Managing Charity Funds
This article was published in the Charity Council’s Newsletter Issue 2.
As a trustee or director on the board of a charity, there are four key areas that one needs to pay special attention to with regard to managing its financial assets:
1. Reserves Policy
The reserves of a charity refer to the part of the fund that the charity can use to pay for its normal operations such as salaries, utilities and rental, but excluding those items that have been committed for the long term such as annual contribution to an orphanage, religious body or university scholarships.
While it is a good idea for a charity to have as large a reserves fund as possible, the Code of Governance requires that charities disclose their reserves policy annually. The reserves policy should state the amount of financial reserves a charity has, the reasons for holding it and how the charity intends to spend it. The significance of this is that large charities must now justify to the public and their donors should they wish to raise more funds to add to their substantial reserves.
2. Endowment Fund
If a charity decides to set up a separate endowment fund or capital fund such as a scholarship endowment fund and building fund respectively, it is required that the prospective donors be informed of the need and the purpose of such a designated fund to be set up, the size of the fund, its target commencement date and the completion date when applicable.
No money in the endowment fund or designated capital fund can be used for operation purposes or outside the stated purpose unless the donors expressively approve such a transfer or change of use.
3. Fixed Assets
Like a commercial organization, a charity is recommended to keep a register for of all its fixed assets and to safeguard their value, such as conducting regular maintenance (or conservation) and arranging for adequate insurance coverage. For some charities and non-profit organizations with a long history, their most valuable assets may be physical buildings or valuable works of art donated by their founders. It would be dereliction in the performance of duties on the part of the trustees if such assets were left to ruin.
4. Investment Policy
A charity should invest its reserves and endowment funds (especially if the funds are substantial) in accordance to the investment policy that is approved by the board. An investment policy statement specifies the investment objectives of the charity, its risk profile and the other applicable constraints such as time horizon and periodic withdrawals. The investment policy should also state the appropriate asset allocation strategy in order to achieve the investment objectives. In the situation where the board does not have members with the necessary knowledge and experience in investment management, the board should seek proper professional advice.
When engaging the service of a financial adviser, the board should note that they are ultimately responsible for the function of managing the financial assets of the charity. The board is however permitted to delegate its investment function to licensed discretionary fund managers under certain conditions.
To help board members of charities and foundations further understand their duties and be more effective, below is a list of good practices that may be relevant:
• Establish an investment committee from among the board members and invite professionals from outside the board to manage the funds of the charity. Write a charter for the charity to ensure its proper functions and to guide its activities.
• Appoint an independent investment consultant to advise the investment committee on all matters relating to its investment activities. These include the writing of the investment policy statement, deciding on asset allocation strategy and performance benchmark, as well as the selection and appointment of professional fund managers. Schedule regular briefings and market updates by the investment consultant for board members.
• Engage the services of professional discretionary fund managers to manage the fund of the charity. So long as the fund managers are investing in accordance to the investment policy and specific guidelines set by the board, the investment committee should refrain from intervening in the investment decisions of the appointed fund managers.
• Review the performance of the fund managers periodically. Require fund managers to provide details of key investment holdings in the fund, the turnover of the assets held, any major change in the personnel of the fund management firm, as well as explain their performance and follow up on all outstanding issues that are raised.
• Appoint a bank that is independent of the fund manager to hold the funds and assets as a custodian. This is particularly important if the size of the fund is substantial and invested with multiple fund managers. The custodian administers independently all the inflows and outflows from the fund based on a set of authorizations provided by the board of charities. It also provides regular independent performance reports based on latest market valuations.
• At all time, avoid situations of conflict of your personal interest with that of the charity. Never commingle your personal investments with that of the charity. In addition, the director should abstain from any decision-making process if he has any commercial interest in the fund-management firm that the charity is considering for engagement.
About the Writer:
Peter Lai is a veteran banker and has been involved in managing funds for charities and IPCs for 15 years. He is also the writer of the book, “Good Practices for Managing Charity Funds”