.
The OCIO guides the selection and the ongoing evaluation of the managers. It also provides consolidated reporting, lessening the burden on organizational staff. The OCIO doesn’t replace the Investment Committee. Rather, the OCIO’s mandate is to ensure the committee focuses on strategic issues that are critical to directing the future of the organization’s investments.
So which model is best?
In part, the answer to this question is a reflection of the size of the organization’s investment pool and the time commitment of the organization’s volunteers (namely, the Investment Committee). However, for most charities, the professional model, which blends volunteer commitment and independent oversight, provides the greatest opportunity for strong governance and better long-term results. Charitable organizations want and need to focus on delivering their important programs and services to constituents. By employing the right investment oversight, charities can maintain a focus on what matters most – the fulfillment of their missions.