Who is in Charge of Investments?
Question: In our organization our CEO has total control of the investing of all our endowment funds. Personally, I do not think this is appropriate. I believe that the board should not delegate the responsibility, because it cannot delegate the accountability. And just because the CEO is experienced in investing, the board is not excused from the accountability. What is your opinion of this?
Answer: you are certainly correct in saying that the board is accountable for the investment function of the organization. However, a board of directors of an organization of any size must of necessity delegate most of its functions to someone. That someone is usually the CEO.
The investment function, however, is unique in my opinion. I do not believe that the investment of endowment funds should be delegated to the CEO even if the CEO is experienced in investing. It is too much responsibility to delegate to one person.
That is not to say that the responsibility for investing should not be delegated to anyone. In my experience it is not likely that a board of directors as a group will have the required competencies for managing an investment portfolio of any size. It will have to delegate that important function to some committee or group that does have the competencies required to fulfill this important function.
The situation that you describe places the CEO into a vulnerable position. Because the board is not likely to be effective in monitoring the quality of the investing that the CEO performs, it places itself into vulnerability as well. This may not be apparent when things are going well. Unfortunately, as soon as something negative happens in the investment program, there is no process in place to address the problem adequately. At that point all the Board would be able to do would be to recognize that it was not governing the investment function adequately.
In my opinion the first thing that a board should do is to secure professional investment expertise. With this information the board of directors should then develop an investment policy that will provide the guidance to whoever is given the responsibility for managing the investment portfolio.
The next step is for the board to form a committee of people with the necessary competencies to manage the investment portfolio within the guidelines of the policy. The committee may include persons who are not board members but who have the professional expertise needed. In this way the board may monitor effectively the investment program to confirm that the investment committee is following in the policy that the board has established.
In this way no individual is given the full authority or responsibility for such an important function. The board of directors is not vulnerable any longer but rather can exercise proper accountability in harmony with a carefully formulated policy for investing.