Independent governance within the charity sector

Ask Andy blog series

5 Oct 2020

independent governance

In this blog Andy Waller, Director of Generation Charity Consultancy discusses the key factors Trustees should be mindful of when making charity investments.

Good governance empowers and supports a charity’s compliance with relevant legislation and regulation. It promotes positive attitudes and a culture driven towards fulfilling the charity’s vision. Poor governance within the charity sector can have devastating – and far-reaching – effects, especially when it affects the charity’s investments and financial viability.

Investment approach

As a Trustee, you should always ensure that you record the key decisions regarding the charity’s investment approach in writing. This will allow you to demonstrate that you have considered the relevant issues and asked for the appropriate level of advice in order to provide proof that you have reached a reasonable and justified decision. It is highly unlikely that your decision will be criticised, if you can demonstrate that you sought advice before reaching a considered and reasonable conclusion.

Appreciate the risks

independent governance - risk

Financial investments always include a level of risk. The most important aspect is to fully appreciate and clearly understand level of risk in the context of what it means for the charity.

Lack of understanding of investment risk often proves to be a significant barrier for Trustees; you must be satisfied with the level of risk you consider to be appropriate for the charity and the reasons behind that decision.

Have a clear objective 

To ascertain your investment requirements you need to have clarity on certain points. These include;

  • How is your charity funded?
  • What is the purpose of the money you are investing?
  • What is your ideal time scale?
  • Do your investments need to deliver an income?
  • How much cash may be required in the near future?
  • What future spending plans do you expect?
  • Is there cash available to cover shorter term expenditure?
  • Is the liquidity of your investment important?
  • Is the board tolerant of losses, if so at what level?
  • Could the charity survive without one of its income streams?

There may be correspondence answering at least some of the above questions, but it isn’t uncommon for these elements to be unknown if investments of this nature haven’t been considered before.

Investment policy

To work out the right investment policy you need to first understand your objectives. The objectives will be heavily influenced by the charity’s situation and goals. This is an area which needs careful consideration; things to bear in mind include timescales, income requirements, ethical policy and any investment restrictions.

Investing ethically

Investing ethically is important for charities for numerous reasons. But what is considered ethical or sustainable to one person often isn’t to someone else, so the first step is to iron out these grey areas. There is significant disparity between how fund managers approach ethical investments, which is why professional and impartial advice is crucial.

Trustees wanting to invest ethically must be able to substantiate why it’s in the best interests of the charity. Ethical or Environmental, Social and Governance (ESG) investments may require additional considerations as well.

The choice of investment manager

Investment objectives and requirements will affect your choice of manager. Many charities conduct a tender process, to ensure they consider a variety of options.

You should feel comfortable and at ease with the organisation you choose, after all you are entrusting them with the charity’s assets. You should have confidence that they can accommodate your investment choices.

How to tender

Charities will typically ask investment managers to submit a proposal, before meeting with a select number who will present their proposition. The process usually includes the below stages:

  • Summary of your charity
  • Amount available for investment
  • Investment policy
  • Link to latest report and accounts
  • Deadline for proposal along with key dates for presentations
  • A named point of contact
  • A deadline for any questions
  • How you expect to receive the proposal (email / post etc)
  • Word or page limit for the document

The process of selection is often called a Beauty Parade, but the charity must consider and document how they selected the fund managers to attend the beauty parade. This will often consist of two or three fund managers, so reasons behind why ‘they’ were selected and the 100 + other fund managers ignored, should be considered and documented.

Reflection and time for review

It is common to receive annual reports; you should also expect your manager to meet with your board of Trustees in person or via video at least once each year. Yearly reviews are good, but our quarterly reports allow quicker reaction to any issues with the fund manager and provide the opportunity to review your manager against the agreed objective.

It is important to remember that there will be time periods when the value of your investment portfolio goes down, quarter-on-quarter, or year-on-year. It is important at these times to focus on the objective you set for your manager and to remember the reasons behind your investment; it can be easy to be distracted by focussing too heavily on the short term.

Ongoing, substantial poor performance or poor service are grounds for a formal review. It may seem counter-intuitive, but significant over performance is also a concern, as your manager may be working outside of your risk parameters.

To speak to me in more detail or to ask further questions please do get in touch.

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