Four questions boards should consider regarding investing governance

Just last week, we met with a large university endowment to help them navigate some pressing issues for boards and governance. The university listed out four major questions they were struggling with. I’m sharing the key points of that discussion, because, from decades of experience guiding not-for-profit investing, we’ve learned that if one organisation is wrestling with an issue, others almost certainly are as well. So let’s get to the questions:

  1. Do we have the right governance model?
  2. What is the right size of investment staff for us?
  3. What cost structure can we afford?
  4. What risk or liquidity appetite should we have?

The questions were cause for self-reflection and discussion of the board and executive staff. The answers focused on the organisation’s mission and the governance strategy that best supported that mission.

1. Do we have the right governance model?

Let’s break this governance-model topic into five interconnected parts: The board of trustees, the investment committee, the advisory committee, the finance committee and the audit committee. We’ll address issues regarding investment staff in the next section.

  1. For nearly all not-for-profits, the board of trustees is the where the buck stops. They are the governing body and the ultimate fiduciary responsibility remains with them.


  2. The investment committee is delegated oversight of asset pool investments, thus ensuring the fulfillment of the organisation’s mission. The investment committee is a sub-committee of the board of trustees.

    To ensure the investment committee is well connected with the board, part of the investment committee is typically filled by board trustees. The board has the fiduciary responsibility, and the investment committee is responsible to the board. Some investment committees are filled only with board trustees.

  3. The advisory committee—assuming there is one—is there to advise the investment committee.

    In some organisations, the advisory committee is where the meat of the discussion occurs. They then come to the investment committee or the board with a recommendation. With high-functioning advisory committees, those recommendations are approved more often than not. In other organisations, the advisory committee makes introductions or is part of the due diligence on an investment. Some advisory committees attend, but do not vote, at investment committee meetings, while others are more ad hoc in nature.

    In some instances, it makes sense to give key donors a seat on the advisory committee to ensure they have a voice and feel connected to the organisation. In many cases, advisory committee members become future investment committee or board members.

  4. The finance committee approves budget and capital-markets decisions, such as issuing debt. Some FCs approve the organisation’s spending policy and any annual or ad-hoc updating to the investment policy.


  5. Audit is often also an additional committee. The audit committee’s job is to approve the financial statements which the pool contributes to.

How big should each of these groups be? Boards tend to range from as small as three to as large as 30 members, usually divided into sub-committees. Investment committees, in my experience, tend to range between five and 15 members.

Which size is right for you? A better way to answer this is to look at the strengths and weaknesses of large versus small. A small group can, in theory, be nimbler and more decisive, assuming the members see eye-to-eye and work well together. But that same like-mindedness and rapid decision-making can be detrimental as well. Not all investment decisions should be made quickly.

While larger groups may lead to more debate, larger numbers can also mean more resources, more diversity in thought and representation and less issues for turnover and even attendance. Consider this: If you have a committee of five and just one person doesn’t show up for a key meeting, you’ve just created a 20% power shift.

2. What is the right size of investment staff?

There’s clearly no one-size-fits-all answer to this. For most organizsations, the size of staff depends on the mix of in-house and outsourced duties and the size and complexity of the plan. In rough terms, we see it typically break down this way:

Large staffs tend to be seen at organisations with $10+ billion in assets. The staff typically includes asset-class heads, deputy CIO, COO, internal general counsel, internal back office, internal risk and internal HR. A large staff like this is typically run akin to a large advised institutional fund.

Mid-sized staffs are usually used for investment programs that range between $2.5 and $10 billion in assets. A mid-sized staff typically includes asset-class heads, a pool of analysts and full back office, for a total of 10+ people. This model is akin to a smaller long-short fund with institutional infrastructure.

Small staffs are typically relegated to investment programs with $2 billion and below. They typically depend on more of a generalist staffing model, and typically have one analyst per managing director. Most back office infrastructure is handled by outside general counsel and an outsourced custodian.

An OCIO model drastically reduces these numbers. That said, even if you outsource everything through a full OCIO, nearly every organisation still needs at least one in-house investment staff member—someone to coordinate cash that comes out of the OCIO, and to interact with accounting, auditing and external reporting. If even these duties are managed by the OCIO, there still likely needs to be at least a staff of one to manage the OCIO relationship.

3. What cost structure can our foundation afford?

Your needs are non-negotiable. The cost structure it takes to meet those needs is flexible. A clear-view way to look at this issue is to consider each task within a cost-benefit analysis. You know that if you want to have your own securities trading desk, it’s gonna cost you. So you outsource that function. But what about regulatory reporting, risk monitoring, fee budgeting and cash management? Should you outsource these duties or hire staff and keep them in-house? Keep in mind, you’ve also got to pay staff benefits and pay share accounting.

For example, strategic asset allocation is relatively inexpensive to do and provides huge benefits. Therefore, it makes sense for many plans to keep that role in-house. On the other end of the spectrum is that trading desk. It’s expensive. Outsource it. What about auditing? Should you outsource that to an external auditor? What about recordkeeping and reporting? Wire transfers? Cash calls? You can plot these and all of your other tasks upon the cost/benefit axes to help guide your decision. Or, a skilled outsourcing provider—like Russell Investments—can help you do this same analysis.

4. What risk or liquidity appetite should our non-profit have?

The good news is that every investor on the planet is forced to answer this question and the answers will be different for every organisation, because every organisation has unique goals.

Start with the goals. What are you trying to accomplish? Are you more driven by the long-term sustainability of your endowment or by your short-term spending needs? And then, make your risk and liquidity decisions based on those answers. In my experience, nearly all not-for-profits still like predictability, even if predictability is hard to come by.

Cashflows into the pool (cash-in), are usually in the form of gifts—and those contributions can be erratic. If there is a regular fundraising campaign cadence, that approach may create a sort of seasonality to your inbound cashflow, but how that money is designated—both by the board and by donors—is still hard to predict. Capital distributions—usually from private market funds—can be modelled, but not with 100% precision.

Cashflows out of the pool (cash-out), are usually in the form of spending payouts and capital calls. You may have a very programmatic approach to spending payouts, but there are certainly surprises there as well, in the form of one-time redemptions, one-time capital calls for private-markets investments, and exogenous events—COVID comes to mind.

When determining your investment risk and liquidity appetite, a brutally honest assessment is in order—assessing both the pattern of your cash demands and how strong of a stomach you have for illiquidity and market volatility.

Some investors tend to think of liquid and illiquid as two distinct buckets, but liquidity is really more of a spectrum. If you need to liquidate an equity fund, it might only take a day or a week. Hedge funds, on the other hand, might need notice periods. And illiquid private markets funds generally do not have options to redeem.

We believe the best way to manage these challenges is to take a total-portfolio approach to both risk management and liquidity. For example, it may be completely appropriate to carry more illiquid, long-term private markets investments—even if you expect to have major cash demands—as long as you can liquidate other aspects of your portfolio, like publicly traded equities.

And if you have a clear understanding of the long-term approach of your investment goals, it may be appropriate to increase the exposure to more volatile sectors of the market, because, at the total-portfolio level, a long-term approach smooths out short-term volatility. Again, consulting with a skilled, external strategic partner here can provide some much-needed clarity and comfort.

The bottom line

Not-for-profit investing governance is a big topic. This article is just a toe in that water.

Hopefully, three things are clear: One – your organisation is unique so your answers will be unique. Two – Your long-term goals should be your guide. And three – don’t hesitate to reach out to discuss.

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