There are many challenges facing not-for-profit (NFP) organisations. In this article we highlight 3 areas to consider as priorities as we enter the new financial year.
There are many challenges facing not-for-profit (NFP) organisations. In this article we highlight 3 areas to consider as priorities as we enter the new financial year. Firstly, lower expected returns on investments have created budget pressures at a time when the need for services is greater than ever. Secondly, there are increasing demands on boards as government and industry oversight increases. Thirdly, while short term pressures need more and more attention, the strategic positioning of your organisation requires long term thinking – risk management and planning for the long term is essential.
Governance is now a big issue facing the boards of not-for-profits. Trustees are usually chosen because they have a passion for the cause or the activity of their organisation. They give their time freely and operate in good faith. However through increased government oversight of the sector and increasing demands on Trustee’s in general, the job is getting more difficult. Trustees are feeling increasingly squeezed and vulnerable as they become more visible and potentially personally liable for their actions. It’s no longer possible to simply be well-intentioned.
It’s prudent to consider the best strategy to manage this situation, how to discharge increased duties in a responsible way and how trustees can best direct and spend their limited time. Professional assistance can help put the essential building blocks in place including how to monitor time and activity, the best way to delegate and most importantly, how to effectively manage governance issues to the standards required.
Good people are hard to find. It’s important they continue to contribute their talent and passion, not burn out and fade away.
What does governance mean to you? If you see governance as determining what success looks like for an organisation and setting a strategy to get there, monitoring progress on the path to success becomes an acute part of the process. Given the pressures on governance resources, knowing what to monitor and how often is critical: no one wants to waste time measuring something that doesn't really matter. Often short term investment returns feature strongly in the monitoring process, whereas NFPs tend to have long term goals. We believe a good investment monitoring process should also allow you to step back and compare your returns against the benchmark portfolio (is our manager earning the fees we are paying?), against peers (what are others doing?), and against the long-term investment objective (is our investment strategy well-aligned with our goals?). And what about risk? Are you monitoring the risk being taken to achieve those investment returns?
Right now there is concern around future investment returns being lower than the past 5 years and potentially too low to manage a significant rise in requests for services.
Let’s not forget we have recently experienced a significantly buoyant financial period. Returns on investments have been high; in fact since the GFC of 2008 we have had seven years of fruitful harvest. Those who have stored a percentage of their high yield gains will have more to work with now the economy has slowed.
That aside, it’s important to note the prospective return environment we are faced with and develop an appropriate investment strategy.
The historical model for many NFPs was to invest in cash/term deposits and maybe some high profile local shares. We believe that strategy won’t generate the returns it has in the past, especially with official cash rates so low.
So, what’s the best way to deal with this?
Professional advice will help identify new ways to diversify your portfolio and develop different sources of return. This is the time to gain clarity around what you’re trying to achieve and develop a new, robust medium to long term plan and approach to the way you earn and spend.
It’s important to identify the long term risks that face every organisation. Thinking long term, especially around potential risks can require a significant behavioural shift but it’s essential to put the right strategies in place.
For example, the potential impact of climate change on future returns for investments and growth assets cannot be ignored.
With the right advice and planning you can limit exposure to climate change regulations and changes to the macro environment it could potentially create. Investments need to be sustainable over the long term and when you’re prepared to navigate the changes that a structural and systemic issue such as climate change represents, you can better manage exposure to future risk.
Risk means different things to different people. It’s important for each group of Trustees to identify and to prioritise the risks they face. Is the risk of not earning enough to fund expenditure this year more critical than the risk of a significant investment loss that erodes the capital base (harming the ability to spend in the future)? How much risk are the Trustees willing to bear? Many Trustees spend time looking at historic returns, but less time understanding the risk taken to generate those returns, and what level of risk they are comfortable with looking forward. How do Trustees balance short term risk, like investment volatility, with other more long term factors like those associated with climate change? Are the Trustees well equipped to manage the risks they have identified? What risk management has been delegated to others?
Trustees for NFPs are currently facing a crucial period of change and challenge. It’s important for the ongoing well-being of your organisation that board members retain enthusiasm and belief in their role. We believe it’s possible, with clarity of vision and trusted professional advice, for you to successfully navigate your way through the vital issues facing your organisation and be well positioned to make the most of future opportunities.
Russell Garrett is a Principal in Mercer’s Investments business. He is responsible for managing client relationships as well as advising major institutional clients on delegated investment solutions, strategic asset allocation, portfolio construction, and manager selection.
Russell is a member of Mercer’s Endowments & Foundations specialist client unit and he leads the team in Wellington, New Zealand.
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