The financial crisis and bear market of 2008-09 taught many boards a painful lesson: it is their legal obligation as fiduciaries to pay more attention to the oversight of their endowments.
The question is, how should they do this?
Most boards have availed themselves of their legal authority to delegate the actual management of their fund to their investment committee, which is often made up of experienced financial professionals able to understand the arcane language and challenging requirements of managing long-term financial assets. Trustees who have less investment knowledge are often bewildered by the technical jargon and complexity of the committee’s reports and are reluctant to ask questions. But if they don’t understand the reports, how can they execute their fiduciary duty?
Here are a few tips:
- Begin by writing or rewriting the charge (i.e. job description) of the investment committee to specify that the committee should be made up primarily of individuals with financial experience, but it should also include one or more “laypeople” from other professions. These members should be chosen because they are not afraid to ask the so-called “stupid question” that will force the experts to explain the answer in plain English. The job of the investment committee is to report to the board not only about the recent performance of the fund, but also the level of risk taken to achieve the return and the role of the asset classes and strategies used to generate it. Their job as expert fiduciaries is to make their report understandable to all of the trustees, not just their investment colleagues.
- Encourage the “lay” members of the investment committee to acquaint themselves with a basic set of investment terms and principles through primers and educational seminars (either in person or digital. AGB has a range of booklets and articles on financial and investment topics, as does NACUBO and Commonfund Institute.
- Ask the board chair and the investment committee chair to schedule a yearly educational session to acquaint new and existing trustees with the principles and methods by which the endowment is managed. This session should include an overview of the governance model used (e.g. outsourced versus internal management, use of an outside consultant, etc.) as well as an overview of the portfolio, all in layperson’s terms.
Overseeing an endowment is a challenge for nonfinancial trustees; as fiduciaries, it’s incumbent on them to understand the basics and too important to be left to the experts.