Well, It Seemed Like A Good Idea.

Surviving hard economic times

It looks like the equities markets have begun to stabilize. But, it has looked that way before and it was a false positive. There are alternatives and the chief financial officers of three organizations, two with international ties, were brought together

In this installment of Executive Session, sponsored by The NonProfit Times and the United Way of America, the finance gurus discussed everything from blocked currencies to stymied investment committees.

Participating this go-round were: Charles Brice of Associated Black Charities in Baltimore, Ellen McPeake of Greenpeace in Washington, D.C., and John Woody of AFRICARE, also in Washington, D.C.

The session was moderated by Thomas A. McLaughlin of Grant Thornton and Paul Clolery, editor-in-chief of The NonProfit Times.

Thomas A. McLaughlin: Through hard work, determination, and a little bit of luck, you have managed to accumulate a few extra dollars that you don't need right away. You want to invest that money efficiently, effectively, and safely. Maybe even a little innovatively.

How do you get from here to there? What are some first steps that you followed in your organizations?

Charles Brice: For us, we have an investment philosophy. Those dollars at this point would be invested in accordance with that philosophy. We have a finance committee. The finance committee establishes the philosophy in conjunction with the staff. Our philosophy states that 10 percent of all investments are put into cash, 40 percent into bonds and notes, and 50 percent in equities.

John Woody: We take an approach similar to the one you described in that we have an investment committee at the board level that consists of some of the top investment managers in this area. We look at a number of different options.

We have an investment policy which allows us a basic 40-60 split for what we consider our endowment. We have a certain pocket of money that we call "let's go for it" money There we get into higher risk investment strategies to try to maximize our return, which generally in this market obviously was not a good strategy.

We also have some more reserved money, which is primarily overnight investments, and CDs, and government securities. So, we would look at the source of this money, and try to identify how best to use it. Based on that, we determine the investment strategy.

McLaughlin: Talk about your "go for it" money.

Woody: Our "go for it" money has been the hi-tech, and it has not gone very well.

McLaughlin: Who determines how much is "go for it" money, and where it gets invested?

Woody: We have a very active investment committee at the board level. It's headed up by a partner of one of the investment firms in the District. So, that's the primary decision maker in these areas.

Ellen McPeake: We don't have an investment committee, unfortunately, nor much in the way of escrow. We have an investment policy. Essentially it looks at short-term cash, which we would view as probably three months operating expenses. Next is longer term reserves, for up to six months of operations, which might also be used to fund a key program opportunity that we want to go for.

The rest, we could invest in equities. The challenge for Greenpeace is that our investment policy is a socially responsible one. It's very hard for us to find companies in which we could invest.

In addition, our policy prohibits us from investing in Treasury bills, because of the military-industrial complex, which is funded by the government. So, you can see that we have some challenges.

Paul Clolery: You're all U.S.-based. At least two of the organizations have international sights, and some international scope. Is there anything at the board level, or at the finance level, that determines how much of that money will be invested in U.S. equities, or U.S. securities, versus securities and equities in other countries?

McPeake: Not for us. Ours would be invested in the U.S.

Clolery: So it must be invested in the U.S.?

McPeake: Yes. There's Greenpeace International, but it's a different organization. So, it would invest its money in a different way. We have standards, for example, for a reserve policy. Greenpeace International would like all Greenpeace offices around the world to have six months of reserves, and no more than that.

McLaughlin: Those reserves that you spoke about, what is the guidance for how they should be held?

McPeake: The international organization is just looking at this issue now. There's only really four or five large Greenpeace offices. The rest are just starting off. So, they're just beginning to get into this issue.

They're very focused on socially responsible investing. There's no question about that. I think if I had a fantasy, it would be wonderful to have enough money that we could invest in some of the technology that we believe in, for instance, renewable energy, or solar energy. Because clearly there's an energy crisis in this country, I think that those would be both very close to our mission.

Woody: I'm glad you brought that point up, because we are entertaining becoming a partner in an investment type fund. This fund is going to basically consist of four or five organizations, each partner contributing a certain amount as an investment.

The purpose is to make money available within these various countries, primarily Africa at this point, to get loans, and from the loan repayments that would be proceeds of the principle, along with some interest, would be returned to us as an investor. This is at the early stages at this point.

McLaughlin: Who would be the borrowers?

Woody: The borrowers would be small businesses in some countries. Farmers. It could consist of small associations that basically don't have access for funding within their countries because of banking limitations. It's a risky situation, but it will also give us avenues for some of our blocked currencies as investment vehicles.

Clolery: Explain what you mean by blocked currency.

Woody: The currency really can't be expatriated from that country. We have pockets of money that are sitting there. We creatively use it. But we would rather use it in a way that would benefit the countries in which we are holding them.

Brice: Would that be a separate organization?

Woody: It would not be a separate organization. It would be our own unrestricted money put into a partnership. The partnership itself would be a separate entity.

McPeake: But it would be used for loans?

Woody: It would be used for loans, primarily.

McLaughlin: Do you find the blocked currency issue to arise often, or only in a small number of countries?

Woody: Enough countries that it's an issue we have to constantly wrestle with. But this is something that we desire, even if we have to use our own money from here in the United States. We want to contribute to the development of some countries, also possibly getting a good return on those funds.

McLaughlin: The risk of the principle in the investments that you make is one of the areas around which people within an organization often divide quite sharply. So it's something that needs to be attended to, because you have to have some general understanding of the risk level that you are comfortable with to make sensible -- to have a sensible policy as an organization.

Do you find differing levels of risk tolerance among the various board members, staff members involved?

Brice: I do. We're a small nonprofit organization. Our finance committee is very conservative. As a matter of fact, we only changed our philosophy six months ago because of the changes in the market. They didn't feel comfortable with leaving 60 or 70 percent of our investments in equities with the market fluxuations.

Now, on an individual basis, their investment philosophy, I believe, is totally different.

McPeake: I find it so fascinating in the nonprofit world. I've had developers come to a board meeting and say that a building in downtown D.C., which is clearly worth at least $1 million, that we should only bid $300,000. Somehow the rules that they would use in their personal life, they don't apply to business practice in the nonprofit world.

Somehow when board members put on their board-member hats, some become a different personality. They don't take the personal expertise, and experience, and whatever that they've learned in real life, and apply it to the nonprofit world.

McLaughlin: How do you explain that?

McPeake: It's a different world for them, the nonprofit world. I guess they feel so responsible for the assets. But in some ways, it's short-sighted.

Brice: On our board we have members from (an investment firm) and two bankers. Just to give you an idea, listening to their ideas about how they wanted the organization's philosophy to look, was extremely conservative.

Clolery: When you've got a group of bankers, a group of very smart people on the board, you would think it would be the other way, where they would be teaching nuance, and saying, push this way, push that way, instead of being more grounded in the 60-40 mix. Does that surprise you, Mr. Brice?

McPeake: How long had you been trying to get this policy in place, because the market was flying high for quite a while.

Brice: It did But I think for our organization, one of the concerns they have is that we're building an endowment, which is relatively new in the African-American community. So they were more interested in maintaining principle than taking any risk at this point.

Brice: They were comfortable with it being 60-70 percent -- about six months prior to the end of year 2000, and then major concerns surfaced around current market conditions. At this point, our finance committee recommended we take a more conservative approach to investing.

McPeake: When I was at Public Citizen, we put in an investment policy. The market was at 2000. We wanted to invest a small portion in equities. The president was so nervous. You know, the market's too high. The market's too high.

Clolery: At 2000, now it's more than 10,000.

McPeake: When I left we had finally reached agreement with the board that we would do dollar cost averaging, and we would very, very judiciously put in a certain amount -- a small amount every three months. After I left, they pulled it out of the market. There was some little drop in the market.

McLaughlin: John, it sounds like you must have in some way tackled this risk issue for your organization to have an acknowledged go-for-it pot of money in your operations. How do you deal with this heavy-handed fiduciary concern?

Woody: Well, the go-for-it pot of money was devised because one of our primary founders is about to retire. We had a certain goal of reaching a certain amount for the endowment. The market, as you said, was doing so well that we thought it was just an opportunity to take advantage of.

In spite of our conservative nature, we took a small pot of money, and that basically was the option. But we do have a very conservative board. Our basic policy is a 60-40 split, equity to bonds. This is probably one of the most difficult areas to discuss because on our board, there are some who want to be very conservative, and as a group don't want any funds in the stock market. There are others who say that, you know, that we should give the investment managers unlimited flexibility to choose as they so decide. If they do well, they would be rewarded by staying with us -- if not, we would basically get rid of them.

Our policy has not formally been approved by everyone, but by enough majority to say it's a policy in place. It changes as the board changes. We're overexposed at this point in some areas. We will be having a meeting very, very shortly to review that policy, to minimize our risk.

McLaughlin: We've heard the word endowment in the course of just this conversation. It comes up often as the sort of grail of a lot of nonprofit management. But I'm not sure there's agreement about what an endowment should be, what it should do. How it should operate or be handled.

What is your model, if you will, even if it's just implicit, as you strive to accomplish an endowment? What does it look like? How do you know what you're shooting for in quantitative terms? Or, are you shooting for something in quantitative, terms? Or, is it just more extra cash that you can have lying around?

McPeake: I think legacy. I think it's institutional legacy issues. As nonprofits, we have a huge obligation to take our donors very seriously in their contributions to us. Most donors, when they leave you money in a bequest, think of it as a legacy to your organization, which will continue to allow your organization to function and survive. We don't have that in practice yet, but that's what we'd like to do.

What that means to me is that Greenpeace could be around in 100 years. That it could survive, survive the downturns.

Brice: Our organization has initiated a major gifts, planned giving initiative that is directly focused on the African-American community. We're looking at the endowment not to just fund the future growth of the organization, but also as a source of funds available to partner with other organizations to affect greater change in our community.

McLaughlin: Have you been able to come up with some of those new programs, and new ideas?

Brice: Currently through our allocations process, we fund organizations that are addressing our priority areas. Although our grants range from $5,000 to $20,000, we feel our grants allow us to address current issues through funding those organizations providing services to the community.

Initiating new projects is a slow process. Funding for such programs is critical. With our appeal to individuals, foundations and corporate donors, we hope to initiate and fund new programs in the future. Establishing funding streams for periods longer than 12 months is essential.

McPeake: So, do you view an endowment as a way to launch new programs?

Brice: Yes. There are two aspects to our endowment at this point, preservations of principal and endowment income. Endowment income is directly linked to our investment philosophy. If we continue to maintain a conservative approach to investing, dollars available to launch new programs will be limited to outside funding sources.

Clolery: What do you consider conservative? Three percent? Five percent? Nine percent?

Brice: With the conservative it's about 5 to 7.5 percent. With the aggressive investments, someplace in the neighborhood of 15 to 20 percent.

Woody: We have a slightly different approach in that our goal is to raise $20 million. We've found that in order to do that, we've had to go after the foundation community to a larger extent.

We've proposed that for every dollar that is contributed to the foundation that we would also contribute a certain amount out of our unrestricted funds. That's flown well with some of the larger foundations.

Clolery: It's a self-matching grant?

Woody: Within the endowment itself. We have a large fundraising dinner every year. We take that money from the dinner primarily, and put it into the endowment. Then the foundations would come in and match that amount.

But then the money from the dinner that would normally be used for operations is no longer available. So we've developed a formula whereas a certain one-third of the income from the endowment is then pulled out, and used in operations through a holding account. That way it keeps it balanced out, and it seems to work.

McLaughlin: If a dollar were to come into your organization unexpectedly for your use, there's always going to be two ways of thinking about how to use that. The conservative, let's just hold onto it, make it part of an endowment. The other part says use it for operations. Use it today, and be done with it.

How do you deal with the differing philosophies of, let's use a dollar for the endowment, or use a dollar for operations?

Brice: Major gifts that have come to us have been designated to go into our endowment. For example, we had a $250,000 donation to the organization. It was specifically earmarked for the endowment. The board has stated that major donations should go in to the endowment.

McPeake: Are you trying to build reserves now also -- on top of the endowment?

Brice: Yes. We would like to.

McPeake: We're trying to build reserves. It's an ongoing struggle. My view is that it's crucial for our organization to build some reserves. We have some in the (c)(3), almost nothing in the (c)(4). I think that we need substantial reserves, plus eventually an endowment, for the good of the organization. It's been very uneven.

The short-term reserves would simply be cash flow. We operate in a very political climate, which makes for instability. So we need to build long-term reserves for that very reason. Greenpeace often takes a political position, and supporters can dry up in a minute.

Woody: Well, you may think that we're in a more stable environment, but in reality that's not the case. Our primary donor is the Agency for International Development. You all know that they are constantly being threatened. So we have to build our reserves for that day that may come when USAID is no longer around.

McLaughlin: Do you dare budget for profit, which can be put aside for endowment?

McPeake: We're doing it. I want a contribution to reserves every year.

McLaughlin: Did you have to do any educating of board members or staff members in order to get that in place?

McPeake: Some would like to use everything. But I think that they're finally getting the message that it's for their own good, and the good of the organization that we build reserves, so that we can keep doing what we're doing.

Woody: There's another driving issue with us, in that there are sometimes needs in Africa, and we don't have any donors available to fund those needs, primarily in the health areas. So, we intentionally take the position that if a need is great enough, we will go into our funds, our sources, and fund these programs out of our own money.

When you said long-term reserves, we tend to think of it as, maybe one day we will not have any donors around, and we would like to be able to still maintain a certain minimum amount of programming and staffing in place. That's basically what it's for. This is something that we just, out of our need to want to help, on a short-term basis, we go into these funds.

McLaughlin: Some of you have mentioned advisors. Let me just ask you quickly, paid advisors versus volunteer advisors?

Brice: Not us. Our advisors are volunteers.

McLaughlin: Strictly volunteer? Are they board members, as well?

Brice: Yes.

McLaughlin: So they have that dual role of advisor and board member?

Brice: Right.

McLaughlin: Do you select, do you seek them out for that capacity, for that ability to do that?

Brice: Yes.

McPeake: They manage the money for not a fee?

Brice: We're with Alex Brown right now. The advisor we had was actually a representative of Alex Brown. So, through his connections, he was able to work a deal where we're not paying any fees for establishing our endowment there.

I think they would prefer we move on now. But, that was the agreement we made three or four years ago. So, as we grow, what we're looking for is eventually to move those dollars that are in that 10-40-50 investment philosophy probably to another investment group. Hopefully by then the board will be a little bit more relaxed about their philosophy.

Woody: We've had a different approach. We have an investment committee, and we had an interview process, whereas we brought in a number of representatives from investment firms. I have through this interview process found out how they would invest the money that would be made available to them. From a group of about seven investment firms, we selected three different groups and allocated the funds available between these groups.

They're paid for their services. Of course, the investment committee board members are not paid for their services. We do periodically call these groups in and review them. If we're not satisfied with their services, we terminate the relationships.

We have negotiated where one group was working for no fee. The other was working for a reduced fee. Another is a full fee at this point.

Clolery: How quick is that review process? Six months? A year?

Woody: It has not been any specific period, per se. We have the investment committee meetings and the executive committee meetings about every three months. Then we go over the investment strategies and results. Based on those discussions, we call in the various groups.

McLaughlin: What standards do you use to evaluate performance? For example, what standards did you use to select an advisor in the first place? What standards do you use to evaluate their performance?

Woody: We have monthly reports that we look at the results from each investment management group. We look at what was given to them. We look at the mix of their investment strategies. Our board is a rather sophisticated group, basically reviewed their investments.

McLaughlin: So that the small committee is the consumers of these reports, rather than the full board?

Woody: That is correct.

McLaughlin: Sometimes these financial reports are very hard for nonprofessionals to understand. So, your small committee is an intermediary in the process?

Woody: That is correct. But we also include the total board. Full board meetings are held every six months. We include the summary investment reports for those that are only interested in the summary. The details of all of the investments are within that report for someone who wants to look at more of the detail.

McLaughlin: Do any of you use other advisors? Paid or unpaid bankers, for example? Do they play a role?

McPeake: We've had a paid advisor since the early 1980s. She provides socially responsible investment. She guides us on how to vote proxies and helps us with shareholder activism, because we do that sort of thing.

McLaughlin: So that shareholder activism means that you're operating on two levels. One, your internal investments, but then externally, the share holder activism related to the outside world?

McPeake: We hold certain stocks, because we want to get the annual reports on the companies. But, you need more stocks to do share holder activism. Our investment advisor will go through her client list, see who is holding a certain amount of stock, and help us get the proxy; so that we can put resolutions forward to advance our campaigns.

McLaughlin: So there's a major moral component in, obviously, your investment selection?

McPeake: Yes, like all the things we cannot invest in. Then there's also a positive side, when we will invest in certain kinds of either companies or equities that are compatible with our mission.

The most pathetic thing is we buy these oil stocks, and they make money for us. As a matter of fact, a whole bunch of staff were asked to buy shares of one oil company. We all bought it. Every three weeks I get seven pence from England. Dividends.

Brice: With us, our finance committee will discuss it first. They would make then a recommendation to the board. The board would either approve it or ask for additional information.

Woody: We've stayed away from oil companies in the past for different reasons. But right now we have moved to the point that we allow our investment managers unlimited flexibility in deciding what stocks or bonds to buy.

McLaughlin: Now, we are in a downturn period, economic period. Nobody knows how long it's going to last, or what the bottom looks like, or whether we're even there yet.

You have a certain amount of excess cash. You've got protective reserves in one way or another, restricted reserves in one way or another. What's going to happen if operations fall off to such a degree that it would really be helpful if you dug into some of those reserves in that endowment? How would you handle that?.

Woody: We just had an executive committee meeting perhaps two weeks ago. The subject was just how low we want our investments to go before we totally pull out of the market. It was a very feisty little discussion.

One really wanted to pull out sooner than later, and to basically go with various bonds, and government securities. The others say you still have to look at this as a long-term strategy. Even though the market is going down now, it possibly will come back. But one of the board members jumped in and said, well, there still has to be a cut-off point. A point where you say, we're going to bail out.

That point was not specifically defined. But the thoughts are there. We're having a meeting, I'm supposed to call the chairman of the investment committee tomorrow to talk about pulling out of the high-risk investment fund, because we're saying already that that one particular fund, enough has been enough. We'll see where we go from there.

What are some of those other models that you have encountered internationally that might be adaptable here?

Woody: We've gone to some of our donors that would normally give us grants for programs. Asked that instead they make contributions to the endowment. We've been successful with that because many of these foundations do have the funding. But, they just don't think of funding an endowment. It's brought in some of our larger contributions.

McPeake: So the foundation world is willing to give to the endowment?

Woody: Yes. I mean, you have to lead them to that point. But, it has been somewhat successful for us.

McLaughlin: Do you have a business case to explain why they should be in connection with your lending, for example?

Woody: Well, we tell them that we want the organization to be in existence, to be able to continue funding. That has resulted in significant contributions from our normal lead grantors.

McLaughlin: Is there a message that you would like to send individually or collectively to the world out there as to what would make these programs work more smoothly?

McPeake: I think the dance for us is to maximize the return on the money that our donors work so hard to give us, while minimizing the risk. I think that's it. We have to do that dance.

Brice: Organizational stability. I think when we look at our boards, they may seem conservative. But if you've been around for 10, 15 years, they look for stability. That's very key for all of our boards.

Woody: I think that we have to all continue to look for new ways of identifying funding. Because what we recognize is that our old donors are not our primary contributors now in this new environment. We've had a lot of success with that group that has new money.

By educating them, they're willing to make contributions. I think the key is to make people aware of your organization, aware of what you're doing. Keep your name out there, and it brings in the results.