Putting financial strategies, policies in writing is good exercise for nonprofits


Do nonprofit boards of directors sidestep their fiduciary responsibilities by being too prudent? Do they err on the side of caution in order to avoid being labeled risk-takers? In fact, do they miss financial opportunities by scrupulously avoiding risk?

These are heady questions nowadays. On the one hand, TC nonprofit boards have historically been scrutinized for taking excessive financial risk. Now, the scrutiny pendulum is swinging toward boards who do not fulfill their fiduciary responsibilities because they avoid all risk with the nonprofit's investment portfolio. This according to a letter I recently received from a reader, Rex Rehfeld of Baltimore, vice president for investments with Gruntal & Co. and a financial adviser. Rehfeld also writes a business column for the Baltimore Business Journal.

The concerns do not end with risk-taking, according to Rehfeld.

"My experience with smaller nonprofits is that the staff and boards are not schooled or experienced in either cash or investment management. On the cash side, they tend to keep too much money in checking accounts, often noninterest bearing. They do not do a good job of cash flow forecasting so as to take advantage of higher paying money market accounts or, when the flow permits, treasury bills or discounted federal agency notes."

While these types of transactions may add only a few basis points, says Rehfeld, they are surely justified when one thinks of how much time and effort would go into fund-raising those same dollars.

"One of the problems," Rehfeld goes on to say, "is that boards often do not understand what is meant by risk, viewing it only in terms of potential loss. But that definition . . . is one-sided. It only deals with loss of value. It rarely takes into account loss of opportunity. Effective money management requires that these risks be balanced." Good points.

Many times I have worked with nonprofits whose cash reserves are consistently higher than current needs. I've often wondered why a solid financial plan wasn't developed to deal with the situation.

According to Rehfeld, "Many boards are wary about making investment decisions because of risk and potential liability. That, of course, is their choice. However, it may also result in a failure to live up to their responsibilities. As a potential donor, I am more likely to contribute to an organization that is handling their finances in a responsible manner than one that fails to effectively use the assets under their management."

These are excellent points that every nonprofit board needs to consider. Organizational finances is one of the principal areas of nonprofit governance, which should be spelled out as part of the board's policies. How does the board view risk? How does it view missed opportunities? Has there been a careful financial plan developed that takes into account cash flow and cash reserves?

These issues take on a somewhat different cast when it comes to qualified retirement plans, according to Rehfeld. Here, federal laws may impose certain governing principles on the nonprofit.

"Under the Employee Retirement Income Security Act [ERISA], it is not acceptable to hide behind 'safety' as a method of avoiding fiduciary liability. The failure to take advantage of appropriate opportunities can leave fiduciaries liable. Also, ERISA requires the development of an investment policy. While nothing in ERISA requires that this policy be in writing, it would be difficult to satisfy the requirement without putting the statement in writing."

Putting financial strategies and policies in writing is a good exercise whether or not a nonprofit has a qualified retirement plan. The discipline of developing a written philosophy and set of guidelines is transferable to all other areas of nonprofit governance. That is one of the reasons I am an advocate of a board manual. Another, and perhaps more important, reason to commit policies to writing is that it elevates the board to debating questions of policy and governance, rather than arranging furniture.

Les Picker is a philanthropy consultant. Write to him at The Brokerage, 34 Market Place, Suite 331, Baltimore, Md. 21202.

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