Managing funds that are not your own is a big responsibility. There is a significant duty of care as you are tasked with enabling the organisation to fulfil its purpose and longevity and any mismanagement can cause distrust or reputational damage.
It is important to ensure the organisation meets its regulatory and legal obligations. There are processes and paperwork, including Investment Policies, Responsible Investment Charters, and Reserves Policies. These require oversight and they are important to protect the organisation and its governance team. If you are a trustee yourself, it is doubly important to get this right as you take on personal obligations and risks in your role.
Making sure you have finance expertise – and that it is not just with one person
Many of those who are attracted to NFP board roles have a depth of experience in the sector, and this is essential to provide meaningful oversight.
However, often that does not come with much experience in investment management and people can shy away from contributing when that part of the agenda comes up. This can mean sometimes it all falls on the one “finance person” and there is a risk that inexperience – either on the part of that person or the board in totality – can drive decisions.
Inexperience can also mean people get the jitters – especially when returns are volatile. For boards like this, the early days of Covid would have been challenging as we all watched fund balances rapidly fall. The returns in 2022 were poor, but 2023 rallied. So, make sure you have more than one person with long-term investment experience to help the team stay the course.
Managing a bias towards the conservative
It is natural to be cautious when your money comes from hard-earned donations and goes towards improving outcomes for key stakeholders.
That said, growing the capital base of an NFP through investments will be of long-term benefit – but it needs a level of understanding. Board members need to understand why today’s decisions have been made, for the future.
Too often we see that conservative bias manifest itself in putting long-term investment assets into cash and term deposits, which may not generate the best return when you have time on your side. A solid investment strategy (with a suitable split between cash, bonds and shares) is crucial, as is understanding the difference between financial reserves and long-term investments.
Balancing competing demands with limited resources
For NFPs the debate is often on what to spend now versus what to preserve for the longevity of the organisation. Maintaining the strategy can be challenging with changing Trustees, so it can be helpful to consider viewing it in set timeframes.
- Short term: the goal here is a steady, sustainable income (including grants) for the provision of services and operational expenses – plus emergency reserves.
- Medium term: scoping the investment needed for projects to improve lives, spending material levels of capital in the near term, for benefits that might take five years.
- Long term: the need to sustain the organisation intergenerationally.
Short term budgets vs long term goals
Tight budgets are inevitable in the sector, and being reliant on investment outcomes for a 12-month budget can be a risky approach.
For example, an unrealised loss of $100,000 from investments in a year can wipe out the hard work from an operational budget, frustrating the chief executive and board.
Understanding the volatility of short-term investment returns and not allowing this to cloud longer-term goals is a challenge. Setting aside some earnings in the good years provides protection during the volatile times.
Responsible investing
The very nature of charities means they will want to invest responsibly but, charities face higher scrutiny about where they invest.
For example, a charity helping in the care or research into cancer should ensure it has excluded the likes of tobacco investment.
Responsible investing is a rapidly-evolving landscape – the board/trustees must stay abreast of this and ensure there is a robust policy that is reviewed regularly.
A good sense check is the “newspaper test” and for boards to consider the impact of a story on the front page of a newspaper.
We have partnered with social analytics firm ImpactLab to produce the Charitable Sector Insights Report, a first of its kind for NZ, which provides an initial data-driven view of Social Return on Investment (SROI) in the nonprofit sector.
This report helps empower our clients to make informed decisions about social investment via understanding of the social impact of charities and organisations.
Managing money for a charity is not just about preparing the annual financial statements or monitoring returns.
What we have outlined above is far from exhaustive and it considers those organisations fortunate to have financial resources. The amazing work of people in our charitable sector balances so many factors while working with finite resources.
We at Jarden are proud to support many organisations in the pursuit of these challenges.
- Andrew Austin, Director, Wealth Management Adviser.
Jarden Securities Ltd is an NZX firm. A financial advice disclosure statement is available free of charge at https://www.jarden.co.nz/our-services/wealth-management/financial-advice-provider-disclosure-statement/.
Full disclaimer available at: https://www.jarden.co.nz/wealth-sales-and-research-disclaimer
