Board Governance: Do we need an investment policy?

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.

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