II: Assembling an Investment Committee

The investment committee provides the critical service of ensuring that the investment fund meets the organization’s objectives, which are often diverse and dynamic, and that the fund is administered properly. An investment committee that is not focused, not sufficiently deliberative, or does not clearly understand its objectives faces a considerable struggle to execute its fiduciary duties.   

Therefore, when assembling an investment committee, the board should purposefully decide on the number of committee members, their terms, and the desired skillsets and diversity. For nonprofit organizations, membership should not be conferred simply to the largest donors or most successful community members, but rather, to those who offer expertise and are available to meet regularly. Moreover, boards should seek members who are humble, open-minded, patient, consensus-oriented, and capable of asking probing questions.   

Size  

Large committees can be unwieldy, as well as susceptible to groupthink and social loafing. Attempting to organize a dozen or more people and allowing each member to meaningfully contribute is difficult. Large groups are more prone to seeking harmony and minimizing conflict than smaller groups. Often this will lead to decisions without critical analysis from each member and the suppression of dissenting viewpoints. Furthermore, large groups of people tend to exert less effort than smaller groups. Generally, five to seven members are sufficient to provide the necessary breadth of opinions without being overly burdensome.  

Terms  

Terms should be clearly defined to safeguard against complacency and to ensure new members the opportunity to offer fresh ideas and opinions. Unlike other board committees, however, investing requires a long-term view, and that perspective should be well understood. Therefore, continuity of members and institutional knowledge must be preserved.  

Frequent committee turnover can lead to changing investment beliefs, which can be detrimental to a successful long-term investment strategy. Therefore, members should serve terms of at least five years, and re-appointments should be possible for contributing members. This term structure allows for one or two new members every few years while maintaining long-term continuity.  

Skillset/Diversity   

In selecting new members, diversity should be considered. Multiple opinions and perspectives can be beneficial. If everyone had the same knowledge, same skillsets, same life experiences, and the exact same beliefs, there would be no need for a committee, because one person could serve the role. Therefore, carefully selecting members based on their skillsets and life experiences can reap enormous benefits. Having an investment committee composed entirely of finance and investment professionals, despite the apparent advantages, may not be the best approach, as these individuals may not adequately consider outsiders’ perspectives. Including business and community leaders with expertise in fields other than finance can provide differing views and encourage the committee to thoughtfully reconsider established beliefs.  

Although diverse perspectives can be beneficial, the committee members should share common values. For instance, to benefit from each committee member’s different skills and backgrounds, the members must be willing to embrace a degree of conflict and share their views openly. Furthermore, the committee members should focus on the needs of the organization as opposed to their own personal goals.  

Sometimes board and committee members will have conflicts of interest, such as working for a firm that would like to be considered to manage a portion of the portfolio. This is unacceptable, and a strong conflict of interest policy should be adopted to prevent members from personally benefiting through their role on the board or committee.  

These principles apply to all organizations, not just those that are forming investment committees for the first time. For organizations with functioning investment committees, the board should periodically evaluate the structure of the committee, including the number of members, the length of their terms, and the need for diversity. If change is needed, the board can adopt new guidelines and enhance existing documentation to structure the investment committee more thoughtfully.  

The next piece in this series will focus on how to design and implement an effective investment process.   

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser (RIA). Registration as an adviser does not connote a specific level of skill or training nor an endorsement by the SEC. More detail, including forms ADV Part 2A & Form CRS filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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