The following article was published in the New York Times, August 30, 2014.
After a steady run-up in the stock market, the members of the investment committee of the HudsonAlpha Institute for Biotechnology were faced with a decision this year that would affect the future of the nonprofit and the cutting-edge biotech research it funds.
From left, John Wynn, Rick Myers and Eugene Sapp, directors at HudsonAlpha Institute for Biotechnology in Huntsville, Ala. Credit: Joe Buglewicz for The New York Times
Should they reduce their holdings in equities and put that money into a fund for operating expenses in advance of a future correction, or should they continue to maintain their equity investments and hope that stock prices continue to rise, which would help build HudsonAlpha’s relatively modest $32 million endowment?
They went with the sure thing, a strategy their investment manager called “Bank It,” and members have no regrets. But it wasn’t an easy decision.
“I said, ‘Why would we do that?’ ” said John R. Wynn, a partner at Lanier Ford, a law firm in Huntsville, Ala., where the institute is based, and an investment committee member. “I was content with where we were. I raised the issue of why would we get out of equities.”
He said he was won over when the institute’s adviser, Richard Saperstein, chief investment officer of Treasury Partners at HighTower Advisors, explained that the process would be gradual and that even though the money would be put into bonds, which committee members were not confident in, they would be short-maturity and low risk.
“It was more of a gradual thing and not a radical departure,” Mr. Wynn said. “I got comfortable with that after these discussions.”
Trustees of nonprofits are generally affluent people who donate their time, knowledge and in many cases money to a cause they believe in. They then take on an advisory role for that charity and are faced with decisions as difficult as those confronted by directors for-profit companies — except that nonprofit trustees are not paid handsomely, as for-profit board members often are. There is also a greater good at stake, whatever the mission of the nonprofit is.
Decisions of investment committee members can affect the performance of an endowment worth tens of millions, even billions. Are all of the members up for the task and if not, how can the head of the committee make a change?
What, for that matter, are the qualifications that a good investment committee member should have? Surprisingly, most people I spoke with stressed that a committee made up of all investment professionals is not the best way to go. If that’s true, what’s a better way to recruit members?
Mike Penfield, national director of U.S. Bank Charitable Services, said advice on recruiting members was often vague. The main rule is to find people who communicate well. But he stressed that stacking the committee with board members who have financial services backgrounds is not the most effective approach. He said committee members should be selected like securities in a portfolio.
“Maybe your stocks are people from the financial world or investment managers themselves,” he said. “But you need people from other professions to balance out the investment people. That is where some of the best communication occurs and the best decisions get made.”
Fair enough, but just because members of investment committees are volunteering does not mean problems will not arise that need to be managed as they would in any workplace. There are at least three risks that can derail the best intentions of an investment committee.
The first is one personality will dominate. This is the person who steals the floor at every meeting or who has such standing that all members defer to him or her.
Stephen S. Smith, managing director at Brandywine Global Investment Management and one of the most successful bond managers of his time, would seem like one of those trustees who would dominate an investment committee. But Mr. Smith says he strives to do the opposite on the boards where he serves, including his alma mater, Xavier University in Ohio.
“I would always just state my opinions on what we should do; sometimes we did it and sometimes we didn’t,” he said.
Yet he remembered that a member of one committee he was on tried to persuade the others to put a large percentage of the foundation’s assets into gold. Mr. Smith thought it was a bad idea; the proposal came after years of record growth in gold but before its recent decline.
But in difficult situations like this, he said, members can always lean on the outside investment consultant advising the firm. “If there is a conflict they tend to ask the consultant and take the consultant’s advice,” he said.
It’s a form of passing the buck, but it’s one that works.
A related risk is that not every committee member will contribute his or her thoughts. It could be the result of a committee made up of people who have very different levels of expertise, or no expertise. It could be that some people with a legitimate reason to be on the committee are not confident enough to speak out.
In this sense, the leader is not first among equals but the person charged with keeping the committee members focused. Charles Ellis, founder of Greenwich Associates and a former chairman of Yale University’s investment committee, equated it to parenting. “Your job as a father is to serve the child long term,” he said. “You learn different ways of relating to each individual child in ways that they can enjoy.”
A third risk is the discussion will focus more on investing and not on what the money is supposed to do. Advisers said that an investment committee needs to consider how their decisions will allow the nonprofit to do more of what it wants to do, and not just on how they are investing the money.
“It would be very helpful if each investment committee recognized that each institution is really different and then think back to the first principles of the institution and what it’s meant to serve,” Mr. Ellis said. “Our mission and responsibility is not dominated by the markets but by the clients we’re trying to serve.”
Anne B. Shumadine, chairwoman and founder of Signature, a wealth management firm, says most of the committees she serves on use a model where the investment decisions are outsourced. This frees the members to talk more expansively about their roles.
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“We have to make sure the portfolio reflects the policy that you’ve agreed on,” she said. “If it says no more than 35 percent in illiquid assets, and you end up with 60 percent or even 40 percent, that is a question. Then you have to decide if that’s right.”
In the case of the Bank It strategy with HudsonAlpha, the committee had been working with Mr. Saperstein since 2006 and had built a level of trust from the financial crisis.
Mr. Wynn said that a more difficult decision to make had been to take their advice and begin investing more in equities in 2009. “We were in a position where I felt we had to preserve capital,” he said. “We needed a sufficient cushion to move forward with our building plans and we couldn’t lose this endowment. In February, a recommendation was made to gravitate more into equities.”
The committee members agreed and it worked out well for the organization. But Mr. Saperstein said that for the most part, investment committees need to be concerned more with their fiduciary roles and how the investment policy statement will accomplish this. “We want to have a road map because if we don’t have direction any road will take us there,” he said.
Providing that direction is what all committee members need to ask themselves if they’re doing.
Paul Sullivan, New York Times
