Volunteer directors given new task

Legislation is making them more accountable for their investment decisions

Kelly Rodgers, The Globe & Mail, Report on Business, March 23, 2000

Philanthropists may want to be aware of the fact that the rules for investing by non-profit organizations are changing, and volunteer directors are being held to a higher standard when it comes to managing their money.

In July, 1999, Ontario adopted a prudent investor standard, which spelled out the criteria that must be considered when making investments on behalf of an organization. These criteria include an examination of the current economic situation, the possible effects of inflation and deflation, expected tax consequences, and the expected total returns from income and appreciation of capital.

Some provinces, and territories were already using this standard, and it is expected that the rest will follow.

The new Ontario Act specifically states that directors of non-profit organizations - whether incorporated or trusts - will be held to the criteria outlined. This is excellent legislation from the perspective of the organization because it forces better investment decisions, but it could cause problems for board members who aren't paying attention, meaning that they can be held liable for actions they take - or fail to take.

Too many boards, knowing how hard it is to raise money, have deliberately taken an overly conservative approach to investing. If investments are long term in nature, where the capital will not be needed in the next seven to 10 years, a conservative approach that invests in T-bills, guaranteed investment certificates and other fixed-term deposit instruments is not only a poor choice because of the lack of long-term growth, but it also could land directors in trouble for not providing enough returns.

The need to consider both the income and the total return (income plus capital appreciation) and the effects of inflation strongly suggests that equities should be included in any non-profit portfolio to provide for future growth. Directors are now faced with the need to balance current and future needs. If the organization needs to grow its capital to keep pace with inflation, yet invests only in money markets and spends the annual income, the directors could potentially be held liable for this failure.

So how do they protect themselves? In British Columbia, Alberta and other provinces that have a legal list for trustee investments, the first step is to ensure that documents such as articles of incorporation, bylaws, or trust indentures specifically allow for investments outside the Trustee Act, and that they meet the prudent investor standard.

Organizations in Ontario, Quebec, Yukon and Northwest Territories and other provinces that have a prudent investor standard can immediately begin to focus on developing proper investment strategies.

In doing so, a board has two choices. It can manage the money itself, often with assistance from a broker or investment adviser. Otherwise, it can have the portfolio professionally managed by an investment counsellor.

I have been involved with the management of non-profit portfolios for close to a decade, both as a volunteer and professionally as a portfolio manager and consultant, and I would never agree to serve on a board that chose the first option. As a director, there is little upside to this and a lot of personal risk.

Directors should insist that their investments are professionally managed with a proper policy statement and performance reporting. There are two options, depending on the size of the portfolio. If the investment assets are less than $1-million the best solution is some type of managed account program, or balanced pooled or mutual fund. These are available from brokers and planners, and there is a wide variety of managed programs with a wide range in fees, so investors can shop carefully.

For assets in excess of $1-million, directors should go directly to counselling firms. These companies may be less numerous, but it is well worth the effort since professional management can be had at a lower fee rate. All of the banks have investment counsel subsidiaries, and there are dozens of high-quality independently owned firms.