Want to become a nonprofit board member? Here is what to consider as a fiduciary for endowments and foundations

In the commentary below, Fidelity’s Erika Murphy, Ian Johnson, and Jennifer Bahus discuss some key considerations for board members at endowments and foundations, and the critical role they play in decision-making and investing. There are some best practices that nonprofit board members might consider:

Roles and responsibilities of board members

Leadership is crucial for any organization. A nonprofit organization has a board of directors or trustees to ensure proper governance of the organization and to provide guidance and support of the nonprofit mission. Therefore, a board can be a tremendous resource for an organization.

The key responsibilities of nonprofit boards include advocacy, fundraising, strategic planning, hiring, and the oversight of executive leadership. What is sometimes less understood is that board members must abide by financial and legal duties of care, loyalty, and obedience. In most cases, board members are also expected to strengthen the organization by providing direct financial support.

No two boards are exactly alike, just like no two institutions are exactly alike. To ensure board members are properly engaged, educated, and aligned on their responsibilities, boards should offer onboarding training, ongoing education as well as networking events to facilitate peer-to-peer learning. We also recommend that boards annually review strategic goals against existing board member skill sets. This practice may help to identify skill set gaps and can help catalyze board and staff recruiting strategies.

A focus on fiduciary responsibilities of board members

All board members should understand the nonprofit’s budget, spending needs, and overall investment strategy and risks. However, not all board members need to be deeply involved in investment oversight. We often see boards formalize an investment subcommittee, which is responsible to formally establish and oversee the organization’s investment policy and investments. The investment committees often draw on their own experience or that of a consultant or outsourced chief investment officer (OCIO) to help translate the nonprofit’s strategic goals into well-articulated risk and return objectives, spending policies, as well as other preferences and constraints related to liquidity, time horizon, use of alternatives, and desire to incorporate mission-aligned investments in their portfolio.

Importantly, to ensure board members are fulfilling their duties of care and loyalty, we recommend that board members develop and adhere to a code of conduct and disclose any conflicts or potential conflicts of interest. In fact, some states require that nonprofits have policies in place to guard against conflicts of interest.

Best practices in investment oversight

We strongly recommend that all nonprofits have an investment policy statement (IPS) because this is a critical governance document to ensure the investment portfolio is properly aligned with the organization’s strategic goals. The IPS articulates long-term return objectives, spending policy, and the organization’s tolerance for risk and liquidity needs. This framework guides the portfolio’s strategic asset allocation, as well as any investment restrictions and constraints.

Investment committees are responsible for developing and documenting an IPS, which should be reviewed annually by investment committees and boards to ensure the return and risk objectives and constraints are still aligned with the organization’s strategic goals.

Investment committees are also charged with implementing the IPS, which includes hiring and firing of portfolio managers, consultants, or OCIOs. In making these hiring and firing decisions, investment committees should consider their own expertise as well as potential conflicts of interest. Boards and committee members should only make decisions that are in the best interest of the nonprofit—not in the best interest of board members (or any related for-profit entity). If investment committees need to manage conflicts, lack adequate time and resources, or if they lack asset allocation and manager selection experience, they may wish to consider hiring a consultant or OCIO to fulfill their fiduciary duties.

If committees choose to solicit advice or outsource these investment responsibilities, we recommend they commit time to regularly review these services, investment performance, and positioning (usually quarterly or semi-annually) to ensure portfolio investments are aligned with the IPS. A best practice is to issue a Request for Proposal (RFP) every 3–5 years to ensure the committee is conducting a thorough search before hiring these services.

Succession plans and diverse boards

For many nonprofits, succession planning is often overlooked or put off. It might be uncomfortable for senior leaders to contemplate their departure, but many funders expect to see solid succession plans that ensure the long-term sustainability of the organization. This applies to both staff and board leadership. A thoughtful, intentional succession plan builds confidence in the organization and can serve as a major step toward continued stability.

A board should be comprised of well-connected professionals, passionate advocates, and experts in relevant fields. It’s also important to have representation from the community or constituents the organization serves. A diverse and well-run board ensures that a nonprofit organization has a broad slate of expertise and connections to draw on no matter the circumstance.