CEO Adviser: Money, Money, Money

When the renowned New York City Opera filed for bankruptcy protection and closed its doors last year, the reverberations were felt well beyond the art world.

How did a 70-year-old cultural institution with a generous endowment run out of money? The story is not as intriguing as the operas it produced. The City Opera tapped its endowment to fund short-term operating deficits.

Within five years, the $51 million endowment was completely spent, seasons were canceled and the artists were out of work.
It is easy to place blame for the closure on the operas board of trustees. The reality is nonprofit boards all too often operate without a full financial picture of the organization or complete awareness of their fiduciary responsibilities, leading many nonprofits into dire circumstances.

Accountability for a nonprofits investment program rests with the board, so it is imperative that trustees ensure the organizations resources are effectively managed. In my practice as a wealth manager and financial adviser to endowments, I see a number of consistent best practices among financially stable nonprofit organizations. These might serve as guidelines for trustees seeking to evaluate or build the financial health of the organizations they serve.

1. The board agrees on the endowments investment purpose and goals. A clear, realistic and written investment policy exists and covers objectives, asset allocations, guidelines for engagement of outside management and strategy for risk control. All trustees understand their role in the development and implementation of the Investment Policy Statement.

2. A well-staffed investment or finance committee oversees the assets and determines how they are invested. People with the appropriate experience make up the committee, they follow the stated investment policies and they report to the larger board regularly.

3. There is a thoughtful decision whether assets will be managed by the finance committee or through outside advisers. Ethical challenges may arise when assets are managed internally or by a manager with close ties to the organization, so experienced boards account for this with stringent conflict of interest policies.

4. The organization establishes and follows a clear asset allocation strategy. This may encompass guidelines for socially responsible investing and payout considerations for endowments.

5. Realistic long-term performance objectives are set and monitored.

6. The board is provided with regular reporting. Investment manager reports are available quarterly and custodian reports monthly to ensure the board can effectively steward the assets. Additionally, periodic board education on topics relating to aspects of the portfolio helps build the skills and knowledge of the larger board.

7. The organization has clear definitions of investing roles and responsibilities. Relationships are strongest when there is open communication between all parties. The Investment Policy Statement clearly defines the role of the investment committee, the investment manager and the custodian for optimum collaboration as well as checks and balances.
When these best practices are not followed, the opportunity arises for poor financial decision making or, worse, the end of an established institution such as the New York City Opera. Trustees must ask questions and establish plans for change when they notice discrepancies. If necessary, seek counsel from neutral outside experts.

A comprehensive investment plan is critical for any nonprofit to ensure it can continue to serve the community, to ensure the trustees fulfill their obligations and to ensure the organization is fiscally sound. This is true for nonprofits large and small, none of which are immune from the potential downfall of an endowment mismanaged.

Kerry Kozlowski is a managing director and client manager at Bellevue-based Cornerstone Advisors. Reach her at 425.646.7600 or [email protected]. This is the second of two CEO Adviser columns about serving on nonprofit boards. The first appeared in the October issue.