Investment Policies for Nonprofits

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The board of directors of a nonprofit has a fiduciary responsibility to protect the assets of the nonprofit and ensure that the nonprofit's operations and activities use the assets to further the nonprofit’s mission. A prudent way to serve as fiduciaries of a nonprofit's assets may be to invest the nonprofit’s cash in investment vehicles, such as stocks and bonds, and other financial investments.

However, any investment carries a certain amount of risk. Being prudent means taking into consideration that investments usually take time to grow, but investing 100 percent of a nonprofit's cash in a long-term investment won't allow the nonprofit access to cash, if needed in the short term. Before your nonprofit invests its nest egg in the stock market, develop a sound approach to investing assets by defining the nonprofit’s objectives for investing, identifying the nonprofit’s risk tolerance, and adopting an investment policy. The board could also delegate day-to-day responsibility for the nonprofit's investments (while retaining oversight responsibility) to a committee, an outside professional fund manager, or accept responsibility itself, as a full board, for monitoring and managing the performance of invested funds/assets. (Ownership of real property, such as a building used by the nonprofit, is also considered part of an "investment" portfolio.)

Practice Pointers

There are three potentially competing interests for any funds that a nonprofit invests: (1) protecting the value of the initial invested assets; (2) growing those assets to increase their value; and (3) maintaining access to the assets, in the event the nonprofit needs to tap into the investments for cashflow needs. Some investments may also be restricted as "endowed" funds - not to be used for short term cash flow needs.  An investment policy can address all of these issues, as well as define who is accountable for investment-related activities. Investment policies may also address the nonprofit's commitment to socially responsible investments, spending policy, cash thresholds, and asset allocation.

Of course, there is almost always a risk that any particular investment will not grow at all, but in fact lose value. To mitigate such risks, many nonprofits consider the need for diversity of investment vehicles, and many hire professional investment managers to monitor market values and benchmarks, provide advice, and carry out the actual trades/purchases/sales of investment vehicles.

Providing oversight for all of a nonprofit's assets, including those that are invested, is a basic fiduciary responsibility of the board of directors of any charitable nonprofit. Fiduciary oversight doesn't necessarily mean that the board handles the day-to-day investments, however. In fact, many board members prefer to engage professionals for investment management. The full board may delegate the authority to oversee the nonprofit’s investment portfolio to an “investment committee” and /or the nonprofit may hire a professional investment advisor/manager. However, the full board retains overall responsibility for the assets.

Evaluating the performance of the invested portfolio and the investment manager’s performance are also the responsibilities of the board of directors (or the board may delegate this authority to an "investment committee" of the board). The fiduciary responsibility for oversight of the nonprofit's assets may require re-directing investments that are not performing well, but generally the role of the board is to authorize the risk profile and asset allocation; re-evaluate the goals and performance of investments in conjunction with potential shifts in goals and needs of the organization; and authorize/evaluate the day-to-day management of investments.

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