Why Non-Profit Organizations Often Neglect Investment Governance

Non-profit organizations play a vital role in addressing various societal needs and issues. They serve as pillars of social change, support, and charitable work. Despite their noble missions, many non-profit organizations face significant challenges when it comes to investment governance. The question is, with access to data and information easier than ever, why do so many organizations still struggle with this important task? Here are the three main reasons that have surfaced during our conversations with foundation and endowment executives and their boards of directors.

1. Reliance on their Money Manager for guidance

Non-profit organizations are driven by a passion for their cause rather than financial acumen. Out of necessity, they often rely heavily on external money managers to handle their investments. These money managers are expected to provide the expertise needed to grow the organization's financial assets while adhering to ethical and socially responsible investing principles. It's worth noting, many of them do a great job in that aspect.

Although it’s highly recommended that organizations utilize money managers’ investment expertise, it can easily disconnect the organization's investment strategy and the performance monitoring of their portfolio. To be fair, asset managers strive for long-term, repeatable returns greater than the benchmark they are graded on. They aren’t in the business of comparing themselves to their competitors.

Non-profit organizations must realize that they are ultimately responsible for the decisions made by their money managers. It’s crucial to maintain an active role not only in the investment process but also in its monitoring. Active involvement doesn’t look the same for every organization; the size of the portfolio often dictates the resources dedicated to the task, but the one thing that remains constant across all non-profits is that an independent review is necessary. Even the best money managers will resist providing comparable analysis. Organizations need to look elsewhere than at the same group that manages the money.

2. Knowledge gap in investment monitoring and performance measurement

Non-profit organizations often have executives and board members who are highly dedicated to their cause but may lack expertise in investment governance. This knowledge gap can lead to challenges in effectively monitoring investments and measuring their performance. Without a clear understanding of investment principles and the ability to evaluate performance, non-profit organizations may find it challenging to make informed decisions about their investment strategy. They may be able to identify whether or not their investments are meeting their financial objectives but fall short of understanding how those same investments compare to alternative investments.

Independently assessing the funds that an organization has invested millions of dollars into not only improves the governance process but also provides valuable insights and spurs great questioning during portfolio review periods. To bridge this knowledge gap, non-profit organizations should consider implementing a program to help committee members make informed decisions and hold money managers accountable. Additionally, seeking external expertise or advisors in investment governance can add much needed transparency.

3. A "We've Always Done It That Way" mentality

A prevalent challenge in non-profit organizations is the resistance to change. Often, it’s rooted in a "we've always done it that way" mentality. This resistance can inhibit the adoption of improved investment governance practices and hinder the organization's ability to adapt to evolving financial landscapes (it’s not a problem until it’s a problem).

To overcome this mentality, non-profit organizations should encourage their board members and staff to question existing practices and explore improved processes that can lead to more effective investment governance. Let’s not be confused; it does take more time and energy to improve upon an existing investment governance process, but it’s far easier than most think.

While there are numerous reasons why investment governance may be neglected, it's crucial to recognize that many non-profit organizations do have robust processes in place. As we continue to witness market volatility, it's essential that investment governance climbs up the priority list at the next board of directors’ meeting, particularly for organizations with limited resources dedicated to their investment portfolios.