Aligning Ethical Conduct for Investment Committee Members’ Dual Roles

Volunteers on investment committees of organizations with long-term financial assets are in a position to witness the investment process as both a steward and client. As the steward, these volunteers are responsible for investment management decisions that benefit a broad spectrum of stakeholders. As the client, they frequently rely upon outside investment professionals for directing the actual investing activities. A strong commitment to ethical conduct is beneficial to success in both roles.

As the organization’s primary oversight arm for investment activities, the volunteers accept the responsibility of oversight of invested assets that are intended to benefit the various stakeholders of the organization. Commonly referred to as fiduciary responsibilities, the volunteers need to display loyalty, prudence, and care when carrying out the investment strategy of the organization.

CFA Institute has developed several publications to assist these volunteers in understanding their responsibilities. The CFA Institute Investment Management Code of Conduct for Endowments, Foundations, and Charitable Organizations outlines best practices to support effective stewardship of an organization’s financial resources. The general principles of the Endowment Code, such as displaying respect and acting with loyalty and competence, are applicable to areas beyond the management of financial assets as well.

To fulfill the volunteer’s stewardship responsibilities to the wide range of potential stakeholders (e.g., donors, the organization’s staff, the mission of the organization, and potential grant recipients), the Code covers:

• Understand the organization’s mission and appropriately consider its impact within the investment strategy.
• Have a reasonable and adequate basis for investment decisions supported by active and thorough due diligence of the investment strategies of the organization.
• Ensure a proper balance of all applicable stakeholders’ interests in the operations of the organization while respecting the intention of the organization’s donors.
• Review and adjust investment practices and strategies to best meet the organization’s objectives and to maximize benefits available from the endowed resources.

Another specific provision of the Code recommends accessing professional resources when necessary to carry out the work of the organization. The investment committee continues to act as a fiduciary by hiring the best external manager. When making an informed decision, the committee needs to look beyond returns and strategy and understand the manager’s commitment to high ethical standards.

The CFA Institute Asset Manager Code of Professional Conduct, which is based upon the same ethical principles as the Endowment Code, provides the investment committee with a benchmark set of standards for managers under consideration. The Asset Manager Code contains practical guidelines in six broad areas of the manager-client relationship, including the investment process, trading activities, risk management, and disclosures.

As a client, the volunteers will be keen to know how the manager is working in their best interest. The provisions of the Asset Manager Code facilitating this understanding include that the manager must:

• Review and adjust investment practices and strategies to best meet the organization’s objectives and to maximize benefits available from the endowed resources.
• Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action.
• Give priority to investments made on behalf of the client over those that benefit the managers’ own interests.
• Develop and maintain policies and procedures to ensure that their activities comply with the provisions of this Code and all applicable legal and regulatory requirements.
• Ensure that disclosures are truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively.

As a potential client, investment committees should begin to inquire about the ethical culture of managers during the initial request for proposal (RFP) process. Through the inclusion of a question about compliance with the Asset Manager Code, the investment committee understands the base-level commitment being made by the manager to acting in their best interest. This allows the two groups to engage in meaningful discussions on ethical conduct during future interviews.

Simply nurturing an inclination to do “what is right” is no match for the multitude of factors that could potentially influence the decisions a volunteer or professional must make. The awareness and use of high-level ethical and professional standards by all involved in the management of an organization’s long-term financial resources is critical. These actions lead to a strong culture of integrity in the organization and ultimately the industry as a whole.

The dual roles of investment committee members will be a central theme of a presentation at the 2014 BoardSource Leadership Forum in Washington, DC on 9 October.

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