Wearing the Right Hat: How to Think Like Your Non-Profit

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

Introduction

This paper is the second 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. It looks at a common and equally consequential challenge: the risk of ‘wearing the wrong hat’ when deciding how to invest money that is not yours.

Most people who serve on non-profit investment committees bring with them a wealth of experience. They have managed their own investments, sat on the boards of other organisations, run businesses, and navigated complex financial decisions over many years. That experience is genuinely valuable. It is often the reason they were invited to serve. But, and it is an important but, experience accumulated in one context does not automatically translate to another. Some of the most consequential mistakes arise not from ignorance or negligence, but from the unconscious application of assumptions and beliefs that, while entirely appropriate elsewhere, prove subtly and sometimes profoundly inappropriate in another setting.

This is what we call wearing the wrong hat. It is one of the most pervasive challenges in non-profit investment governance and one of the least discussed. It manifests when a trustee evaluates an investment through the lens of their personal portfolio, when a committee member applies the conservative logic of an approaching retirement to an endowment that is intended to exist in perpetuity, or when a business executive instinctively reaches for commercial frameworks to assess decisions that should be guided by mission, as well as margin. In each case, the individual is applying expertise. The problem is that the expertise relates to a materially different context.

This paper does not suggest that personal experience is irrelevant, or that people serving on non-profit committees should set aside everything they know. It argues for something more nuanced; that effective stewardship of non-profit assets requires a conscious, deliberate effort to understand the organisation being served – its mission, its legal and constitutional obligations, its investment horizon, its cash flow needs, its beneficiaries and its stakeholders – and to let that understanding, rather than simply prior experiences or habit, guide the decisions made on its behalf.

We hope this paper prompts useful reflection and, where needed, a more considered conversation about what genuinely effective stewardship of non-profit assets requires. Wearing the right hat is not simply a matter of good intentions. It is a matter of discipline, self-awareness, and a willingness to subordinate personal habit to organisational need. It is, ultimately, what the role demands.

The Challenge of Perspective

When you accept an invitation to join a non-profit board or investment committee, you bring with you a wealth of experience. You may have successfully managed your own investments for decades. Perhaps you have overseen superannuation fund investments. You may have built and run profitable businesses, managed golf club finances, or served on other charity boards. This experience is hugely valuable and likely one reason you were invited to serve.

But here lies the challenge: the assumptions and solutions that served you well in those other contexts may not translate directly to your work with this organisation. In fact, relying too heavily on them may lead to decisions that feel right but are actually inappropriate for the entity you now serve. And that equals risk.

This is the problem with wearing the wrong hat. It is one of the most common mistakes made by experienced people serving non-profit organisations. In fact, it is, ironically, most prevalent in people with significant experience. And it is particularly insidious because it does not feel like a mistake.

When you apply approaches that have worked for you elsewhere, you are drawing on genuine expertise and knowledge about how to invest successfully. It is natural to do what has worked before. The problem is not with the approach, per se. It is that it may not translate well to another setting without serious adaptation.

The challenge for experienced investors seeking to help non-profits they care about is, therefore, to start with the particular needs and circumstances of the organisation in question and then apply their skillset, rather than the other way around.

The solution begins by acknowledging a simple truth: you are not here to invest like you invest personally, like your superannuation fund invests, like your previous charity invested or how you invested in corporate life. You are here to invest like this organisation should invest, which may be a very different proposition.

We don’t see things as they are, we see them as we are.

Anaïs Nin

Why Non-Profits are Different

Non-profit organisations occupy a unique space in the investment landscape. They are not individuals investing for retirement, nor businesses seeking to maximise profits. They are mission-driven entities established to serve purposes beyond the financial interests of any individual. This fundamental difference has profound implications for how they should be invested. And every non-profit is different.

Consider the question of time horizon. Many charitable endowments and philanthropic foundations are intended to operate in perpetuity. Not for ten years, not until you retire, but forever. The decisions you make today about asset allocation may affect beneficiaries who have not yet been born. This radically different time horizon should logically lead to radically different investment thinking, yet many non-profit investors still default to thinking shaped by their much shorter personal, business or superannuation time horizons.

Or consider the question of spending patterns. Unlike superannuation, where you draw down capital to fund living expenses in retirement, many endowments aim to maintain capital in perpetuity while distributing only income or a sustainable spending rate. The mathematical implications of these different models are significant. An approach optimised for accumulation followed by depletion may be entirely inappropriate for perpetual capital preservation with ongoing distributions. Likewise, a non-profit with varying and unpredictable income needs requires a bespoke portfolio management approach.

Tax treatment provides another point of differentiation. Most Australian non-profits are exempt from income tax and capital gains tax, and most charities can access franking credit refunds. This creates opportunities and considerations that simply do not exist in other investing contexts.

Perhaps most fundamentally, non-profits often operate under specific legal and constitutional constraints. A testamentary trust established under someone’s Will may have explicit restrictions on how capital can be used. A charity may be bound by the purposes for which it was granted charitable and deductible gift recipient status. A scholarship fund may be required to apply income only to specified educational purposes. These are not suggestions or preferences – they are legal obligations that fundamentally shape what the organisation can and should do with its investments.

Understanding Your Non-Profit’s Unique Context

If we are to think like our non-profit rather than thinking like ourselves in other settings, we must begin by truly understanding the organisation we serve. This requires systematic investigation across multiple dimensions.

Legal structure and powers form the foundation. Is this a company limited by guarantee? A charitable trust? An incorporated association? A public ancillary fund or private ancillary fund (now referred to as Giving Funds)? Each structure comes with different governance requirements, different powers, different constraints. Many committee members have only a vague understanding of their organisation’s legal form and have never read the constitutional documents that establish their powers and duties. This is problematic. How can you make appropriate investment decisions when you are unclear about your legal authority to make them?

Take the time to obtain and read your organisation’s constitution, trust deed, or other governing documents. Understand what powers the investment committee actually has. Can you invest in any asset class, or are there restrictions? Are there explicit requirements about capital preservation? Are there limitations on risk-taking? And then consider your legal and moral duties as a trustee/director/committee member. These are not academic questions; they define the boundaries within which you must operate.

Purpose and mission should shape investment thinking in concrete ways. Why does this organisation exist? What is it trying to achieve? A medical research foundation, a homelessness charity, and a scholarship fund all have different purposes that may logically lead to different investment approaches. The medical research foundation might have a view on investing in tobacco companies. The homelessness charity might consider the social impact of property investments. The scholarship fund might think carefully about exposure to industries that align or conflict with educational values or donor priorities.

More fundamentally, how urgent is the mission? If you are managing a portfolio for a homeless shelter in the midst of a homelessness crisis, the argument for maximising current distributions might outweigh the argument for building capital for future generations. Conversely, if you are managing a foundation established to fund research into a rare disease with no known cure, you might take a long-term view that prioritises capital growth, accepting lower current distributions to build a larger capital base that can fund more substantial research in future decades.

The source and nature of capital matters enormously. Was this money donated by individuals who made sacrifices to contribute it? Was it government money that came with strict conditions? Was it a bequest from someone’s estate with specific intentions attached? Was it a one-time large gift or is it accumulated from many small donations over time? Is it expected to grow through future donations or is this effectively a closed pool of capital?

The psychology and ethics of investing donations differs from investing an unexpected windfall. The person who worked and saved to donate $10,000 to a charity might quite reasonably expect that gift to be invested carefully and used efficiently. This doesn’t necessarily mean conservatively – but it does mean thoughtfully, with genuine consideration of the donor’s implicit trust.

Cash flow characteristics and stability shape how much liquidity you truly need and therefore how much of your portfolio can be invested for long-term growth. Does the organisation have stable operating income from government contracts, membership fees, or other sources? Or are revenues unpredictable and programs dependent on investment income? How much does your organisation typically need to withdraw annually from the portfolio? Is this amount stable or highly variable?

An organisation with diversified operating income and stable, predictable withdrawal requirements can invest quite differently from one that depends primarily on investment income for operations and faces variable demands. The former might maintain modest liquidity buffers and invest substantially in growth assets. The latter needs more careful consideration of sequencing risk and may require larger, liquid, defensive allocations.

Stakeholder expectations and constraints must be understood and, where appropriate, managed. Who are the stakeholders in this organisation’s investment decisions? Donors, bureaucrats, beneficiaries, staff, members, regulators, the broader community? What do they expect? What would they consider appropriate or inappropriate? Are there explicit or implicit commitments or past promises that constrain your investment choices?

Some of these constraints are legal. You cannot do things that violate your governing documents or regulatory obligations. Others are practical – investing in ways that alienate your donor base or members may be legally permissible but strategically unwise. Understanding where these lines sit requires genuine engagement with the various stakeholders and honest assessment of your organisation’s dependencies and vulnerabilities.

Investment horizon and capital requirements need to be explicitly established. Is this organisation intended to operate forever? For a defined period? Until a specific purpose is achieved? How does the organisation think about the relative importance of supporting today’s beneficiaries versus future generations? These are difficult questions that many boards avoid, defaulting instead to vague aspirations about “sustainability.” But vague aspirations make for poor investment policy.

Some non-profits describe themselves as endowment investors, while citing an investment horizon of five-to-ten years. If an organisation genuinely has a perpetual outlook and equal concern for current and future beneficiaries, that should lead to a portfolio structure that prioritises real capital growth over time – which likely means substantial allocations to growth assets despite their volatility. If the organisation has a finite horizon – say, a foundation established to spend down over twenty years – the appropriate investment approach might look quite different, with a declining risk profile as the end date approaches.

Knowing others is wisdom. Knowing yourself is enlightenment.

Lao Tzu

Common Traps and How to Avoid Them

Even when we intellectually understand the need to think like our organisation rather than how we think in other contexts, ingrained habits reassert themselves. Recognising the common traps can help us avoid them.

The “what I would do” trap manifests when committee members evaluate investment decisions by asking what they would do with their own money. This feels reasonable, but it is the wrong question. The right question is “What should this organisation do given its specific goals, obligations, and constraints?” Your personal risk profile and investment priorities are not relevant. When you catch yourself thinking “I wouldn’t be comfortable with that level of risk” or “I prefer more defensive investments,” pause and ask: “What is appropriate for this organisation, regardless of my personal preferences?”

The “all non-profits are the same” trap assumes that what works for one non-profit organisation should work for others. In reality, non-profits span an extraordinary range of circumstances. A $100 million foundation with a perpetual horizon and fixed spending requirements is nothing like a $5 million non-profit membership body dealing with rising operating costs. Yet both might be labelled “non-profit investors” and assumed to require similar approaches. Every non-profit is unique. Size, purpose, legal structure, cash flow, stakeholder expectations, time horizons – all vary enormously. The approach that serves one organisation well may be entirely wrong for another. Avoid assuming otherwise.

The “corporate thinking” trap applies commercial frameworks to purpose-driven organisations. Corporate executives bring real value to non-profit committee work – strategic thinking, financial discipline, results orientation. But businesses generate returns for shareholders, while non-profits support members and beneficiaries. Applying pure commercial logic to mission-driven organisations can be risky. Different responsibilities involve different considerations. And different objectives demand different decisions.

The “past experience” trap over-emphasises what worked previously in another setting. Perhaps your last non-profit could earn higher returns by making illiquid investments. Perhaps your superannuation fund achieved excellent returns with a particular asset allocation. Perhaps your golf club stayed out of trouble by keeping everything in bank deposits. But those approaches worked in those particular settings at a particular point in time. What worked before might work again – or it might not.

The “comfort zone” trap leads committees to avoid investment approaches or asset classes that feel unfamiliar, regardless of their merits. Alternative investments may appear complex and therefore inappropriate. Illiquid investments may sound overly risky. In some cases they may be – but personal experience should not determine a non-profit’s asset allocation. The question is not whether you are familiar with an asset class or strategy, but whether it serves the organisation’s needs. If a ‘new’ investment approach serves an organisation’s needs, the answer is not avoidance, but education and professional advice.

Practical Tips to Think Like Your Non-Profit

The following practices can help individuals and committees genuinely think from the organisation’s perspective rather than defaulting to pre-set, plug-and-play approaches.

Read and understand your governing documents. Make this non-negotiable for every investment committee member. You cannot properly serve an organisation whose fundamental legal structure and purposes you do not understand. Obtain the trust deed, or other constitutional documents. Read them all carefully. Discuss them with fellow committee members. If anything is unclear, seek professional advice.

Engage with the organisation’s key people. There is no better way to understand what is going on inside an organisation than to talk to its people. Doing so in line with appropriate governance protocols will help you deeply internalise what the organisation is about, what it needs and more importantly what it needs from you. Think Directors, committee members, executives, staff members, members, stakeholders and beneficiaries.

Develop a written investment policy statement specific to your organisation. The process of creating this document forces explicit consideration of all the factors we have discussed – time horizons, cash flow needs, risk tolerance, constraints, objectives. It also creates a reference point for future decisions, fostering continuity and discipline even as committee membership changes. Importantly, this document should be revisited annually and whenever there is significant external or internal change. Policy and strategy should evolve in line with both.

Conduct regular “first principles” reviews. At least annually, set aside time to step back from routine reporting and ask fundamental questions: Does our current investment approach still align with the organisation’s circumstances and needs? Have those circumstances changed in ways that should affect our approach? Are we making decisions based on genuine organisational needs or on unexamined assumptions?

These reviews work best when structured around specific prompts: “If we were starting fresh today, knowing what we now know about this organisation, would we construct the portfolio this way?”, “Where might we be applying thinking from other contexts that does not fit this situation?”

Seek diverse perspectives and challenge consensus. Committees that think too similarly or defer to their loudest voice are vulnerable to blind spots. Actively work to include people with genuinely different backgrounds, experiences and perspectives. When decisions feel obvious to everyone, that is the time to dig deeper. What are we taking for granted? What might we be missing?

Consider explicitly designating a “devil’s advocate” role for major decisions – someone whose job is to articulate why the apparently obvious course of action might be wrong. This practice can surface unstated assumptions and force the committee to defend its reasoning rather than simply following familiar paths.

Invest in education specific to non-profit investing. This is not the same as general investment education. As already stated, non-profit investing has unique characteristics, legal frameworks, and best practices. Committee members should understand concepts like fiduciary duty, intergenerational equity, mission alignment, and the specific regulatory environment for non-profits.

Bring in speakers who specialise in non-profit governance and investment. Attend conferences focused on non-profit portfolio management. Read publications specific to the sector.

Work with advisers who understand non-profit contexts. Not all investment advisers are created equal in this regard. Many capable firms specialise in personal wealth, superannuation, or asset management – but have limited experience with the specific needs and constraints of non-profits. The frameworks and solutions they apply instinctively may not fit.

Seek advisers who can demonstrate genuine experience with organisations similar to yours. Discuss how they address the unique governance challenges of volunteer boards and committees. Explore their understanding of the regulatory environment for non-profits. You want advisers who will help you think like your organisation, not advisers who encourage you to invest like they do for everyone else.

Document your decision-making rationale. When making significant investment decisions, record why you are doing what you are doing. What organisational factors drove this decision? What alternatives did you consider? What assumptions are you making? This discipline forces clarity of thinking in the moment and provides an invaluable record for future committees reviewing whether past decisions still make sense.

Build in accountability and review mechanisms. Establish clear metrics aligned with the organisation’s strategic objectives and review performance against them regularly. Be thoughtful about what you measure, beyond portfolio returns. Are you meeting distribution requirements? Are you keeping pace with the organisation’s inflation rate? Are you managing liquidity effectively? Are your governance processes working?

Perhaps most importantly, periodically assess whether the committee itself is functioning effectively. Is the committee’s combined portfolio management experience broad as well as deep? Is discussion robust or perfunctory? Are decisions made thoughtfully or by default? Does the committee feel it truly understands the organisation it serves? Honest self-assessment can reveal opportunities for improvement.

Seek first to understand, then to be understood.

Stephen Covey

Conclusion

Accepting a role on a non-profit investment committee is an act of service. Members offer up experience, expertise, judgment, and time to help an organisation serve its mission more effectively. This contribution is valuable and needed. But it can only fulfil its potential when past experiences and pre-conceived ideas support observing the defining characteristics and changing circumstances of the organisation in question.

The challenge of wearing the right hat is fundamentally one of intellectual humility and curiosity. It requires acknowledging that expertise in one place and time does not automatically translate to another. It demands setting aside assumptions and preferences that have served people well elsewhere to make room for fresh thinking and learning, based on the here and now.

This is harder than it sounds. Our patterns of thinking are deeply ingrained. The mental models we have developed through years of successful investing, leading and governing do not surrender easily to new frameworks. Yet this is precisely what effective non-profit investing requires – the discipline to examine each decision not through the lens of what we would do personally, what worked at our last organisation, or what seems obviously prudent based on other experience, but through the lens of what serves this organisation’s unique mission, obligations, and circumstances.

The organisations that receive this quality of thinking from their investment committees – committees that have genuinely internalised the organisation’s mission and values – are far better positioned to flourish over the long term. They construct portfolios that genuinely fit their needs and circumstances rather than portfolios that fit someone’s usual approach. They fulfill the true meaning of fiduciary duty – acting in line with the organisation’s interests rather than allowing personal preferences or beliefs to unduly influence their investment approach.

This is what wearing the right hat means in practice. It is the foundation of effective non-profit investment governance. And at Koda, we believe governance is the foundation of successful non-profit investing.

Self-Reflection Questions

• Does your committee discuss what your organisation is trying to do, who or what it exists for and what is happening inside it?
• Can you confidently say your committee invests in accordance with the constitution of the entity that legally owns the assets, and applicable regulations?
• Can you explain why your current investment approach is right for this specific organisation, taking into account its goals, needs and unique circumstances?
• Has your committee explicitly discussed and documented your organisation’s specific objectives, investment horizon, risk tolerance, liquidity needs, and mission-related considerations in the last twelve months?