Author: Chris

Borrowing can be used for offensive as well as defensive purposes. Typically, it takes the form of a Letter of Credit or borrowing under a Securities Lending Agreement.

Research has shown that Endowments will often use lines of credit offensively to fund private equity capital calls. It enables better cash management and investment timing. Smaller Foundations tend to use lines of credit for that same purpose. Foundations also use Securities Lending defensively to avoid selling “underwater” equity positions to fund current grantmaking. This can make sense if the Foundation views itself as a perpetual investor and the equity sell-off is considered a temporary or short-lived phenomenon. (One should ensure that the Foundation’s governing documents either enable or do not preclude borrowing.)

Lines of Credit – Typically arranged with a bank and often is uncollateralized.

Securities Lending – Collateralized borrowing is an active part of the financial markets and many market players engage in this type of lending to boost returns.

We envision Securities Lending as a defensive means for Foundations or Endowments to avoid selling “underwater” equity positions, rather than “locking in” a loss. Securities Lending agreements are highly standardized and sample templates are available on the Internet. (You should of course use your own legal counsel) but the internet documents do provide the reader with a sense of the wide use and standardization that exists.

Goal – If the entity has a perpetual time horizon and believes that the equity markets typically rebound within a 2- or 3-year future time horizon, borrowing may make long term sense.

Collateral – Typically one would pledge securities that would be placed with a custodian. (Securities may need to be “aged”, i.e. fully paid for and have been held for a minimum time period, e.g. 1 month, prior to pledging.) The advance rates would be based on the specific assets pledged. Typically, the rate would be Libor + a spread.

Want to learn more? Please contact Chris Cutler or Tom Donahoe

We have led OCIO searches and selected providers as well as analyzed many additional completed OCIO searches. We’ve distilled the process down to 7 key steps. They are as follows:

CATALYST – There are typically specific concerns that trigger a search: performance, portfolio concentration, liquidity, poor service, and/or fees. Survey participants often tick the box as “fees.” While often true, we believe that “fees” may often be a stalking horse that provides cover for other motivating rationales.

AWARENESS – The Investment Committee or Board needs to educate themselves as to what’s available in the market. This takes time and direct interaction between providers and Board/IC. Internal staff is often understaffed and is not able to distill the information on a timely basis. (Surveys show internal investment staff to be 0.5 FTE or less.) Moreover, staff members may wear multiple hats and investing oversight may be hampered by manual processes.

GOAL(S) – Investment Committee members should agree on a clear articulation of the organization’s goals. If this is left vague or allows late-entrants into the bidding process, it will reduce the efficiency and transparency of decision making.

IDENTIFYING ELIGIBLE OCIO PROVIDERS – This requires someone with industry expertise, time in markets, and understanding of client’s needs and goals.

REQUEST FOR INFO – This should precede a formal RFP. It is a list of 5 to 7 key questions that are submitted to a larger, potential universe of OCIO providers. This enables you to surface issues (conflicts) early, review each submission on a conference call with the provider (and get a feel for working with that team.) You then go out with a formal RFP to a distilled subset of your RFI respondents.

INTERVIEW – This is essentially a semi-finalist stage. Then, there should be an on-site visit at the provider’s place of business once you are down to the finalists.

DECISION – Always have a first choice and a back-up, in case the first choice does not result in a final agreement. Entire search process is typically 3-4 months.

Want to learn more? Please contact Chris Cutler or Tom Donahoe.

Trustees are a great asset, provided you select and support them diligently.

The governance structure of non-profits tends to be the mirror opposite of for-profit organizations. It is a simple reality that those long-term board directors in non-profit institutions usually shape the policies and direction of their organizations. Having an effective governance strategy for selecting and rotating board governors is a great way to ensure that the non-profit institution has the right set of committed and unconflicted talent serving as directors.

Typical Tenors	For-profit Companies	Non-profit orgs (Institutionalized)	Non-profit (founding family-majority)
CEO tenure	6 – 10 years	10 – 20 years	+20 years
Board tenure	+20 years	9 years (maximum)	No real limit

Progressive term limits protect the institution:

Board member terms are best staggered, (similar to the US Senate, only 1/3rd of Trustees seats should become open each year.) This ensures stability and thoughtful transitions. Having three 3-year terms seems quite tidy but can make for an untidy mess. You expose yourself to “social loafing”, disruptive actions, and perhaps embrace too much risk with a new, untried Trustee.

As an alternative, one could implement progressive terms: initially 1Y term, then 2Y, and finally a 3Y term (you’ll know after 3 years if a director is good.) The rationale is that you could identify a new Trustee’s poor participation or lack of commitment early on, and this structure offers you a convenient (non-confrontational) way to limit damage to the institution. Also, try to avoid the romance of focusing only on the well-credentialed. You need to understand why a person is joining and if the new person also serves on another Board with one of your current Board members. This may result in a conflict.

A typical bylaw provision allows the “firing” of a Trustee at any time. In real life, most Boards simply plod ahead and refuse to face the friction of a contested exit that often requires near-unanimous agreement on ejecting a current director. A real-life anecdote is instructive. A Trustee missed 5 of 7 meetings and was considered “effectively” resigned. The Board woke up one day to a scathing press release that the Board member was “resigning in protest” about a sensitive issue.

Emeritus Status:

In a word, don’t! It’s better to have an annual dinner with current and past Trustees. Emeritus is an active designation and holders believe it confers power/access/voice in current decision-making. Emeritus may demand to see current minutes, etc. It is better to honor completed, past service. Moreover, ex-Trustees often simply want access to the library or email address. This can simply be approved by the Board and arranged by staff. Moreover, emeritus has often been given to large donors and this tends to annoy past Board members who served well but simply don’t have a thick wallet.

Want to learn more? Please contact Chris Cutler, Tom Donahoe, or Safia Mehta at 917-287-9551.

You’ll find below ten low cost, handy steps that can be implemented at your Foundation without spending Foundation resources.

1. AN INDEPENDENT GUIDE TO TRUSTEE DUTIES – For onboarding new Trustees or ensuring that current Trustees fully understand or are refreshed in their duties; the NY Attorney General’s office publishes RIGHT FROM THE START and also INTERNAL CONTROLS AND FINANCIAL ACCOUNTABILITY. What better way than having a neutral, authoritative voice review the Duties of Care, Loyalty and Obedience in a clearly written dispassionate prose?
   
2. START WITH THE TOUGH TOPICS – At Board or Committee Meetings, address the toughest topics first, do not let them hide deep in the agenda. Everyone is freshest and most alert at the beginning of the meeting. The priority topics will also ensure that Trustees join the meeting at the start. Ensure that there is a published time limit for each agenda topic.
   
3. PROPOSED MOTIONS SHOULD BE DRAFTED IN ADVANCE – Draft proposed motions BEFORE the Trustee meeting. This ensures a thorough drafting, unrushed by time pressures. It also provides a document to speak to and use as a gauge. The meeting also does not devolve into a word-smithing exercise that eats up valuable Trustee time. If multiple motions are needed or pro- and con- motions, those also need to be shared with the Trustees before the meeting. (Ideally via a link to Cloud storage.)
   
4. FUTURE TOPICS – Provide a list of planned topics on a rolling 3 quarters in advance so that Trustees know when major recurring topics will be addressed. They can also anticipate what projects might be helpful to align with the timing of future meetings.
   
5. TIMELY SCHEDULING OF COMMITTEE MEETINGS – Require that periodic Committee meetings be scheduled at least ten days to 3 weeks before the actual Board meeting. This ensures that information distilled will be current and avoids a rush analysis in order to place items in the “Board Book” in preparation for an actual Board meeting.
   
6. RECORD THE BOARD MEETINGS – It helps resolve disputes about what was said and ensures the accuracy and timeliness of the Board minutes, even if they are written weeks after the actual Board meeting. (Recordings can be deleted after one year or on a pre-agreed basis.)
   
7. FOUNDATION EMAILS – Require all corporate information to be communicated on Foundation emails, which means that all Trustees are assigned foundation-domain email accounts. As a potential compromise, Trustees may continue to use their personal accounts, but ALL emails need to be cc’d to their foundation email accounts. (The latter is not best practice but may be a viable work around if not abused.)
   
8. SOCIAL CAPITAL – All groups work best together if there is social capital built up. You should not solely rely on telephone meetings. There should be periodic meetings in person, even if only on an annual basis. The annual meeting or at least one meeting per year should be held at the site of the Foundation’s location or activities.
   
9. INSURANCE – You absolutely need to review ALL your insurance coverage on an annual basis and in-depth. Risks and coverages change, and insurance gaps provide a potential for a major loss to a Foundation if not properly addressed. Trustees may want to focus on D & O coverage and be conversant with any “indemnity” coverages that the Foundation has agreed to provide, typically in its bylaws.
   
10. CONFLICTS OF INTEREST POLICY– There are few topics other than conflicts that can cause as much damage to a Foundation, either reputationally or financially. With the Internet, scandal spreads quickly AND permanently. Your policy must allow for Audit Committee review, especially in a case of first impression. Avoid any appearance of conflict. An outside law/audit firm review could help.

Want to learn more?

Please contact Chris Cutler, Tom Donahoe or Safia Mehta at 917 287 9551.

Here’s why… Your needs change and the composition of most Investment Committees typically change over a 5-year period as well. The coverage and (more critically) the investment decision makers at your OCIO can change as well, all too regularly. (Fees should be reviewed and evaluated every year even without an RFP, simply because of a Fiduciary’s Duty of Care.)

If investment performance has been good (acceptable) and interactions with your coverage have been timely and beneficial, an RFI would seem entirely appropriate. You have a good relationship already and you simply want to validate that you are achieving the best results that your organization can achieve.

The RFI is composed of your own brief set of questions. The answers you obtain should inform you as to your next steps. You essentially validate whether the OCIO is helping you fulfill your mission or not. If you determine that the current OCIO arrangement is not optimal, then it may well be time to undertake a formal and comprehensive RFP process to replace the existing OCIO.

A Sample of 3 Key points to focus upon with a 5-year check-up:

1. RETURNS – Your returns versus peers and versus the market benchmark(s). If there is underperformance, try to establish the root causes: asset allocation, re-balancing discipline, portfolio concentrations, overreliance on specific factors, etc. It is important to understand the “why” of what is not working properly for you.
2. RISK PROFILE – Many providers continue to provide a crude (simplistic?) analysis of the portfolio’s risk profile. You deserve detailed graphs and tables (they should be presented in an intuitive fashion) since the analytical programs and tools are so readily available in the industry.
3. COMPARISON TO PEERS – Your OCIO should provide you with insight as what is changing and what seems beneficial amongst your peers in the market space. You may learn of innovative approaches as to all aspects of investing, analysis, reporting, training staff, etc. There are often steps that can be taken to achieve greater efficiency and transparency that are simply operational and not proprietary in nature. These shared insights can improve your own efforts and organization. The OCIO can share these types of insights.

Want to learn more? Please contact Chris Cutler, Tom Donahoe or Safia Mehta at 917 287 9551.