Principles of Nonprofit Investment Management - Commonfund

ObjectivesAll involved in nonprofit governanceand management certainly know theirorganization’s mission and – at least ingeneral terms – the kinds of programsmost likely to realize its goals. Butwhen it comes to assuring the financialresources to support those programs,different perspectives and expertiseare required.Members of the governing board whocame of age in the private sector maytend to think of ultimate objectives interms of net profit, return on investment,and shareowner value, all ofwhich are measurable. In their nonprofitroles, however, they have tocope with more subjective goals.These goals must be understood firstin terms of the social and intellectualutility of the institution, howeverintangible that may seem. Ultimately,the board must view the pools of assetsthat support the mission within thecontext of the entire organization andthe optimization of its mission. Whatcan create confusion is that the termsemployed resemble those used inbusiness; profit and growth certainlyhave relevance to the management ofa nonprofit’s investment fund. But ina nonprofit environment, success hasvery different implications.The board, usually through its investmentcommittee, exercises that responsibilityby defining the objectives thatwill guide its assigned investmentexperts. While the statement of theobjectives should be clear and simple,the process of formulating – as wellas maintaining – those objectives isnever simple.The committee has to weigh severalpotentially vexing issues that can affecthow the mission will be translated intoinvestment policy. The issues mayinclude:◆ The role of the fund in supportingthe institution’s mission, as well as inmaintaining a healthy balance sheet◆ The total real return goal neededfrom investment activities◆ The additional bequests and/ordonations that can be expected◆ The legal requirements affectingthe fund◆ How much of the endowment’sreturn should be spent, and howmuch reinvested, and how thisshould be calculated◆ The liquidity required to coverdistributions and expenses over areasonable time frame◆ The level of risk the board membersbelieve they can tolerate, includingdefinition of acceptable (and unacceptable)types of investments◆ Formal documentation of thedecision-making process, andresponsibility, accountability andauthority, including which investmentdecisions, if any, should bedelegated to outside consultants,advisors, or investment managers◆ Special characteristics of the nonprofit’sprograms, distributions, andother financial decisions that canaffect spending or tax exposure◆ Special limitations on investmentimposed on portions of the fund bydonors or by particular constituencies,such as a community nonprofit’sgovernance requirements◆ The impact of policy decisions onfuture giving◆ The strengths and weaknesses ofthe institutions, the investmentcommittees, staff and any outsideconsultants.- 5 -