Non-Profit Trustees Fiduciary Responsibilities

While each individual is entitled to make his own investment judgments regarding appropriate vehicles for his personal funds and accounts, not-for-profit trustees are entrusted with specific fiduciary responsibilities. These fiduciary responsibilities have been established to ensure the safety, stability and security of not-for-profit's funds. Unfortunately, these rules have been rather general rather than specific in most cases, and that has led to financial disaster for certain not-for-profits. In my many decades of consulting to not-for-profit organizations, I have found that most Trustees or Board members appear to be completely unfamiliar with how serious their fiduciary responsibilities are, and should be taken.

We have all heard and read about the impact of the monies managed by Bernie Madoff, on not-for-profits that invested in those vehicles. Putting aside the issue of the legality and legitimacy of Madoff's transactions, many believe that hedge funds in general, because of their sometimes speculative nature, and lack of certain controls that other investments possess, would be inappropriate vehicles under any circumstances for any not-for-profit. The logic behind these rules is that while an individuals who speculates with his own monies only impacts himself and his family, non-profits that speculate may put at risk monies that have been entrusted to it to serve specific causes or missions.

TheFreeDictionary.com defines the "prudent man rule" as "the requirement that a trustee, investment manager of pension funds, treasurer of a city or county, or any fiduciary (a trusted agent) must only invest funds entrusted to him/ her as would a person of prudence, i.e. with discretion, care and diligence. Thus solid "blue chip" securities, secured loans, federally guaranteed mortgages, treasury certificates and other conservative investments providing a reasonable return, are within the prudent man rule."

The "Prudent Man Rule" has been the standard since around 1830, when there was a dispute settled by the Massachusetts courts. There have been many adaptations since then, because of the different and increased number of types of vehicles available to invest in today. One of the updates has been, for example, to include the concept of "diversification" into the definition, so an organization is not over- exposed to one particular investment. Thus, if we apply that towards the Madoff investments, even if the trustees felt that the investments might have some appropriateness as one of their investments, the many non- profits who were ruined or nearly ruined financially by holding this investment were obviously not being prudent by having a very large percentage in these investments. Trustees must not be blamed when an unforeseen circumstance causes otherwise suitable investments to financially implode, but the trustees must be held to the intent of the "prudent man rule" when making investment decisions.

Trustees must re-examine investments on a recurring basis, and assure that any changing circumstances has not changed the suitability status of a particular investment. They must insist that the portfolios be diversified as to type of investment (common stocks, preferred stocks, treasury bonds, corporate bonds, etc., as appropriate), industries invested in (no over-concentration on what investment area, e.g. technology, health, pharmaceuticals, etc.), and that the portfolio is suitably diverse. Many organizations have begun to utilize some facsimile of what is known as the "20/5 Rule." This means that, for example, that no more than twenty percent of the portfolio be invested in any one industry, and that no more than five percent be invested in any single investment.

Trustees have the fiduciary responsible to assure compliance with the "prudent man rule." This is important, not solely for legal reasons, but also for moral, ethical, and safety reasons as well.