We are fortunate to engage with many charity and not-for-profit (NFP) organisations across the country. We’ve produced a Governance Guide to support the work of these organisations, with the goal of helping them ensure their assets are effectively managed.
Matt Henry, Forsyth Barr’s Head of Wealth Management Research, has written the article below as an introduction to the key issues and to provide an overview of the Governance Guide.
Helping Shape the Future: Managing the Assets of Not For Profits
New Zealanders are, on the whole, a charitable bunch. The country has around 28,000 registered charities — one for every 190 people, the highest per capita in the world — and more than 115,000 not-for-profit (NFP) organisations.
Many of these NFPs are endowed with significant financial investments that are directed at fulfilling their missions both today and in the future. A key goal for any NFP should be to ensure its assets are effectively managed. The performance of these investments can have a considerable bearing on an organisation’s future financial resources, and therefore its ability to deliver positive impact to its beneficiaries.
For any organisation, robust investment governance improves the chances of a positive outcome. Unfortunately, however, in our experience, this is an area where some NFPs fall short. This probably doesn’t come as a huge surprise. Many NFPs are relatively small, governed by passionate volunteers whose focus is on the organisation’s mission but who have limited investment experience – they don’t know what they don’t know. For us, a bit more surprising is that as NFPs get bigger their investment governance often doesn’t get a lot better. Even in larger organisations we regularly see examples where the investments are managed DIY or outsourced “to a mate”.
Please don’t get us wrong. We’re not suggesting all NFPs’ investment governance is lax. We see many good examples, in both big and small organisations. But we also see many where it could be significantly improved.
The importance of effective investment governance
Effective governance of a NFP’s investments are vital for a number of reasons:
- Legal duties: It helps ensure the board members or trustees of a NFP are meeting their duties under the governing legislation and organisation's governing documents.
- Financial sustainability: NFPs may rely on their investments to fund their operations and/or to support their mission. Effective governance ensures a NFP’s investment portfolio supports the organisation’s needs and objectives.
- Risk management: Investments inherently carry risk. Effective governance can help manage this risk, ensuring that the investment portfolio is properly diversified and is aligned with the organisation's investment timeframe and risk tolerance.
- Alignment of values: Most NFPs’ raison d'etre is founded on strong values and principles. Many wish to ensure all aspects of their organisation live up to those values, including their investment portfolios.
- Compliance with laws and regulations: NFPs are subject to laws and regulations regarding how they can invest their funds. Effective governance can help ensure compliance with these rules and avoid potential damage to the organisation's reputation.
- Trust and reputation: Donors need to trust that their contributions will be used wisely. Effective governance, including transparency and accountability, helps to build trust. Moreover, mismanagement of investments can damage an organisation's reputation, potentially impacting future donations and grants.
The governance toolkit
In order to deliver effective governance our experience suggests that there are a number of tools that any NFP should consider implementing.
Investment committee
The first step for many NFPs is to establish an investment committee to either advise the organisation on how to best manage its investments, or manage the portfolio under a delegated authority.
The benefit of an investment committee is ensuring that the necessary skills and focus are applied to the management of the investment portfolio.
Investment committee charter
A Committee Charter outlines the authority, roles, and responsibilities of the investment committee and serves as a tool to unify committee members behind the purpose and mission of your organisation.
Code of conduct
A Code of Conduct outlines ethical standards for behaviour and should cover conflicts of interest, confidentiality, disclosure requirements, and other areas of potential ethical concern. A well written Code of Conduct provides security — protecting your organisation from a loss in reputation or donors’ gifts, and potential legal action.
Statement of investment policies and objectives (SIPO)
A well-formulated SIPO should outline the investment strategy that will support the mission of the organisation.
A SIPO defines the purpose, objectives, constraints, and measures of success for the investment portfolio. It outlines the policies and procedures for asset allocation, risk management, performance evaluation, and Responsible Investment.
A SIPO can help limit the emotional elements that sometimes inhibit an investment committee’s decision-making process. For example, overspending when investment returns are high, or reacting to challenging markets by changing strategies which, ultimately, could have a detrimental impact on the portfolio's long-term investment performance.
Responsible investment (RI) policy
A NFP may consider developing a responsible investment policy as part of its investment strategy. RI includes the incorporation of environmental, social, and governance (ESG) factors into the investment decision-making process. An RI policy can provide a number of benefits including improved risk management, alignment of values between the organisation and its investments, and compliance with regulatory requirements.
In summary, effective governance best positions an organisation to make informed investment decisions that align with its overall mission and strategy. To help, we have published Helping Shape the Future: Guide for Not-for-Profit Investment Governance to assist NFPs in answering the question “what does good investment governance look like?”
Forsyth Barr takes pride in working with organisations across our community. We recognise the financial challenges of operating a successful NFP in today’s environment, and that it is critical to maximise the benefit of all resources available. If you would like a copy of our governance guide or would like to discuss how we could potentially help you better manage your financial assets please contact one of our financial advisers or email us at nfp@forsythbarr.co.nz
