Board members hidden fiduciary risk the investment policy statement

“California Attorney General sued directors and officers of Monterey County AIDS Project…Settlement created $1M fund plus barred 16 former officers and directors from serving as a fiduciary of any California charity for at least 5 years.”

This headline is from the Office of the Attorney General, State of California.

Unfortunately, these types of headlines are becoming far too common for the officers and directors of many not-for-profit organizations. In many cases, board members graciously donate their time and effort to furthering the cause of their chosen charitable organization; the last thing on their minds is becoming involved in a nasty lawsuit or related litigation.

Even more surprising to many board members is that their personal net worth may become subject to risk if they are not fulfilling their fiduciary duty, just as if they were a board member of a publicly-held company.

One example of a board not fulfilling its fiduciary responsibility is with respect to improper execution, adherence, review, and modification of the organization’s Investment Policy Statement (IPS). This simple breach of duty may expose board members to personal liability risk. Donors, beneficiaries, insiders, outsiders, the entity itself, the State Attorney General, and others are potential claimants in a suit against directors and board members.

Do these risks mean that you need to turn down all your board positions? Of course not.

However, you do need to follow and comply with best practices to protect yourself from liability.

First, board members must operate in harmony with well-established case law, which spells out their fiduciary duties. These include making decisions solely in the best interests of the organization, with the appropriate care of a prudent person, and free of conflicts of interest. Second, board members are required to act in accordance with the Uniform Prudent Management of Institutional Funds Act (UPMIFA) or similar state act (Pennsylvania Act 141). These acts provide guidance and authority to charitable organizations concerning the management, investment, and spending of the organization’s funds.

Here are a few tips and items that should be addressed in your investment policy statement:

  • Determine spending policies. Document and have controls for appropriations and the handling of funds. Make sure the spending level outlined in the policy can be maintained in perpetuity and will not “spend out” the endowment in a few years.
  • Be very clear with respect to the objectives and related financial goals, attitudes, and expectations.
  • Create a prudent diversified portfolio in accordance with UPMIFA or Act 141 standards. Stick to the allocations in your IPS. If objectives and guidelines change, they need to be modified in writing in a timely way. Make sure you change the guidelines before your new investments are made into different asset allocation classes or weightings. Have a method of disposing of inappropriate assets (assets that do not fit in your IPS).
  • Understand the true costs of your investments and determine if they are appropriate.
  • Use third-party experts to help periodically analyze your procedures and IPS. These experts should have an unbiased point of view and be able to suggest necessary changes to the board.
  • While you can delegate activities to consultants and money managers, you should remember that the board has the ultimate fiduciary duty and decision making authority. Make sure the board monitors all service providers on a regular basis.
  • Lastly, avoid conflict of interest. The consultant reviewing the investment policy should not be the investment manager, your best friend, a fellow Board member, or an acquaintance performing a favor for the charity.

Staying in compliance with UPMIFA or PA Act 141 is an on-going regular process, not a one-time event. Organizations, board members, and goals can change, so it is important that policies and documents are monitored periodically. Following best practices and basic and well-documented review procedures will reduce the personal liability risk for all Board members and officers.

Maxine G. Romano can be reached at Email or 215.441.4600.

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