What Good Looks Like: Strong Charity Investment Governance in Practice

Good investment governance rarely announces itself with great fanfare. More often, it looks rather ordinary: trustees who understand what their money is there to do, an investment policy people have actually read, advisers who speak to one another and a board that feels comfortable asking questions when something doesn't quite make sense.

That may sound simple, but in practice it takes work, particularly when markets are volatile and even the most carefully agreed long-term strategy can suddenly feel rather less comfortable than it did on paper. Trustees don't need to become investment experts, but they do need a framework that allows them to make good decisions, understand the advice they're receiving and remain focused on the charity's objectives when the inevitable periods of uncertainty arrive.

Give the portfolio a job description

The most useful place to start is also the most obvious: what is the money actually there to do?

A charity may be looking to preserve capital, generate income, support regular spending or achieve long-term growth, and in many cases it'll be trying to balance several of those objectives at once. Understanding how much the charity expects to withdraw, when that money might be needed and how much fluctuation it can realistically tolerate along the way should all feed into the investment strategy.

There's an important difference between having an investment objective written in a policy….and understanding what it means in practice. A portfolio can only really be judged in the context of the charity's wider finances, including its reserves, expected expenditure, fundraising, cash requirements and future commitments. A charity preparing for a significant capital project in three years' time will naturally have different investment requirements from one managing a permanent endowment for future generations, even if the two portfolios happen to be similar in size.

In other words, the investment portfolio needs a job description. Once everyone agrees what the job is, it becomes considerably easier to work out whether it's doing it well.

Keep everyone working from the same map

For many charities, investment decisions sit within a much broader financial picture, with trustees, executives, investment committees and external advisers all contributing different pieces of information. Good governance relies on those pieces being joined together.

An investment manager needs to understand upcoming spending commitments, changes in cash flow or anything else that might alter the charity's capacity to take risk, while trustees need enough information from their investment manager to understand how the portfolio is positioned and why. Where financial planners, accountants or other professional advisers are involved, the same principle applies: everyone should be working from a broadly consistent understanding of what the charity is trying to achieve.

That alignment becomes particularly important when thinking about risk, because investment risk means rather more than choosing a label on a questionnaire. Trustees should understand what a meaningful fall in the portfolio would mean for the organisation in practice: whether planned expenditure could continue, whether sufficient cash would remain available and whether the board could realistically tolerate a period of weaker returns without feeling compelled to change course.

The same joined-up thinking should apply to responsible investment. For some charities, particular environmental, social or governance issues will be closely connected to their purpose, while others may have broader concerns around reputation, stewardship or the types of activities they feel comfortable financing. The important thing is that trustees have considered what genuinely matters to their organisation and translated that into an approach that can sensibly be implemented.

Sadly, there's no prize for producing the longest responsible investment policy - a proportionate one that's understood by the board and actually influences decisions is considerably more useful.

Good governance leaves room for challenge

Some of the strongest trustee relationships I've seen are those where questions are encouraged, including the apparently simple ones: Why do we own this? Why has performance differed from our benchmark? What are we paying? What has changed? What would cause you to change your view?

Trustees don't need an investment qualification to ask any of those questions, and a good adviser should be able to explain the answer in language that makes sense. Equally, the relationship needs to allow for challenge in the other direction, because there'll inevitably be periods when markets fall, particular investments disappoint or a different strategy suddenly looks considerably more attractive with the benefit of hindsight.

Those are often the moments when governance matters most. If the charity has already agreed what the portfolio is expected to achieve, how much risk is appropriate and over what period success should be judged, trustees have something objective to return to when markets become uncomfortable. They can ask whether the charity's circumstances have changed, whether its spending requirements are different or whether something fundamental has altered within the investment strategy.

If something meaningful has changed, the portfolio may need to change with it. Equally, there'll be periods when the sensible course of action is simply to give a long-term strategy the time it was designed to have.

Markets have an unfortunate habit of making the most tempting course of action feel particularly compelling at exactly the wrong moment, which is one reason a good governance framework is so valuable: it creates a little distance between the feeling that something ought to be done and the decision that eventually follows.

A useful trustee sense-check

There's no single governance model that will suit every charity, and the right approach should reflect the organisation's size, resources, objectives and complexity. There are, however, a few questions that every trustee board should be able to answer with reasonable confidence:

• Can we clearly explain what our investments are there to achieve, and over what timeframe?
• Do we understand how much we're likely to withdraw and when we might need access to capital?
• Do we know what a meaningful fall in the portfolio would mean for the charity's finances and future plans?
• Are our investment strategy, reserves, spending plans and wider financial position properly aligned?
• Is it clear which decisions sit with trustees, committees and external advisers, and are those advisers working from the same information?
• Do we understand how performance is being measured, what we're paying and whether the portfolio remainsappropriate?
• Does our approach to responsible investment reflect the charity's priorities without becoming unnecessarily complicated?
• Are trustees comfortable challenging their advisers, and does the relationship allow advisers to challenge the board in return?
• Could we explain how and why the important investment decisions we've made were reached?

If the answer to a few of those is “not quite”, the next trustee meeting has acquired a useful agenda.

Ultimately, strong investment governance should give trustees confidence that the portfolio remains connected to the charity it exists to support. Circumstances will change, markets will go through periods when they test everyone's resolve and strategies will occasionally need to evolve, but having clear objectives, good communication and a board that's willing to ask questions provides a much steadier foundation for making those decisions.

And when things do become uncomfortable, there's a surprisingly useful question to come back to: what did we employ this portfolio to do?