From Strategy To Structure: Fresh Perspective On The Board's Financial Leadership John S. Griswold, Jr., Executive Director, Commonfund Institute Friday, October 31 2008 BoardSource Leadership Forum Grand Hyatt Washington 1000 H Street, NW Washington DC 2000
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From Strategy To Structure:Fresh Perspective On The Board's Financial Leadership
John S. Griswold, Jr., Executive Director, Commonfund InstituteFriday, October 31
2008 BoardSource Leadership Forum
Grand Hyatt Washington
1000 H Street, NW
Washington DC 2000
2
Agenda
Growth of Nonprofit Sector in the United States
Market Update
Overview of Nonprofit Financial Responsibilities Financial Plan Budget Roles and Responsibilities Governance / Committee Structure Policies
Source: Ibbotson, Bloomberg, Commonfund InstituteThe equity portion of the hypothetical portfolio is based on monthly returns of the S&P 500 Index (12/65-2/08), and the fixed income portion is based on monthly returns of the Lehman Brothers Aggregate Index (01/73-2/08) and the Ibbotson Associates Long Term Corporate Bond Index (12/65-12/72). HEPI data from 07/06 to 2/08 is estimated using the Commonfund Institute method based on regression analysis. Returns for this hypothetical portfolio assume that it is rebalanced to 70/30 annually on 1/1/yy and 5% is distributed annually on 1/1/yy.
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Return/Risk
10 Year Period Ending December 31, 2007
3-Month T-bill
International Equities
Private Real Estate
Private Capital
Distressed Debt
Hedge StrategiesPublic Real Estate
U.S. Government BondsU.S. High Yield Bonds
International Bonds U.S. Large Cap Equities
U.S. Small Cap Equities
Emerging Markets Equities
Commodities
0%
5%
10%
15%
20%
0% 5% 10% 15% 20% 25%
Standard Deviation (%)
Ann
ualiz
ed R
etur
n (%
)
Source: Style Advisor; AltvestThe following are the indices used by asset class: U.S. Government Bonds, Lehman Aggregate Bond Index; U.S. High Yield Bonds, Merrill Lynch High Yield Master II; International Bonds, Citigroup World Govt’ Bond Index; U.S. Large Cap Equities, S&P 500 Index; U.S. Small Cap Equities, Russell 2000 Index; International Equities, MSCI World Ex-US Index; Private Real Estate, NCREIF; Private Capital, Venture Economics (10 years through 9/30/2007); Emerging Markets Equities, MSCI EMF Index; Distressed Debt, HFRI Distressed Securities Index; Hedge Strategies, HFRI Equity Hedge Index; Commodities, Dow AIG Commodity Index; Public Real Estate, Dow Wilshire REIT Index
• Direct hiring / compensation of managers and consultants Auditor/ Custodian
• Auditor reports to CFO / Audit Committee
• Custodian reports to CIO / Investment Committee
• Provide audit / custody services
• Reporting, fund accounting
• Transfer agent
• Compliance
• Legal counsel
Investment Consultant
• Report to CIO/ Investment Committee
• Educate / inform Investment Committee
• Assist with development and review of investment policy statement and policy portfolio
• Conduct asset allocation studies
• Implement manager search process
• Conduct ongoing manager evaluation and reporting
• Provide Investment Committee with research / analysis
Portfolio Manager
• Report to CIO / Investment Committee
• Conduct investment strategy as contracted
• Provide regular written reports and risk-adjusted performance attribution
• Provide educational materials and economic / market analysis
26
Financial Governance/ Committee Structure
Financial
Investment
Audit
(Governance)
QUESTON: Do our committees operate effectively and efficiently?
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Board Committees
88%
82%
77%
56%
43%
43%
41%
38%
36%
Executive committee
Finance committee
Audit committee
Development/fundraisingcommittee
HR/compesation committtee
Strategic planning committee
Program committee
Governance committee
Investment committee
Note: Data represents responses from 603 not-for-profit organizationsSource: The 2007 Grant Thornton LLP, National Board Governance Survey for Not-for-Profit Organizations
28
Policies
Investment Asset Allocation (policy portfolio) Spending Roles and Responsibilities
Conflict of Interest
Debt
Gifts
Whistleblower
Document retention
Code of Ethics
QUESTON: Are we covered?
29
Governance Policy Changes
Note: Data represents responses from 603 not-for-profit organizationsSource: The 2007 Grant Thornton LLP, National Board Governance Survey for Not-for-Profit Organizations
92%
89%
87%
87%
82%
78%
75%
68%
68%
60%
30%
8%
11%
13%
13%
18%
22%
25%
32%
32%
40%
70%
Implemented accounting policies/ procedures
Adopted conflict-of-interest policy
Rivised investment policy
Created new governance policies
Established audit committee
Updated record-retention policy
Established cod-of-ethics policy
Updated gift-acceptance policy
Established wistle-blower policy
Developed audit committee charter
Established policy for board members to review Form 990/ 990-T
Have Adopted Have NOT Adopted
30
Asset Management
Cash
Endowment/ Long term funds Benchmarks Study Topline Leaders
Plant/ Campus
Human Resources
QUESTON: Are we staying ahead of spending + inflation + costs?
31
Commonfund Investment Management & Governance Seminars (3 per Year)
Commonfund Trustee Roundtable Series (Twice monthly on average)(Also in Canada and Puerto Rico)
Commonfund Benchmarks Study® Series Endowment Institute Regional Roundtables and Seminars Publications and White Papers Treasury Institute for Higher Education Higher Education Price Index (HEPI) Commonfund Xchange Teleconferences
Education and Best PracticesA Commitment to Professional Development and the Sharing of Best Practices
32
Total Return by Segment
NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations.All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations.All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
34
Asset Allocation Trends Alternatives – Marketable Alternatives Continue to Dominate Alternative Strategies
Marketable AlternativesEquity Real EstateEnergy & Natural ResourcesPrivate EquityVenture CapitalDistressed Debt
NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations.All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
35
Spending RateBy Fiscal Year
5.7%5.6%
4.4%4.5%4.6%
4.8%4.9%
5.5%5.5%
6.3%
5.8%
5.5%
5.1%
5.5%
2.0%
4.5%
7.0%
FY 2003 FY 2004 FY 2005 FY 2006 FY 2007
Sp
en
din
g R
ate
(%
)
Education
Foundations
Operating Charities
NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations.All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
NOTE: Fiscal year end for the majority of Educational Institutions is June 30th. For the Foundations, Operating Charities and Healthcare sectors fiscal year end is typically December 31st. Copyright 2008 The Common Fund for Nonprofit Organizations.All rights reserved. "Commonfund" and "Commonfund Benchmarks Study" are trademarks of The Common Fund for Nonprofit Organizations. No part of this material may be used without the express written permission of The Common Fund for Nonprofit Organizations.
37
Development
Annual Giving
Capital Gifts Endowment (Restricted/ Unrestricted) Construction/ Renovation
Planned Gifts
QUESTON: Are we staying ahead of spending + inflation + costs?
38
Debt Management
Capital needs plan
Debt service
Hedging risk of rate volatility
QUESTON: What is our risk exposure?
39
Legal/ Regulatory
3 Duties Care Loyalty Responsibility
IRS Form-990UPMIFAFederalState
QUESTON: What is our risk exposure?
40
“The Trustees of an endowment institution are the guardians of the future against the claims of
the present. Their task is to preserve equity among
generations.”
James Tobin – Yale University
41
Duty of Care
To act reasonably and in an informed manner when making decisions
Follow the “prudent man” rule
Attend meetings
Show independent judgement
Know your organization
Rely on trustworthy sources
42
Duty of Loyalty
Trustees must give undivided allegiance to the institution when making decisions affecting the organization
Personal interests (family or associated business interests) should be subordinate to the interests of the organization
Avoid conflicts of interest Develop a written policy Disclose and record all relationships Be aware that perception can equal reality
Review ambiguous situations at Board level
43
Duty of Responsibility
Ensure that the organization remains faithful to its central purpose as expressed in its mission statement and by-laws
Make certain that all those in authority are acting in concert and in the best interest of the organization
44
Summary
Take an all encompassing approach to developing a financial plan
Review your governance structure
Recruit the best talent available
Develop written policies and review regularly
Control costs
Diversify your revenue streams
Diversify your portfolio
Keep an eye on regulatory environment
APPENDIX
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UPMIFA Highlights
Investment freedom. Portfolio managers are not limited in the kinds of assets that may be sought for the portfolio. (Broader than UMIFA)
Costs. Costs must be managed prudently in relationship to the assets, the purposes of the institution and the skills available to the institution. (Not addressed in UMIFA)
Expenditure of funds. Total return expenditure is expressly authorized under comprehensive prudent standards relating to the whole economics situation of the charitable institution. (UMIFA does not address this standard)
UPMIFA abolishes the historic dollar value limitation on expenditure in UMIFA.
Seven percent rule. States may adopt an optional rule that presumes expenditure exceeding 7% of total return is imprudent. (Not addressed in UMIFA)
Release of restrictions for small institutional funds. These is a new procedure for releasing restrictions on small institutional funds (less than $25,000) held for a long period of time (20 years), requiring only notice to the Attorney General 60 days in advance of the release. (Not addressed in UMIFA)
Application. UPMIFA applies to funds held in any form, including nonprofit corporate form, except charitable trusts, with a commercial or individual trustee. (UMIFA applies only to endowments held by a charitable institution for its own account)
Margin of Excellence – The New Work of Higher Education Foundations, Edited by Rick D. Legon, AGB 2005
Stragegicfinance, Planning and Budgeting for Boards, Chief Executives, and Finance Officers, by Kent John Chabotar AGB 2006
2005 NACUBO Endowment Survey. NACUBO, 2005.
An Unconventional Approach to Institutional Investing, David F. Swensen. The Free Press, 2000.
Asset Allocation: A Handbook of Portfolio Policies, Strategies, and Tactics. Robert Arnott and Frank J. Fabozzi, eds., Probus Publishing Co., 1988.
The Asset Allocation Debate: All About Alpha. Commonfund Institute, Monograph Series, 2005.
The Challenges of Investing for Endowment Funds. Cathryn E. Kittell, ed., Institute of Chartered Financial Analysts, 1987.
Classics: An Investor’s Anthology. Charles D. Ellis and James R. Vertin, eds., Dow-Jones Irwin, 1989.
Commonfund Benchmarks Study Commonfund Institute, Education Report, Foundations Report, Healthcare Report, Revised Annually.
The Complete Guide to Securities Transactions. Wayne H. Wagner, ed., John Wiley & Sons, 1989.
Creating and Using Investment Policies: A Guide for Nonprofit Boards. Robert P. Fry, Jr., Association of Governing Boards of Universities and Colleges, 1997.
Debt Is Not the Issue. Commonfund Institute Whitepaper, 2005.
Dow 36,000: The New Strategy for Profiting from the Coming Rise in the Stock Market. James K. Glassman and Kevin A. Hassett, Times Books, 1999.
Endowment Management. William T. Spitz, Association of Governing Boards of Universities and Colleges, Board Basics Series, 1997.
Endowment Management, A Practical Guide. Jay A. Yoder, Association of Governing Boards of Universities and Colleges, 2004.
Endowment: Perspectives, Policies, & Management. William F. Massy, Association of Governing Boards of Universities and Colleges, 1990.
Endowment-Spending Policies. Stephen T. Golding and Lucy S. G. Momjian, Morgan Stanley Investment Management, 1998.
The Financial Analyst’s Handbook. Sumner N. Levine, ed., 2nd ed., Dow-Jones Irwin, 1988.
Financial Responsibilities of Governing Boards. William S. Reed, Association of Governing Boards of Universities and Colleges, 2001.
48
Bibliography (page 2 of 3)
Fixed Income Portfolio Strategies. Frank J. Fabozzi, Probus Publishing Co., 1988.
Foundation Trusteeship, Service in the Public Interest. John Nasson, Council on Foundations, 1989.
Funds for the Future: College Endowment Management for the 1990s. J. Peter Williamson, The Common Fund in cooperation with Association of Governing Boards of Universities and Colleges, and National Association of College and University Business Officers, 1993.
Governance. Your Board: Dynamic or Dysfunctional? Commonfund Institute, Monograph Series, 2005. Guidebook for Directors of Nonprofit Corporations. George W. Overton and Jeannie Carmedelle Frey, eds., American Bar Association, 2002.
The Handbook on Private Foundations. David F. Freeman, Council on Foundations, 1991.
Hedge Fund and Absolute Return Strategies. Commonfund Institute, Monograph Series, 2005.
How Efficient is Your Frontier? Commonfund Institute Whitepaper, 2003.
How to Write an Investment Policy Statement. Jack Gardner, Marketplace Books, 2003.
Improving the Investment Decision Process: Quantitative Assistance for the Practitioner and for the Firm. H. Russell Fogler and Darwin M. Bayston, Institute of Chartered Financial Analysts, 1984.
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Investing with the Best. Claude N. Rosenberg, John Wiley & Sons, 1986.
The Investment Committee. John H. Biggs, Association of Governing Boards of Universities and Colleges, Board Basics Series, 1997.
Investments. William F. Sharpe and Gordon J. Alexander, 4th ed., Prentice-Hall, 1989.
Investments. Zvi Bodie, Alex Kane and Alan J. Marcus, 4th ed., Richard D. Irwin, Inc., 1999.
Irrational Exuberance. Robert J. Shiller, Princeton University Press, 2000.
The Law and the Lore of Endowment Funds.William L. Cary and Craig B. Bright, The Ford Foundation, 1969.
The Management of Investment Decisions. Donald B. Trone, William Allright, Philip Taylor, Irwin Books, 1996.
Managing Your Investment Manager. 2nd ed., Arthur Williams, III, Dow-Jones Irwin, 1986.
Nonprofit Investment Policies. Robert P. Fry, John Wiley & Sons, 1998.
Performance Expectations and Reality: Smaller vs. Larger Endowments. Commonfund Institute, Monograph Series, 2005.
Performance Presentation Standards. Financial Analysts Federation, adopted as amended by the Committee for Performance Presentation Standards, April 1990.
Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. David F. Swensen, Free Press, 2000.
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Bibliography (page 3 of 3)
Principles of Real Estate Investment. Commonfund, 2000.
Risk Bucketing – Keeping an Eye on What Is Important. Commonfund Institute Whitepaper, 2005.
The Role of Hedge Funds in Nonprofit Investment Management. Commonfund, Revised 2005.
Spending Policy for Educational Endowments. Richard M. Ennis and J. Peter Williamson, The Common Fund, 1976.
The Standards of Measurement and Use for Investment Performance Data. Investment Counsel Association of America, 1988.
Succeed in Private Capital Investing. Commonfund, Revised 2003.
Understanding the Four Levers of Fiduciary Responsibility. Commonfund Institute Whitepaper, 2005.
Why Do We Feel So Poor? Commonfund Institute Whitepaper, Reprinted 2004.
Winning the Loser’s Game: Timeless Strategies for Successful Investing. Charles D. Ellis, McGraw-Hill, 4th Edition 2002.
The Yale Endowment. Yale University Press, 1995. The Yale Endowment, Updates 1996-2004. Yale University Press, 1996-1999.