While many of you know me as founder of the renowned alternatives diligence and OCIO search firm MAS, my very first job was serving as a country analyst for the Federal Reserve Bank of New York. I have covered economic, policy, and geopolitical risk considerations for countries, and unfortunately my experience in these fields of study is also relevant today.
As an analyst of OCIO performance, I understand that most OCIOs avoid hedging strategies, instead relying on their diligent asset allocation models to build robust portfolios that will carry their long-term performance through market cycles. However, I would also recognize that any modest loss of alpha from hedging in a geopolitical crisis could actually reflect a disciplined approach to managing risk in crisis situations and, should the crisis worsen, the OCIO’s clients would at least be partially protected. The current crisis reflects one such scenario.
The Pessimist’s Case
First, I must say that I applaud the professionalism of our soldiers in dismantling Iran’s military infrastructure. It appears a critical oversight is how the emergence of low-cost drones magnifies the hazards of asymmetric warfare to other countries in the region. What I find most shocking is the extensive lack of preparation to protect these facilities from drone warfare. Sending $1 million missiles to intercept $25,000 drones is unsustainable. Ignoring the help offered eight months ago by the world’s experts in anti-drone warfare—the Ukrainians—is astounding. Moreover, there does not appear to be a strategy to neutralize the ability to attack shipping or respond in a timely manner when it happens, and energy assets are exceptionally vulnerable when attacked. The U.S. Navy may lack the ships to break the blockade, and I understand no U.S. Navy ships are in the Strait of Hormuz at this time. The 550-ship navy of 1990 has whittled down to about 280 today, most of which are committed to protecting aircraft carriers and allies. A big reason for the decline in ship numbers is the tendency of the U.S. Navy to sabotage its own shipbuilding programs with impractical designs and excessive change orders—that’s an entirely different topic of frustration.
I do not think the markets appreciate the extent of damage that has already occurred to critical shipping facilities that support energy and other commodity exports through the Strait of Hormuz, and the Iranian drones continue to attack. More than one-fifth of global oil production ships through the Strait of Hormuz. About a quarter of that can be diverted into a pipeline to the Red Sea, provided that the Iranian drones do not also compromise that facility.
It is difficult for Westerners to comprehend the stubbornness of theocratic and ideological governments. We can hope for a revolution in Iran but it looks like that may require a civil war. Chinese and Russian intelligence will notify Iran every time an aircraft takes off from a carrier or airport. I also see risk that Russia clandestinely supplies Iran both with Russian-made Shahed drones, with Iran claiming they are domestically made, and with antiaircraft equipment. Any ship transversing the Caspian Sea between Russia and Iran should be viewed with great suspicion. Drones will continue to harass shipping until each vessel has a properly-equipped Ukrainian-trained anti-drone crew aboard, and the U.S. Navy finds the resources to make a determined presence in the Persian Gulf.
Possible Exits
To be sure, good things can happen. Iran may agree to stop attacking neighbors. A sudden coup or successful revolution could occur, ending hostilities with the U.S. and neighbors. Iran and the U.S. might reach some sort of a ceasefire. The U.S. Navy may muster enough forces to defend shipping adequately.
Conversely, more bad things can happen. A surprise “operation spiderweb” with drones attacking a U.S. coastal city from a merchant ship is a possibility, according to the recent FBI warning for Los Angeles. Revenge is a powerful motivator, and after massive damage to Iran, expect the Iranian military to cherish launching every Shahid drone they can possibly smuggle in from Russia at their neighbors.
We are hopeful that the scenario we describe does not play out. However, scenario management is what hedges are for. One example of a partial hedge is to look at a 95%/85% put spread on the S&P 500 for six months costs 1.8%. We would be happy to see an OCIO explaining how they lost 1.8% in alpha to help protect against a 10% loss in this adverse scenario, and we think the next six months will determine the path of the war. More complex hedges covering direct and proxy/correlation hedges could offer smarter approaches toward managing global risks.
While the U.S. is an energy net-exporter, high oil prices will impact already-stretched U.S. consumers. Fertilizer prices will also rise globally, since Urea is also a major Persian Gulf export. Some sector effects likely include:
Airlines could suffer acutely and the travel industry will suffer.
Domestic shipping costs will rise sharply;
Auto manufacturing will suffer;
Energy services and energy will benefit further;
The inflation prints will be discouraging;
While technology will be relatively insulated, technology companies linked to U.S. consumers could be impacted.
It’s also important to consider that the United States is economically insulated relative to other countries. India, China, Japan, and South Korea, the biggest engines of Asia, are very dependent upon Mideast commerce. See for example the sharp declines of Indian and South Korean currencies already, down about 3% over the last month. The Global South is in far worse shape. There will be enormous domestic pressure on governments across the globe to get this war to stop. Only political malfeasance would see this conflict last a year, which is exactly the scenario that concerns us the most.
Conclusion
Long term investors typically hold consistent asset allocation policies and are unlikely to engage in hedging directly. For the most part, we support that approach. We do think however that downside risks are highly elevated right now. Buying a put spread could provide partial protection against theocratic-ideological inflexibility, while still allowing investors to capture most of the upside gains the markets would experience if a peace breakthrough occurs.
Important note: While we outline this scenario and identify a possible hedging strategy, we intend to provide education, not investment advice or recommendations, from our Briefings. Every investor should act only with the review and advice from their retained investment advisers and investment consultants.
On Wednesday I spoke on the CFA Institute’s panel “The Future of Private Wealth Management,” which is part of the CFA Institute’s “Navigating Wealth & Private Markets” series. At Manager Analysis we have been helping wealthy families navigate offerings of private banks, wealth advisers, and Outsourced Chief Investment Officer firms, all of which are now competing against each other in the HNW markets. We are also seeing sophisticated family offices becoming more discriminating in assessing the quality of investment ideas that their advisers bring.
Helena Eaton, CFA from Bedrock Advisers, Peter Went CFA of the CFA Institute, and I spoke on this panel about the rapidly evolving landscape of private wealth management globally. The rise of new sources of wealth from crypto and venture create new dynamics between these new clients and their private wealth managers, who should exercise adaptability and recognize that this “new money” may have entrepreneurial desires that deviate from more traditional portfolio construction. AI tools will materially improve wealth advisers’ internal processes and better prepare advisers for client meetings. Increasing availability of asset allocation and quantitative models, and alternative investment platforms, to smaller wealth advisers narrows the gap in investment capabilities between smaller and larger firms. Challenging private equity market conditions help private wealth managers distinguish themselves for their diligence and skill in selecting investments.
Despite these many changes, the private wealth adviser’s primary goal is unchanged: developing long-term relationships with clients. Having a comprehensive understanding of their goals and desires, and then aligning the client’s portfolio with those goals and desires remains the central role for successful private wealth managers.
Our position as both an OCIO search consulting firm and an alternative investments due diligence provider at Manager Analysis offers an interesting vantage point: while we see how OCIOs allocate into alternative investments, we also see a decent sampling of the quality of alternative investment opportunities that the OCIOs are assessing. We observe that, while compelling opportunities continue to present themselves, average return prospects have also greatly diminished, evidenced by greatly reduced IRRs and very slow distribution rates now persisting for the last three years.
Nonetheless, many OCIOs hope for a recovery in PE performance and liquidity. They continue to advocate for building out PE portfolios, diversified by class year and strategy grouping. We have not yet seen OCIOs accept a prospect for diminished privates returns. Rather they observe that PE markets have recovered very quickly from past down-cycles in subsequent years, so they believe it is critical to sustain the pace of allocations during times of weak performance.
Have return prospects actually changed for private markets? Should OCIO behavior be a concern for OCIO clients? What would we want OCIOs to do in the current PE market?
After Adjusting For Sector Selection, Has Private Equity Really Outperformed?
The existence of widely dispersed investment returns among private equity and venture managers makes these markets a compelling choice for any allocator that believes they have skill in manager selection. We meet few allocators who don’t believe they have such a skill, but nonetheless even without exceptional manager selection skills, hitting the average was still a success over the long term. Allocators for private equity have typically sought excess returns of 3% to 5% over comparable public market returns, and private equity’s long-term returns have, until at least 2022, supported that premise.
But is that outperformance a reflection of private equity managers making skillful selections of enterprises for investments, or something else? For instance, PE managers have had a strong bias toward information technology-related businesses over other sectors. The Russell Technology Index earned an average of 19.7% over the last 10 years to May 30, 2025; compared to 11.0% for the S&P 500 and 5.1% for the Russell 2000. When we consider that the typical private equity fund has a 36.6% allocation to information technology [IT], compared to 14.0% for the Russell 2000 [figures are from Cambridge Associates https://www.cambridgeassociates.com/insight/us-pe-vc-benchmark-commentary-first-half-2024/], the typical PE Fund should outperform public markets. For example, using public market equivalents [PMEs], the higher return from the higher IT weighting creates an alpha versus the Russell 2000 of 5.8%. The IT sector weight in the S&P 500 is about 27.5%; the extra tech weight there adds only about 0.9% alpha versus this large and megacap index over those 10 years.
Looking at performance through June 30, 2024[1] we see that Cambridge’s PE index outperformed the Russell 2000 by 8% and the S&P 500 by 2% over 10 years through June 30, 2024.[2] In fact, our sector-adjusted PME estimates for PE explain much of the actual performance: about half of the outperformance versus the poorly-performing Russell 2000, and 1 percentage point of the 2% outperformance versus the S&P 500.
[1] Performance may appear stale but this data was released in March 2025 and does not overly rely on interim estimates.
[2] Our PME adjusted alphas for the 10 years through June 30, 2024 are close to those through May 30, 2025: 3.65% versus the Russell 2000 and 0.87% versus the S&P 500.
Have Private Markets Fundamentally Changed?
From our diligence work, we observe that investing in Private Equity markets has become more difficult. For private equity, we see the following challenges:
Middle Market Company Underperformance Also Impacts Private Equity Investing
PE performance has been set back because the earnings of America’s middle-market companies have vastly underperformed the experience of America’s publicly traded companies. In a study prepared jointly between Marblegate Asset Management, a distressed private debt investor, and RapidRatings, a credit assessment firm, the authors found severe financial deterioration among middle-market companies with sales between $100 million and $750 million per year—prime hunting grounds for private equity managers. Their 2024 update paper is “Dragged Out to Sea: The Ongoing Stress and Distress in the U.S. Middle Market – an Update to 2023’s “Riptide: The New Era of Acute Financial and Operating Stress in the U.S. Middle Market”” [see FundFire article https://www.fundfire.com/c/4852394/660564/middle_market_train_wreck_marblegate_warns?referrer_module=sideBarHeadlines&module_order=0], and they expect to release an update showing similar results shortly. The authors incorporate full year 2023 financials from RapidRatings data for over 1200 private non-financial middle market companies and a cohort of public companies from the Russell 3000, to show the ongoing deterioration in the financial performance of the middle market companies as predicted in their original paper. A few tables from their paper highlighting this deterioration are quite revealing:
The study shows a surprising amount of distress among middle market companies. Net Profit After Taxes [NPAT] fell almost 80% from 2019 to 2022, and showed net losses in 2023. EBITDA fell almost 40% over four years to 2023 while borrowing increased 45% and leverage 1.4x. Servicing debt alone is very difficult, with interest coverage falling 73%. Marblegate concludes that “This dramatic decline for middle-market companies likely reflects a combination of higher input costs, increased debt service expense and limited pricing power.”
Unsurprisingly, the struggles of middle market companies seem to be reflected in public market equivalents. It is helpful to observe graphically the performance over the last 10 years, with the S&P 500 [middle line] having vastly outperformed the smallcap Russell 2000 [bottom line], and IT stocks [top line] achieving the highest returns:
Given the more recent challenges of the middle market, should we care more about shorter-term performance than longer-term performance as an indication of PE market’s return profile? Looking again at Cambridge’s PE performance table, PE has vastly underperformed the S&P 500 from June 2021 to June 2024 [6.9% vs 10.9%], while outperforming the abysmal performance of smallcaps [6.9% vs -1.4%]. So from this viewpoint, PE does appear to be adding value versus smallcaps, likely reflecting a mix of skill in avoiding the more problematic middle market companies, selecting and managing sound businesses, and a bias toward investing in IT businesses.
The net result is that PE returns reflect the successes and struggles of the broader middle market, with a bias toward IT businesses. PE might be characterized as a competing allocation for small and microcap stocks, with similar return and diversification benefits. The approach of using PE to build an asset allocation model with a small/microcap framework might be more suitable than assuming PE returns of “market plus 3%” with unbelievably low volatility.
This public-markets equivalent viewpoint on PE modeling mirrors my previous look at venture capital markets, albeit from the other end of the market capitalization spectrum. See “Venture Capital Versus the Magnificent Seven” which we published in January 2024. In this paper we assert that the large R&D budgets of megacap firms, which are collectively larger than capital deployed annually in venture capital, means that investors in these firms are already meaningfully allocated to the more successful part of venture investment activities. Conversely, the Cambridge venture capital return data does not show, on average, compelling venture performance versus public market equivalents. Nonethless, truly exceptional investors in venture capital can still experience truly exceptional results.
Ramifications of Lower PE Returns on PE Investment Strategies
At Manager Analysis Services we believe that investors’ frustrations with their recent PE returns reflect the dynamics of companies in America’s corporate middle market. We are seeing PE managers respond to the environment by trying to protect their businesses’ earnings potential. With PE funds’ underlying portfolio companies performing far below expectations, we believe that PE managers are holding investments in these companies longer, hoping for a recovery so they can meet their hurdle rates and potentially earn some carry.
The consequence of this “hold for longer” dynamic is that exit rates for PE funds have slowed dramatically over the last three years, leaving markets to find alternative sources of liquidity. The rise of secondary funds reflects market demand for liquidity. PE managers themselves are also embracing new investment structures that allow their funds to hold investments for longer, and in some cases, reset their carry terms through continuation vehicles and other structures. Purchases of captive investors like insurance companies, creation of interval funds, and efforts to access retail sales channels represent a combination of aggressive distribution strategies and a repositioning for future illiquidity.
These strategies indicate a likelihood that investors must be extra vigilant that the PE managers for their future investments have both the will and the capability to execute a PE strategy that is consistent with the investors’ expectations for timing of return of capital. They also indicate a stress upon the reliability of the historical experience, that buyout and growth PE funds would typically be able to return capital on average every 4 to 7 years. We believe that investors in PE today should be prepared for the prospect of much longer effective commitment horizons for new PE investments.
Is Your OCIO Smarter than the Ivy League Endowments?
While the endowment and foundation world has historically looked to the Ivy League endowments for ideas and inspiration, their more recent performance has reflected the challenges we discuss in this Briefing. Illiquidity is a huge problem. The following chart shows the extent to which Ivy League endowments have overextended their commitments to private markets, with unfunded commitments consuming on average 45.6% of their liquid assets, according to a study by Markov Processes:
The combination of any future recession alongside material cuts in government grants for these schools could create major challenges for these institutions.
While these very respected endowments remain committed to keeping large PE allocations, some are clearly responding to being overextended. Both Harvard and Yale have announced curtailments or sales for portions of their private holdings. They will likely be disappointed with the secondary market values for their holdings.
What We Are Thinking About OCIO Allocations to PE
We do believe that PE markets have achieved maturity and that on average PE managers will struggle to outperform public market equivalents. We question the historic assumption that PE markets will rebound simply following the historic pattern of rebounds. Instead, we think PE markets will reflect the subsectors into which the PE funds have allocated, and the fate of America’s middle market. If the middle market recovers, so will PE; if they continue to struggle, so will PE.
We believe that past use of public market equivalents made faulty comparisons to large cap markets, and that the small and microcap markets are more suitable benchmarks. We question how PE is classified as a separate class within equities, and we think that OCIOs should pay closer attention to the underlying sector allocations of their PE fund holdings. OCIOs should ensure that the sum of their PE funds’ sector exposures are in line with the OCIO’s overall desired market sector exposure.
Despite these observations, we do believe that PE markets continue to offer very attractive investment opportunities for sophisticated investors. The very high dispersion in returns across PE managers and their funds offers evidence that having exceptional manager-picking skills in PE markets is imperative. Moreover, we caution embracing the skeptic’s view, that PE markets just don’t add value after adjusting for sectors. Rather, the PE managers’ embrace of entrepreneurialism is exactly what caused them to concentrate in the best-performing investment sector, information technology, over the last ten years, creating substantial value for investors.
OCIOs should focus their PE investment efforts on areas where they have the strongest quality-sourcing capabilities for private investment opportunities. If the OCIOs believe, as do we, that PE funds tend to track the performance of the middle market and its underlying business sectors, then it is somewhat less important to have a truly diversified PE portfolio, because public market equivalents are available. Instead, OCIOs can maintain higher liquidity for clients while targeting scarce resources on sourcing the best managers in sectors they find compelling for their clients. What we have seen working best is a sort of barbell by PE manager type: investing in already-established relationships with a small set of capacity-constrained, highly performing premiere PE managers; sourcing boutiques and sector pros who avoid “auction markets” and who can find their own management talent to run their portfolio companies; and avoiding the “asset gatherers” who will struggle to add value compared to relevant public market equivalents.
Information about us is on our website www.manageranalysis.com, and we would welcome a conversation with you about this Briefing.
In addition to conducting OCIO searches, we also evaluate OCIOs for clients that want a “wellness check” on their OCIO relationships. These clients find our OCIO evaluations informative and helpful, and thankfully, for the most part clients find that they remain satisfied overall with their current OCIO provider. One area that clients find particularly enlightening is having their OCIO advisory fees “marked to market,” particularly where reviews have not been conducted for more than four years. Potential fee savings are often a multiple of the cost of an OCIO review. This can essentially make the evaluation “free” and result in an annual saving to the client. Review of an OCIO over a Full Market Cycle aligns with the industry practice of reviewing any investment manager performance over a market cycle.
Here are other common themes found in our OCIO reviews:
Conflict of interest from OCIO Self-Evaluation: Many OCIO clients excessively rely on their own OCIOs to self-evaluate their performance. We see many cases of OCIOs reporting their performance in the best light, and not comparing themselves to appropriate peer groups. This practice occurs because evaluating OCIOs requires specific resources and expertise that often is hard for OCIO clients to access internally. Our evaluation service closes this gap.
OCIO Performance Evaluation: Particularly over the last three years, some OCIOs have experienced substantial negative alpha on their liquid, actively managed equity strategies. Often more than offsetting that negative alpha has been strong performance in private equity investments. We can help you ascertain whether the recent record of negative alpha in equity strategies is a warning sign, or is a reflection of temporary market conditions. We can also help you evaluate the quality and scope of your OCIO’s private investments program.
OCIO Alternative Investments Success Evaluation: Almost all OCIOs have embraced private investment strategies for a portion of their clients’ portfolios. However, some OCIOs have moved very quickly into private investment strategies, and some may not have built out experienced diligence teams nor developed robust investment premises behind their private investment programs. This development could be a material risk to you, because the long-term nature of private investments means that you are “stuck” with any errors made for a 5 to 10 year horizon. We are experts at evaluating private investment strategies, so we can help you calibrate your OCIO’s strengths in private investment strategies.
We would welcome a conversation to show how we can help your specific situation during which we would be pleased to share a sample OCIO Evaluation Report with you.
Since 2003, Manager Analysis has provided investment research and support for clients. All 3 principals each have 30+ years investment expertise, including having led 3 different private foundations and having served on 11 different Boards.
We can be reached at 917-287-9551 and at cutler@manageranalysis.com.
Many fiduciaries have been challenged by their OCIO’s performance this year, and question whether their OCIO’s performance is acceptable in light of terrible market performance [S&P 500 down 14% plus and bonds down 10% to 15%]. Returns are actually worse after considering 8% inflation, and many fiduciaries are finding that the actual buying-power is down over 20% in real terms.
What steps should you take that properly support your decision to retain your OCIO, or to explore whether you should search for a better-performing OCIO relationship? We suggest that a first step is to consider whether your OCIO is performing satisfactorily, relative to market conditions, to help inform your governance efforts:
Market returns have been exceptionally poor 2022 YTD. This year is only the third year since 1900 when both equities and bonds indices were both down. (2015 and 2018 were the other two years.) Indeed all 11 S&P sectors suffered with the notable exception of energy (+34.5%). Certain alternative funds provided effective diversification. Those OCIO managers that were sufficiently nimble to layer in protective equity puts, pivot to energy, avoid long duration fixed income, and focus on specialized hedge strategies were best able to reduce overall market losses. It is these types of OCIO managers who are the standouts.
Conversely, we have seen OCIOs underperform from several causes. OCIOs that pursued 60/40 allocations that did not dodge rising interest rates’ impact on their bond portfolios received a double hit. OCIOs that focus on “alpha creators” for their long only equity managers [an allocation approach we meet with great skepticism] also were hit hard by the fact that those OCIOs really didn’t diversify by style, and many of their managers are growth-and-tech bias at the epicenter of underperformance in year’s value-oriented equity market. OCIOs with a strong “geographic diversification” [i.e. underweight in the US markets] were hit by falling European currencies and weak European equity markets. Finally OCIOs that tend to use equity-oriented hedge funds missed the benefits of having the full suite of hedge fund strategies.
Whether you wish to continue your OCIO relationship or are considering a search potentially to replace your OCIO, we recommend that, as fiduciaries, you evidence that you have reviewed your relationship if you have had losses near or over 15% this year. We specialize in evaluating OCIO portfolio performance and can assist you in providing an objective third party analysis. Manager Analysis Services has nearly 20 years’ experience in this field. We offer your fiduciaries a complimentary discussion of your OCIO’s performance, and whether you should take further steps.
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
N.B. – A non-profit Board is not considered “institutionalized” if the founders retain a Board majority.
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.
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?
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.
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.)
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.
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.
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.)
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.)
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.
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.
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:
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.
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.
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.
