Set Up For Success: Is Your Investment Committee Really Working?

by David Knowles, Head of Philanthropy & Social Capital, Partner, Koda Capital

Introduction

This paper is the first in a series dedicated to helping trustees, directors and investment committee members of Australian charitable, non-profit and philanthropic organisations (‘non-profits’) think more clearly about some of the common, yet less obvious risks they face as non-profit investors.

Koda’s experience leads us to suggest that good governance is the foundation of successful non-profit investing. Consequently, we begin this series by looking at risks related to investment governance. This is consistent with our advice to clients: before thinking about the kind of returns you want, or the kind of portfolio that will deliver them, look at whether your investment governance framework is fit for purpose – because this framework is the base from which all subsequent decisions will flow.

This paper is designed to help non-profit investors examine their governance arrangements by asking a deceptively simple question that deserves more attention than it often receives: What kind of investment committee do you actually need?

It may sound like a simple question. In practice, it is one of the most consequential a committee can address, whatever its current modus operandi. Non-profit investment committees can and do operate in different ways, play different roles, and take different approaches to their responsibilities. What works well for one organisation may be quite unhelpful elsewhere. What worked at one stage of an organisation’s investment journey may not be appropriate at another. And what suited one group of committee members, may not work at all with different individuals at the helm. So, asking the question and asking it regularly is a matter of good governance.

At Koda, we have worked with non-profit investment committees for many years – large and small, experienced and inexperienced, newly formed and long established. Our Partners are not merely advisers or observers. Many of us serve as volunteers on non-profit investment committees ourselves, bringing the perspective of experienced practitioners who understand the challenges from the inside. That experience has taught us that the committees that function most effectively are invariably those that have been thoughtful and deliberate about the kind of committee they ought to be. Conversely, many of the difficulties we have witnessed stem from a lack of clarity about role, structure and purpose.

This paper is an invitation to reflect on those things. Our aim is to share what we have learned from our advisory work, from our own committee experience, and from studying how some of our most effective investment committees operate, in the hope that it helps committees and boards make more deliberate and better-informed choices about how they work. We hope it prompts useful reflection and acts as a prompt for an honest and open conversation about how your committee operates and whether that approach is still serving your organisation as well as it should.

For the sake of simplicity, we use the term ‘investment committee’ as an umbrella term throughout this paper. The considerations we discuss will also be relevant to ‘finance’, ‘finance & risk’, and ‘finance, audit and risk’ committees charged with the responsibility of overseeing investments.

What Kind of Committee Do You Need?

Paul Heath, Koda’s Founding CEO and a highly experienced non-profit investment committee member in a personal capacity, puts it like this:

What sort of a committee are you going to be? Are you going to be a committee that manages the money, a committee that manages an outsourced adviser or a committee that delegates full responsibility to a portfolio manager? The roles are fundamentally different.

Paul Heath

Role choice is the first and most fundamental choice for most committees. At one end of the spectrum sits the committee that takes a direct, hands-on role in investment management: devising mandates, making active allocation decisions, selecting individual strategies and implementing their own decisions. At the other end sits the committee whose role is limited to governance and oversight: setting policy parameters and delegating portfolio management to an external adviser or manager who manages the portfolio on a discretionary basis, within set policy limits.

Fig.1 Three Distinct Roles Assumed by Investment Committees

N.B. In all scenarios, accountability remains with the Committee. Responsibility can be delegated, not abrogated.

No approach is inherently superior, but they are genuinely different. And making the right choice is a fundamentally important task for all non-profit investors. The three broad roles that sit along this spectrum carry different advantages and different trade-offs. The table below expands on Fig. 1 above to highlight some of the considerations involved.

While no one approach suits all situations, Paul Heath identifies a common issue that committees fall into when they want to exercise a high degree of control: that of wanting to be hands-on and interventionist, while typically meeting on a quarterly basis. The problem is obvious. Market crises do not wait for quarterly meetings and volunteer committees are not built for speed. As Stephen Fitzgerald AO, former CEO and Chairman of Goldman Sachs Australia and New Zealand, and a former Guardian of Australia’s Sovereign Wealth Fund, observed in conversation with Koda:

You can’t manage money by a committee, and you can’t manage money part time. It’s a full-time job. So you need to be clear on what you’re not going to do as much as what you’re going to do.

Stephen Fitzgerald AO

This matters in a risk context because a committee that overestimates its ability to act as a portfolio manager –without, perhaps, the skills, time, or infrastructure to do so – is a committee that creates risk rather than managing it. It may miss important decisions or make them too slowly. It may lack the professional, dispassionate discipline to maintain a well-considered investment strategy under real pressure. And it may create accountability gaps that only become apparent when things go wrong.

The Importance of Composition

The type of committee you opt for should shape the people and skills you recruit to it. This is a point that both Paul Heath and Stephen Fitzgerald emphasise, and it is an area where non-profits can easily get things wrong.

Over the last decade and a half, the non-profit sector has seen a general shift in the way portfolios are overseen. While boards maintain ultimate governance responsibility, the sector has moved away from finance committees populated by board members overseeing investments, to dedicated investment committees heavily populated by banking and investment professionals overseeing investments. This ‘professionalisation’ of committee work now sees industry veterans sitting alongside board members, who often defer to the latter’s experience, particularly when the former have little or no professional investing experience of their own. This deference and expectation can create its own risk.

Experienced industry professionals add a huge amount to their investment committees. That said, non-profits should be aware that it is not reasonable to expect one individual who has had a successful career in one area of finance (say, banking or stockbroking) to be an expert in all aspects of portfolio management, let alone the nuanced world of non-profit portfolio management. This is, unfortunately, an assumption made quite frequently on the part of recruiting non-profits – and would-be recruits. The skills required to be an effective committee member are not the same as the skills required to be an effective investment professional. Governance is different to practice, and is a skill unto itself. Non-profits should be alert to these issues, for their sake and the sake of those they seek to recruit as volunteers.

The fact that you have a long- and well-established track record in investment markets doesn’t necessarily make you a good committee member. A good committee member has to be prepared to listen, to work towards getting consensus in a group setting.

Paul Heath

If a committee’s primary role is oversight and governance then among the most valuable people around the table will be a person with strong governance credentials who genuinely enjoys working through investment policy frameworks in a group setting. Equally, there is a real need to involve people who truly care about the organisation’s mission and who understand the context in which investment decisions are made. Good committee members do not operate in an investing vacuum, apart from their non-profit, but with interest in its work, understanding of what is happening within it and a clear grasp of its broader financial position.

Overall, committee composition should ideally encompass a wide variety of experiences and perspectives, reflect the role the committee will play, and allow complementary personalities working with complementary skill sets to form an effective group. Getting clear on the order: first deciding what kind of committee you need, then building the right team around that decision and, finally, deciding what policies and strategies to adopt, is one of the most important things a committee chair or board can do for their organisation.

Finally, when thinking about composition and participation in meetings, committee chairs should think carefully about when to bring in executives, advisers and other subject matter experts. Done well, allowing CFOs and other executives to participate will create an effective connection and two-way communication channel with leadership and the wider organisation, while advisers and external experts will, by invitation, provide information and perspectives of value to the committee, the board and the wider organisation.

Keeping Pace With Change

It is worth acknowledging that the ‘right’ committee set-up often changes over time. An organisation at the beginning of its investment journey – perhaps managing a modest portfolio for the first time, without established relationships with professional advisers or a developed investment policy framework – may need a committee that is more directly involved in day-to-day investment decisions than one used to managing a mature, well-governed endowment with a trusted external adviser relationship in place.

As an organisation grows, as its investment portfolio becomes more sophisticated, and its governance frameworks mature, the role of its committee will also evolve. A committee that was right for an organisation five years ago may no longer work today. Regularly revisiting the question – ‘What kind of committee do we actually need?’ – is a healthy and important practice.

Getting the right mix of people around the committee table, building trust, creating the time and the space to have the critical conversations – I think those things are vitally important

Paul Heath

Foundations of an Effective Committee

Having looked at different approaches, considered the importance of composition and flagged the need to evolve, we now look at some of the key building blocks that set an investment committee up for success.

Certain foundation stones support all investment committees that function well. These foundations are not bureaucratic formalities. They are the practical tools that allow a committee to operate successfully, with discipline and clarity, and to manage risk in the fullest sense of the word.

Clarity of Purpose

Before a committee can operate effectively, it must be clear about what the money is for. This sounds obvious. In practice, it is a question that many committees never fully answer. Failure to arrive at a point where everyone involved is clear and certain often results in confusion, contradiction and the adoption of inappropriate investment strategies – in other words, poor investment outcomes and a poor experience for all involved.

Paul Heath makes the point that clarity must flow from the organisation’s mission:

The first question I think is vital for you to answer is: what is the purpose of the money? And are we aligned with the organisation’s mission? If not, I would argue that you are letting down the organisation.

Paul Heath

What the money is for can differ profoundly from one organisation to the next, and the ‘right’ portfolio will look very different depending on the answer. A charity raising funds to construct a building faces a finite, near-term obligation. Its priority is to protect that capital and have it available, in full, when it is needed. A scholarship fund, by contrast, exists to meet a recurring and growing commitment – one that tends to rise faster than inflation – and so must earn returns above the rate at which education costs increase, simply to preserve what it offers. An organisation holding reserve assets it is unlikely to draw on for several years may be doing its mission a quiet disservice by leaving that capital in cash and foregoing returns it could be putting to work. And a true, perpetual endowment, charged with supporting its beneficiaries in every year to come, must design a portfolio that balances the needs of today’s beneficiaries with those of others not yet born.

Matching portfolio construction to the genuine purpose(s) of the money is a fundamental risk management task, and one that sits squarely within the investment committee’s domain.

Clarity of Mandate

Clarity of purpose is only the starting point. That purpose must then be translated into something precise enough to invest against – a defined objective, clear benchmarks, and measurable targets – so that everyone understands what success looks like and the portfolio can be built and assessed accordingly. Stephen Fitzgerald points to the Australian Sovereign Wealth Fund’s historic approach as a model for the kind of mandate clarity that allows effective governance:

It’s very important to know what your mandate is, what your benchmark is, what you’re trying to achieve; be very clear and make sure everyone’s aligned around that.”

Stephen Fitzgerald AO

In the absence of well-defined objectives and benchmarks, the risk is that each member quietly assumes their own and portfolio management thinking becomes the subject of competing instincts that are never reconciled. A clear mandate resolves this in obvious ways. It converts a group of individuals with different ideas and beliefs into a committee that can apply a single reference point to every decision and every assessment. With one, clearly-defined mandate in writing, a committee can distinguish a poor outcome from a poor decision, hold advisers to account, resist the pull of short-term noise and challenge the loudest voice in the room. Clarity of mandate is key to ensuring good governance trumps individual influence.

A Committee Charter

Before turning to the question of investment strategy, a committee needs to be clear about how it is itself constituted and authorised to act. A Committee Charter is the document that sets this out. It defines a committee’s role and purpose, the powers delegated to it and the limits of those powers, the duties of its members, its composition and reporting lines, how often it meets, and how it makes decisions. In short, it captures a committee’s modus operandi.

Understood this way, a Charter is the natural place to record the deliberate choices discussed earlier in this paper – not least the kind of committee the organisation has decided it needs, and the division of responsibility that exists between the board, the committee, the executive and any external adviser or manager. It is also where the obligations of committee service belong: the commitment to mission, the fiduciary duty to act in the organisation’s best interests, the disclosure and management of conflicts of interest, and sensible arrangements for member tenure and renewal, so that the committee refreshes itself over time without losing institutional memory.

Some organisations maintain a standalone Charter; others incorporate a Charter’s key elements into their Investment Policy Statement. Either approach can work, and the right choice will depend on the organisation. What matters is that the decisions are made consciously and then documented. A committee that has never documented its role, powers and duties is, in practice, relying on unspoken assumptions – and unspoken assumptions have a habit of diverging at exactly the moment clarity matters most.

An Investment Policy Statement

An Investment Policy Statement (IPS) is the centrepiece of any well-designed investment governance framework. It sets out the objectives, constraints, asset allocation parameters, risk tolerances, and governance arrangements that guide investment decisions. All committees should have one and most do. However, not all use theirs as well as they might. Many make the mistake of relegating it to a hygiene factor – a formality that once dealt with can be put away, left to gather dust in a digital filing cabinet. An IPS is, however, a powerful tool for ongoing governance. Used well, it serves as a rulebook, a compass, a stabiliser, a safety net and a basis for effective and consistent communication.

At Koda, we use an aeronautical analogy to illustrate the point. An experienced pilot, regardless of how skilful and how many hours they have flown, still works meticulously through a pre-flight checklist before every take-off. Not because they don’t know how to fly the plane, but because the discipline of the checklist is itself a form of risk management. It ensures nothing is overlooked, and it reminds everyone in the cockpit that they are following a process, not just acting on instinct. An IPS is a committee’s checklist. It is not a document to be drafted once and filed away. It is the guiding framework against which decisions are tested and the blueprint to which the committee returns when markets become uncomfortable and the urge to deviate grows strong.

Stephen Fitzgerald speaks to this point directly. He points out that the costliest mistakes committees make are not usually acts of recklessness. They are acts of panic. When performance disappoints or markets fall, committees may abandon carefully considered mandates and asset allocations at exactly the wrong time. The remedy is not emotional control alone. It is the structural discipline of a well-articulated investment policy, reinforced through regular communication and a shared commitment to the process.

The Right Kind of Meeting

Investment committee meetings can easily become consumed by performance reviews, market updates, and procedural reporting. These things matter. However, there is a clear distinction between the technical agenda and the more important work that committees sometimes crowd out in favour of it.

A good investment committee creates the time and space to address fundamental questions: Is our portfolio still aligned with the purpose of the money? Is our investment policy still fit for purpose? Are we the right committee for where our organisation is now? Are our stakeholders – the board, the executive, donors, and the communities we serve – properly informed about what we are doing and why?

These conversations cannot be rushed. They require preparation, time, trust among committee members, and a chair who is genuinely committed to creating the conditions for them to happen.

Stakeholder Communication

One of the more underappreciated risks in non-profit investment governance is poor stakeholder communication. The moment a committee begins talking to its stakeholders should not be when performance drops well short of expectations. That is a crisis management exercise. The moment to begin is well before anything goes wrong.

Every investment portfolio will, at some point, deliver negative returns or disappointing outcomes. That is the nature of investing. Committees that have communicated clearly and consistently with their boards, executives, donors and communities in advance and at regular intervals are far better placed to maintain their support and confidence through difficult periods. Committees that have not are more exposed. In the course of our work, we witnessed how, in the wake of events like the Global Financial Crisis and COVID-19, robust policies and consistent communication helped protect organisations and committees alike.

At Koda, we encounter committees that prioritise stakeholder communication, committees that don’t and committees that see it as unhelpful. While different approaches are definitely required in different settings, on balance, we believe almost all committees will be glad they paid attention to keeping stakeholders informed if they ever encounter a problem with their investment program down the line.

Best Practice: What Sets Good Committees Apart

Over many years of working with non-profit investment committees, and through our own experience serving on such committees as volunteers, Koda’s Partners have had the opportunity to observe what effective governance looks like in practice. The committees that function best are not necessarily the most sophisticated or the ones managing the most money; they are the ones that have turned good intentions into consistent habits. While every committee is different, the most effective tend to share several traits and behaviours.

• They see themselves as prudent stewards. They treat the careful stewardship of capital as their first duty. Most are temperamentally cautious – valuing capital preservation, reliable income and liquidity – while pursuing any growth their organisation needs, via steady, durable returns rather than speculative gains.
• They align capital with mission, and are open about it. Strong committees align invested capital with their organisation’s purpose and values – and where applicable, with any legal and ethical duties the organisation owes the people and/or entities that provided the funds being invested. They are confident and transparent about their approach; sharing their thinking and their policy positions openly with the boards, donors and communities to whom they are accountable.
• They manage risk deliberately and quantify it precisely. Risk is not left to vague comfort levels. It is consciously set, clearly defined and, wherever possible, specifically quantified. It is then managed through genuine diversification, with real attention paid to how individual assets and asset classes move in relation to one another, and, where appropriate, capital-protection measures such as defensive cushions, low-volatility strategies or drawdown guidelines.
• They keep a very close eye on liquidity. They maintain adequate liquidity at all times, with levels accurately matched to the organisation’s current financial position and likely cashflow needs, based on well-considered best and worst case scenarios.
• They invest in their own learning. Effective committees are humble and diligent. They commit to ongoing education in investing, portfolio management and governance, treat no question as too stupid to ask, and foster a culture in which probing questions are welcomed rather than resented.
• They treat portfolio adjustments as routine, not reactive. Rebalancing and other changes flow from the discipline of an agreed framework and are made calmly, as a matter of process, rather than reactively under the pressure of short-term market movements.
• They run themselves well. Behind the investment work sits sound governance and housekeeping: clearly defined delegations, well-prepared agendas, decisions that are documented with clear owners, careful management of conflicts of interest, and sensible member tenure and recruiting policies.
• They review the portfolio – and themselves. They review strategy, policy and performance on a regular cycle, and they apply the same scrutiny to their own effectiveness, periodically asking whether the committee’s role, composition, and modus operandi still support the task at hand.
• They invest in their own learning. Effective committees are humble and diligent. They commit to ongoing education in investing, portfolio management and governance, treat no question as too stupid to ask, and foster a culture in which probing questions are welcomed rather than resented.
• They hold their advisers to account. They engage with their advisers regularly, constructively and inquisitively – drawing fully on professional expertise while testing the advice they receive, rather than assuming the right questions have already been asked.

Conclusion

The first question we posed in this paper, ‘What kind of investment committee do you actually need?’ is a simple question. It is also a profound and persistent question for all non-profit investors. In Koda’s experience, committees that have fully answered it – and that revisit their answer as their organisations, committee memberships and finances evolve – consistently function well and deliver the best outcomes.

They function well because their members understand their role, what they do and do not do and what their organisation and its beneficiaries need from them. They function well because they are all on the same page. They function well because their governance frameworks give them the discipline to hold to a sound investment approach when conditions are testing and the temptation to deviate is strong. They function well because their stakeholders trust them, not because everything has always gone perfectly, but because they have communicated openly throughout. And finally, they function well because being on the committee is a genuinely productive and rewarding experience for the people involved.

None of this requires financial scale or uncommon sophistication. Rather, it requires clarity, honesty, rigour and commitment, and the willingness to have conversations that might be hard, but which are, ultimately, essential.

The risks of ignoring the question, making assumptions or getting it wrong are real. The cost may be experienced in high turnover, financial loss or reputational damage. A committee that is unclear about its role creates governance risk. A committee that is not aligned on its mandate is likely to make some poor investment decisions. A committee whose composition does not match its role or the needs of its non-profit is likely to experience difficulty at all levels. These are not theoretical risks. They are the source of many of the difficulties that Koda has witnessed in the non-profit investment committees we have observed over many years.

The aim of this paper has been to help those working on boards and investment committees understand that they have choices, and that the choices they make about how to operate can make an enormous difference to investment outcomes, to governance quality, and to the experience of every person involved. There is no universal right answer. The right answer depends on your organisation, your committee, your circumstances, and the moment in your organisation’s investment journey that you find yourself in.

What matters is being deliberate about it.

Self-Reflection Questions

• Does your committee define its role with explicit reference to your organisation’s stated mission and clear agreement on the purpose for which funds are invested?
• Has your committee ever had an explicit conversation about what its modus operandi should be – and does everyone around the table share a common understanding of the answer?
• Is the composition of your committee genuinely aligned with its function, or has membership been assembled on the basis of professional status and relationships?
• Does your committee have an Investment Policy Statement that is regularly reviewed, genuinely used, and shared with relevant stakeholders?
• Does your investment approach comply with relevant regulatory/statutory requirements, applicable funder-related obligations and the terms of your non-profit’s own constitution?
• Does your committee create sufficient time and space for the important strategic conversations, or is your agenda dominated by portfolio-level discussions?

Download the report here.