Investment Committee Guiding Principles
By: Brian Seay, CFA
Leading the investment committee for your organization can be challenging. Often, these turn into slow, frustrating, “check the box” exercises. However, if you build the right process and governance practices, your investment committee can be engaging and empowering for members. Here are a few guiding principles to help you build a more effective investment committee:
1) Clearly Define the role and decision-making authority of the committee
What decisions will the committee make on its own? When is a decision required to go back through the full board? Committee often waste time on this every time a decision needs to be made. In our experience, often major asset allocation changes and spending policy changes are approved by the full organization’s board, perhaps with a recommendation from the investment committee. But the investment committee oversees everything else including investment strategy, performance reviews, investment manager reviews and annual spending determinations. Ideally, your organization would document all of the roles and responsibilities of the investment committee so that everyone is aligned as members rotate on and off the board and various committees.
2) Develop and Document your Investment Policy
Large and successful endowments and foundations all have well developed investment policy statements. The investment policy statement provides everyone a roadmap to fully understand the role investments play in your organization’s long-term financial plan. They often include details about investment goals, asset allocation, risk tolerance, spending policy and performance review cycles among other topics. Documenting your investment approach helps ensure you stick with it over the long-term, especially as committee members rotate on and off.
Remember, the asset allocation and market exposure documented in the policy will determine more than 90% of your investment success over time. So don’t skip the part of investing that is the most connected to your long-term success! This is a great first step if you are just starting out.
3) “Governance is not Management” – Kenneth Dayton
Governing an endowment or investment portfolio and day-to-day management are different roles. No different than the distinction between the role of a board member and an executive director or CEO of an organization. The investment committee should be focused on connecting the investment portfolio with the organization’s strategic goals, developing asset allocation, and reviewing performance. The day-to-day work of rebalancing, developing investment themes and selecting individual managers should be outsourced to a professional.
4) Build Meeting Agendas and Send Materials in Advance
Meetings about “investing” can reasonably cover economics, geopolitical issues, organizational issues and nearly anything else someone wants to raise as an issue. Building clear meeting agendas and sending review materials ahead of the meeting will focus the committee on the task at hand. Also, this will help the committee stay focused on issues related to governance and investment policy and not get into the weeds of investment management. For more on running effective committee meetings, see our piece on effective investment committee meetings.