Managing a nonprofit endowment involves a degree of responsibility beyond mere financial stewardship. It entails upholding fiduciary commitments mandated by state and common law, including the three key duties of care, loyalty, and obedience to the organization's mission, as outlined in the Uniform Prudent Management of Institutional Funds Act (UPMIFA). While the ultimate responsibility for the endowment rests with the board of directors, the oversight and management of endowment investments are typically delegated to a finance or investment committee. This article aims to guide investment committees in their oversight by providing insight into six critical areas that require regular review: the Committee Charter, Spending Policy, Investment Policy Statement, Investment Fees, Conflict of Interest, and Access to Records.

Committee Charter 

The Committee Charter is the foundational document that outlines the roles, responsibilities, composition of the finance or investment committee, and organizational policies. It delineates the decision-making process, meeting frequency, and reporting requirements, ensuring clarity and accountability within the committee's operations. The Committee Charter is the framework for collaboration between committee members and other stakeholders, fostering effective communication and coordination in managing the endowment.

Spending Policy

A robust Spending Policy is essential for ensuring prudent and sustainable utilization of endowment funds. It should specify the authorized decision-makers responsible for making distributions from the endowment and establish a clear spending rate supported by investment returns. Additionally, the Spending Policy should define qualified expenditures and incorporate mechanisms for periodic review.

Investment Policy Statement

An Investment Policy Statement (IPS) provides strategic guidance for managing the endowment's investment portfolio. It articulates the endowment's objectives, risk tolerance, and asset allocation parameters, serving as a roadmap for investment decision-making and performance evaluation. The IPS should also outline the roles and responsibilities of the finance or investment committee, investment advisor, and custodian and establish benchmarks for evaluating investment performance and risk.

Investment Fees

In addition to formulating sound investment strategies, it is imperative for the finance or investment committee to regularly review and assess investment fees. This includes evaluating advisory, custodial, transaction, and underlying investment portfolio fees to ensure they are reasonable and competitive within the industry. The committee can optimize investment costs and maximize the funds available for advancing the organization's mission and programs by conducting a comprehensive fee review.

Conflict of Interest

Addressing conflicts of interest is paramount to maintaining the integrity and trustworthiness of the endowment management process. A robust Conflict of Interest policy should be in place, requiring board members to disclose potential conflicts annually and establish clear procedures for resolving conflicts when they arise. By promoting transparency and accountability, the policy enhances stakeholder confidence in the organization’s decision-making process and reinforces its commitment to fiduciary excellence.

Access to Records

Finally, ensuring access to relevant records and information is essential for promoting transparency and accountability in endowment management. The finance or investment committee should maintain up-to-date investment data, reports, and documentation every quarter in a centralized and accessible format. Regular committee meetings should be conducted to share performance updates and records, discuss investment strategies, and address any concerns or questions stakeholders raise. The committee should also regularly report on the progress of the endowment’s investment program to the board.

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In conclusion, effective management of a nonprofit endowment requires diligent oversight and adherence to fiduciary responsibilities. Those responsible for an organization’s endowment program should establish an annual checklist so that decision-makers may review key items and priorities. By focusing on the key areas outlined in this article – the Committee Charter, Spending Policy, Investment Policy Statement, Investment Fees, Conflict of Interest, and Access to Records – the board can uphold the highest standards of governance and stewardship, ensuring the long-term sustainability and impact of the organization's endowment.

Download: A Fiduciary Checklist for Investment Committee Members 

We’ve created a handy PDF checklist that includes the critical areas that require regular review covered in this article. Download “A Fiduciary Checklist for Your Investment Committee” and share it with your team.