August 8, 2023
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Managing your board and its committees is both art and science, and the "science" part is particularly important with investment committees.
A mission-critical task like investing your association's reserves for growth and stability—especially given the volatility and uncertainty of the markets in recent years—should be done with established parameters, training and empirical data.
Best practices include bringing together on the committee people with a diversity of backgrounds and viewpoints, and at least some volunteers with knowledge of investing.
"Having individuals with knowledge of investing, generally speaking, who can bring their own expertise or knowledge into that role, can be very helpful to the rest of the committee members as well as to the company you're using for your investment advising," said Natasha Rankin, CEO of the Irrigation Association. The association's investment advisors are from Morgan Stanley.
But a volunteer's experience with IRA or 401(k) retirement plans is not enough. Rankin, previously chief operating officer at the American Counseling Association, said she seeks volunteers with organizational experience for an investment panel.
"I am thinking of people who—maybe for their company or in a specific profession, (or) maybe as part of their role where they work—have that organizational investing perspective," she said.
Committee members shouldn't rely too much on personal experience, but it happens sometimes.
"(Individual investors are) looking at their own needs; they're looking at the needs of their children or their family," Rankin said. "But it's a really different perspective that you're bringing to an association, because what you're investing for—when you say long-term investing and sustainability—you're talking about, ideally, infinity."
Personal versus fiduciary
Ahmed Farruk, regional director and senior consultant with Fiducient Advisors, agreed.
"Many (committee members) are going to understand most broad investment principles, likely due to their own personal experience. But that is different than investing for a nonprofit in a fiduciary capacity," he said in an email.
Fiducient produced a podcast in 2021 called 10 Habits of Effective Investment Committees, and among the recommendations was that panel members should resist personal investment bias.
"They should understand what's generally happening in the markets but should be careful about what they read and/or what they take away from that. Much of what's out there is designed for the masses (and) leaves out much of the important detail that investment professionals dig into when building and managing portfolios," Farruk said.
Farruk also said the size of a committee is important; five to seven members is sufficient to get a broad array of perspectives and experience. He cited an ASAE study released last year showing most associations of all sizes have between four and six members on the panel, while a substantial number have seven to 10. But 21% of associations with revenue below $1 million have just one to three investment committee members.
Regular training
Among Farruk's clients is the Construction Specifications Institute. COO Velma Hart is CSI's longtime liaison to the seven-member investment committee.
"Those that are educated on a regular basis about the breadth and scope of their responsibilities, and where that breadth and scope end, function at the highest level," Hart said.
There are certain variations to committee roles, depending on factors such as whether an outside investment advisor is used. Some committees have the responsibility of making and executing investment decisions. In CSI's case, the panel is charged with strategic oversight consistent with the association's investment policy statement (IPS). CSI's IPS has not been changed in a long time.
"(The committee's role is) clearly stated in the IPS," Hart said. "They don't decide on investments, but they do oversee the board-approved investment strategy. Their responsibility is to ensure compliance with that investment strategy."
CSI's strategy, since before the pandemic, has been to draw on its ample investment reserves to fund operations and growth opportunities. That makes it essential to get the investment strategy and execution right, in good markets and in bad.
CSI puts resources into training the board, including the investment committee, "so they don't cross that line and get us into danger," Hart said, adding that it "has been money well spent."
"You wouldn't think that people need to be reminded, especially volunteers, of the scope and range of responsibilities, but they do.
"It's been very meaningful and useful to have regularly scheduled training for our volunteers on their responsibilities not only on the investment side but from a governance standpoint," she said.
CSI's board members appreciate the training.
"They look forward to it. They can take that knowledge and use it in their business, in their day-to-day activities. They see it as personal and professional growth, simultaneously," Hart said.
INVESTMENT PANEL TIPS
Diversity: Differences of opinion and perspective are important.
"It's always a good idea to have different views—even if those views don't always result in action," said Ahmed Farruk, of Fiducient Advisors. "They're at least discussed, and there's a record of that discussion."
Institutional memory: Stagger terms on the committee so not all volunteers roll off at once; but fresh perspectives should be brought in regularly.
Strong chair: To avoid a "halo effect," the member with the most power or influence should be the last to provide their opinion, so that others feel free to speak.
"A strong chair is critical to channel the opinions of those who are comfortable with investments and welcome the opinions of those who may not be," said Farruk.
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