For organizations who have more cash on hand than needed for day to day operations, investing is one way to earn a return until the funds are needed. The investment strategy of the organization should align with the strategic plan and budget expectations, as these documents will define what the funds will be needed for, and when they will be needed. An investment policy establishes the framework for investment processes within an organization, and ensures that everyone involved, including external advisors, understand the expectations.
An investment policy should outline an organization’s investment objective, delegation of authority and any limits regarding the portfolio mix or risk tolerance. The investment objective, such as growth, returns or capital preservation, in combination with the risk tolerance, will drive the nature of investments held and how those investments are managed. The authority to make investment decisions and execute transactions, with or without limits, should consider good internal control practices to limit the risk of fraud or inappropriate investment decisions. Organizations should consider its tolerance to the risk of changes in the value of investments and establish limits within the policy to manage those risks. Some examples of risks to consider include interest rate risk, liquidity risk, market risk, concentration risk and currency risk. Finally, the policy should consider how investment activities and performance will be monitored, measured and reported to the Board. Any prohibitions should be clearly outlined in the policy.
Investment objectives and risk tolerance may change over time, and thus, a regular review of the investment policy is important to ensure that the investment strategy aligns with the current state of the organization.
Other articles on Board Governance to read:
- How big should our board be?
- How often should we review our policies?
- How do I find board members?
- What does oversight mean?
- What does risk management mean?
- What are the top internal control tips for small organizations?
- Donations & Fundraising - what is your policy?
- Why is effective budgeting important?
- Is the CEO doing a good job?
- How much should a not for profit organization hold in net assets?
- Should we meet with our auditor?
- What is your role in fraud prevention?
- How do we recruit new board members?
- How do we engage our stakeholders?
- How do we set key performance indicators?
- What are best practices around volunteer management?
- What processes do we need to manage our employees?
- Do we need to project our cash flows?