Although every board committee fulfills a valuable role, it’s no exaggeration to state that the investment committee is one of the most important committees of the board. The financial resources available to colleges and universities—and thus institutional quality and competitive position—are directly affected by the success or failure of endowment management.
The investment committee has important governance responsibilities in assuring the successful management of endowment and other institutional pools of capital. Spending from endowment provides a significant portion of the operating budget at many private colleges and universities, while the percentage of operating support covered by endowment is likely to be lower at public institutions, which typically have a higher percentage restricted.
According to the 2010 National Association of College and University Business Officers (NACUBO)-Commonfund Study of Endowments, spending from endowments represents, on average, about 13.4 percent of total institutional budgets (or a median figure of 4.6 percent). This figure is higher for many well-endowed institutions (about 20 percent, on average, for the largest endowments in the study, or a median of just over 13 percent) and lower for less well-endowed institutions (less than 10 percent for the smallest endowments in the study, or a median of 1 percent). Therefore, the success or failure of the investment committee has a large and direct impact on the resources available to the institution to attract and retain quality faculty, offer scholarships, expand or improve programs, and build modern facilities.
The board, acting through the investment committee, shoulders governance responsibility for investments, primarily setting policies and providing oversight. Management is principally responsible for implementation and reporting. Investment committee members must be cognizant of the fiduciary role they assume as actors on behalf of their institution.
The investment committee has a number of responsibilities, but they generally fall under two key areas: developing a sound investment policy and ensuring that it is implemented efficiently and effectively. These two tasks are easy to articulate, but difficult to execute. Additional responsibilities include reviewing expenses, weighing in on the spending policy, and perhaps addressing campus concerns on issues related to socially responsible investing, if the board determines that to be consistent with overall board priorities.
An effective investment policy contains eight major components: return objectives; key risks, the institution’s tolerance for those risks, and strategies for risk mitigation; asset allocation guidelines and the theory, evidence, and/or beliefs supporting them; rationales for including or excluding asset classes; provisions for rebalancing; portfolio and asset class benchmarks; use of indexing; and approach to currency hedging.
Overseeing implementation of the investment policy is the single greatest challenge facing investment committees. Many committees assume responsibilities for implementation tasks that are better suited to full-time professionals, that is, staff and/or outsiders. Ideally, committees should not be involved in rebalancing, performing manager due diligence, hiring or firing managers, or taking measured contrarian bets within the confines of the policy to add value. These are all responsibilities that properly lie within the purview of the chief investment officer or whoever fills that role. For institutions without a designated CIO, the investment committee may be involved in conducting due diligence on investment managers, hiring managers, and firing managers. However, this complicates the work of the investment committee by crossing over into management issues.