The Importance of Establishing a Not-for-profit Investment Policy

Not-for-profits rely heavily on donations from grantors and donors. It’s common for well-established not-for-profit organisations with sound financial backing to invest some portion of the organisation’s financial assets in stocks, bonds, or other financial investments to improve the not-for-profit’s financial status. Boards have a fiduciary duty to protect the organisation’s finances and other assets. They also have a responsibility to use donor funds for their intended purpose and follow the guidelines donors gave in connection with donations.

An investment policy is a mechanism that offers protection for boards to demonstrate they have the organisation’s best interests at the forefront of their financial decisions, and to prove it if necessary.

Related article: Setting Not-for-profit Board Expectations & Increasing Effectiveness

Why It’s Important for Not-for-profits to Create an Investment Policy

The responsibility for managing a not-for-profit’s funds falls under a fiduciary duty called the Duty of Care. This duty requires boards to protect the not-for-profit’s finances and other financial assets. Ultimately, sound financial management practices ensure the long-term sustainability of the organisation. The Duty of Care also extends to ensuring that the board uses the organisation’s assets to further its mission.

All investments take time to grow, so it’s essential for boards to monitor them carefully. All investments carry a certain degree of risk. It’s not prudent for boards to invest 100% of the not-for-profit’s financial assets in long-term investments. Further, wise financial planning requires boards to allocate a certain amount of operating funds for short-term use.

There are three things that boards need to consider when adopting an investment policy:

1. Whether it protects the value of the initial invested assets.
2. Whether it reasonably ensures that investments will increase in value.
3. Whether boards can access its assets in the event of a cash flow problem.

There’s always the risk that one or more investments will lose money rather than grow in value. In general, investment advisors encourage investors to diversify their investments to help mitigate the risks associated with investing, and that’s prudent advice for not-for-profit organisations as well.

Boards may opt to delegate the responsibility for managing investments to a committee. To be clear, while it’s totally acceptable for boards to delegate the responsibility for investing funds to a committee, the board is fully responsible for oversight of the committee.

The board should expect to receive reports on investments at least quarterly. Professional investment advisors are a good resource for helping not-for-profits monitor their investments and benchmarks.

Related article: The Board’s Role in Developing a Strategy Plan for a Not-for-profit

Elements That Go into a Not-for-profit Investment Policy

A not-for-profit investment policy should be as specific as possible. The policy should serve as a record for the policies and procedures the board should follow regarding how to spend institutional funds. An investment policy serves as a written record of how the board will oversee the organisation’s investments.

Here’s a list of the elements that your not-for-profit board can use as a guide for writing a responsible investment policy:

• Purpose. A narrative that outlines the not-for-profit’s objectives, policies, and guidelines that are related to investment purposes.
• Delegation of Responsibilities. This section should state who is responsible for decisions surrounding investing the not-for-profit’s funds. It should outline the specific responsibilities of the various groups and individuals that are responsible for investing funds.
• Responsibilities of the Board. This section should outline the board’s responsibility for properly managing the not-for-profit’s funds and overseeing the investment committee. It should also state how the board will choose, appoint, and replace committee members.
• Responsibilities of the Oversight Committee. In this section, there should be an acknowledgement that the oversight committee won’t be held responsible for poor investment outcomes and they will be held responsible for adhering to procedures. State the specific responsibilities and limitations of the committee as well.
• Responsibilities of Management. In this section, detail any responsibilities that the executive director or other executives have for administering or implementing board policies concerning managing institutional funds.
• Guidelines for Investing. List the allowable types of investment vehicles and the allowable percentages for investments.
• Performance Measurement Standards. Outlines the standards by which the board will measure fund performance.
• Expenditures of Institutional Funds. States the uses, benefits, purposes, and factors that are relevant to spending institutional funds.
• Donor Restrictions. States that the investment committee agrees all to stipulations given by donors in connection with investing donor funds.
• Reserve Fund Expenditures. Offers guidelines for how much the board can withdraw to add to the operating fund, the allowable purposes for withdrawals, and the allotted timeframe for withdrawing money.

Real property, such as buildings and facilities that are owned by the not-for-profit, is considered part of the investment portfolio.

There’s a lot involved with establishing and implementing a not-for-profit investment policy. It’s essential for boards to have a policy to guide their investment efforts in case their decisions ever come into question. A board portal system is a valuable tool to assist in not-for-profit investing and documentation.

Related article: Re-Evaluating Your Not-for-profit Budget for Board Technology

Using a Board Management System to Manage Institutional Investing

BoardEffect designed a board management system to support all the cycles and activities of not-for-profit boards, including the need to manage investments. The portal offers state-of-the-art security which is vital for managing investments to protect them from hackers and cybercrime.

The board portal provides unlimited cloud storage for storing the investment policy, other board policies, and other important board documents. The investment strategy should be part of the risk management policy and boards can access both policies from any location at any time of day or night.

In addition to storage, the portal is a useful tool for investment committees and the board to collaborate and securely share files. Committees can simply attach investment reports to the board handbook inside the security of the portal. Board administrators have the ability to use granular permissions so investment data remains secure from individuals that shouldn’t have access to it.

In summary, the ultimate responsibility for establishing and overseeing the investment policy is the board of directors. An investment policy serves to outline how and when a not-for-profit organisation invests funds in a responsible, ethical manner. It’s the board’s responsibility to monitor investments and take action when necessary to protect the financial viability of the organisation.

Related whitepaper: The Board Portal Buyer’s Guide