HomeFEG's InsightsGOVERNANCE SERIES: The Importance of Investing for Nonprofit Organizations

GOVERNANCE SERIES: The Importance of Investing for Nonprofit Organizations

This governance series is intended to help nonprofits and other organizations pursue success through understanding the role and obligations of a fiduciary. It is vital that both those who fulfill the role and those who appoint them understand their fiduciary duties for the overall health of an organization.

 

“The trustees of endowed institutions are the guardians of the future against the claims of the present. Their task is to preserve equity among generations.”

– James Tobin, Nobel-Prize-Winning Economist, Yale University

 

Most nonprofits in existence – foundations, endowments, charitable organizations, etc. – have specific missions tied to larger philanthropic purposes.

A community foundation is likely to be tied to the development or welfare of a specific geographic area and its residents. Endowments may exist to provide scholarships for a certain type of student or to fund specific areas of study within a university setting. Charitable organizations may be concerned with improving the lives of a portion of the community that falls beneath the definition of poverty or providing funds for disaster relief or medical research for a specific medical condition.

Nonprofit organizations – regardless of their purposes or missions – must continue to exist in order to fulfill those missions.

How do they do that? There are many factors involved, but the one we focus on here is the financial health of the organization.

Most organizations, including nonprofits, rely on generously provided money or assets. These dollars may have been gifted to them from one large donor or through the organization’s persistent fundraising efforts.

How do nonprofits use these assets? It depends. Many nonprofits invest them in order to generate all or a portion of their organization’s operating income for a given year while also funding scholarships or capital improvements, such as new classrooms or a cardiac care wing.

With rare exception, the missions of most nonprofits are structured so the organization will need to exist for a very long time – if not forever. Even those that fulfill their mission – consider The March of Dimes funding a polio vaccine leading to a cure – can identify a new mission (prevention of birth defects and infant mortality) to continue their good work.

Higher education, healthcare, and the costs of research continue to rise every year. Therefore, it is critical these institutions achieve “intergenerational equity; this simply means that they manage their funds so that they grow so as to have the same economic impact tomorrow as they are having today.

That’s the true meaning behind Tobin’s quote at top: trustees, or those who sit on investment committees or boards for nonprofit institutions have to guard not just against decisions that could adversely affect the organization’s funding for one, five, or 10 years from now, they have to be cognizant of making decisions that could impact the funding decades from now!

Given the importance, how do nonprofits seek to ensure that the dollars entrusted to them go to fulfill their organizations’ missions now and well into the future?

They set up a governance structure, which includes an investment committee, to oversee the responsible and prudent investment and disbursement of their generously donated assets.

If you find yourself on an investment committee, you are part of the governance of your nonprofit’s investment program and you have a very important role to play.

QUESTIONS

What specifically does your nonprofit fund with the proceeds of its investment portfolio?

Does your nonprofit have plans for specific capital projects that it needs to fund?

Given your nonprofit’s mission/purpose, do you think there are industries in which it should not invest? (For example, if it is a foundation created from a tobacco settlement, it would likely be inappropriate for the foundation to invest in tobacco companies.)

If you were to address an audience of your nonprofit’s donors, what do you think they would say is most important to them in terms of the investment program or its outcomes?

 

DISCLOSURES

This report was prepared by Fund Evaluation Group, LLC (FEG), a federally registered investment adviser under the Investment Advisers Act of 1940, as amended, providing non-discretionary and discretionary investment advice to its clients on an individual basis. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. Fund Evaluation Group, LLC, Form ADV Part 2A & 2B can be obtained by written request directed to: Fund Evaluation Group, LLC, 201 East Fifth Street, Suite 1600, Cincinnati, OH 45202 Attention: Compliance Department.

The information herein was obtained from various sources. FEG does not guarantee the accuracy or completeness of such information provided by third parties. The information in this report is given as of the date indicated and believed to be reliable. FEG assumes no obligation to update this information, or to advise on further developments relating to it.

Neither the information nor any opinion expressed in this report constitutes an offer, or an invitation to make an offer, to buy or sell any securities.