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Bringing Charitable Fiduciaries Up to Speed

Too many are still focused on capital growth of foundations rather than their charitable purpose.

Somewhere along the way, directors and officers of charitable foundations have started to view their fiduciary responsibility as standing guard over their organizations’ investment funds by stridently focusing on capital growth and preservation. While well-meaning, standing guard has also meant standing in the way of the very missions—the good works—these organizations are entrusted to do for our communities. 

Investment Choices Undermine Mission

Tax law mandates that 5% of all foundation assets be distributed for charitable purposes each year—that is, to overhead and grants that fulfill mission. For the vast majority of foundations, that’s where the investment in their mission ends; instead they invest the remaining 95% of their assets in stocks, bonds and mutual funds. With such a narrow focus on growing and preserving capital, foundations often lose sight of the fact that their traditional investment choices are undermining their mission: for example, a social justice organization invested in mutual funds holding stocks in private prisons. Some have said that this is akin to having your foot on the gas and break at the same time. Actually, with 95% potentially working against the mission, it’s like driving fast in reverse.

Quite simply, the tally of many foundations’ work for our communities is in the deficit. And this, despite study after study demonstrating that growth and mission needn’t be mutually exclusive, and many investment instruments can do both.

Donor advocates such as GuideStar/Candid and Charity Navigator don’t ask foundations to share their investment holdings—not even in a voluntary way. The information they provide to potential donors is limited to how organizations distribute the 5%. Actual investment holdings—the other 95%—and how they’re used remain hidden. They aren’t even required to be reported on tax returns. With increasing calls for financial transparency in the nonprofit field, this is an irresponsible standard. Why would anyone donate to an institution when they don’t know what that institution is supporting through its investments?

Old paradigms guide the outdated behavior of foundation directors and officers and the asset managers they hire. We hand Robert’s Rules and a fixation on bottom line growth from one board generation to the next. To compound the problem, many asset managers use investment policy statement templates for foundations that don’t ask for, nor pay any attention to, mission statements. Mission isn’t a consideration when it comes to investment choices. The ruts on this old road are deep.

New Wave of Fiduciaries

Fortunately, vision and courage guide a new wave of fiduciaries. These fiduciaries understand the benefits of using all of their assets for their mission; of using every tool in their toolbox to build on that mission. They understand that their primary duty to the foundation they serve is to ensure its assets are committed to its charitable purpose, not to outperform the markets. The leader of the pack is the Heron Foundation, which states that it’s “obligated to examine our portfolio on an ongoing basis to identify holdings that may unintentionally do harm to our missions or to the broader shared interests of society.” Heron begins with doing no harm. From there, it invests actively in things that support its mission.

Coupled with these new foundation leaders is a new type of asset manager ready to guide foundations in both growth and mission. Having done their homework, they recognize that mission-aligned investing not only supports a foundation’s mission, rather than detracts from it, but also may produce better, more secure, returns in the long run. 

New options exist for socially guided investments, from exchange traded funds with high ESG (environmental, social, governance) ratings to bonds that benefit social issues. Foundations have options outside of traditional stock and bond markets, including investing through loans or equity in businesses that fulfill their mission or carrying mortgages for their favorite nonprofits. Innovative options seem to spring up daily. Software, such as Andorra, makes identifying mission-aligned investment options easy for asset managers as well as foundation boards. Andorra also rates foundations’ investment portfolios against their mission statements. It’s one-stop shopping.

Hold Fiduciaries Accountable

It may seem strange to argue that fiduciaries should fully pursue the mission entrusted to them—that they should seek ways to commit the whole foundation to its good works, not the bare minimum required. It’s like stating that firefighters should put out all of a fire and that doctors should heal the entire body. But the purpose of fiduciaries has become clouded, and it’s long past time to demand more of fiduciaries and asset managers. With so many critical issues affecting our communities, from racial injustice to environmental crisis, we desperately need the trillions of dollars sitting in investment funds to get to work and do the double duty of growing and addressing social, economic and environmental challenges. Only then will foundations truly be progressing in a forward direction.

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