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Committee Meetings
We might well set dates a year in advance for meetings”whatever number
of meetings may be expected to be necessary. That way, committee mem-
bers can plan their calendars around those dates. But the committee should
be available for interim, unscheduled meetings if needed.
Many organizations simply plan four meetings a year”at the end of
each quarter to review results for the quarter. I do not favor that approach.
Most such meetings consist mainly of a myopic review of the markets dur-
ing the last quarter and how each investment manager performed. Perfor-
mance summaries should be sent to committee members in advance”and
reviewed by them as part of their expected homework. At meetings, discus-
sion of performance should respond to any question and focus on lessons
to be learned or decisions to be made, such as:

Should we consider terminating one of our current managers, or

changing his benchmark, or adding money to his account, or with-
drawing money from his account?
Should we be looking for a new manager in some asset class?

Is there a reason why we should consider revising our investment pol-

icy or target asset allocation?

It is suf¬cient for the adviser to mail quarterly results to committee
members with an explanation that helps to put those results in a longer
time frame perspective. Each meeting should be devoted to consideration
of a recommendation or continuing education from the adviser.
If the adviser happens not to have suf¬cient business to justify a meet-
ing, the adviser should suggest that the committee chairman consider can-
celing the meeting. If a two-hour meeting is scheduled and the adviser
needs only half an hour of business, the adviser should notify committee
members as far in advance as possible.
On the other hand, if the committee is in the process, for example, of
selecting the managers to ¬ll a revised Policy Asset Allocation, then meet-
Interaction of Committee and Adviser

ings should be scheduled more often until the process is completed”as of-
ten as every week or two. Such a process should be completed in a couple
of months, at most, not a year or two.
If an urgent matter arises that can™t wait for the next scheduled meet-
ing, a special meeting should be called at whatever date most committee
members may be available. If the matter is simple and routine enough, the
committee chairman can avoid a special meeting by circulating to commit-
tee members by e-mail a “consent to action,” which is suf¬cient to autho-
rize action, when agreed to by a majority of the committee.
Committee members should make every effort to attend all meetings,
if not in person, then by conference call”which I have found can work
very well.
In any case, relative to recommendations, the adviser should send
committee members copies of his full presentation materials several days
before each meeting. Committee members should review these materials
with care, so they™ll be prepared to ask better questions during discus-
sions at the meeting. The danger is that a committee member may decide
how he will vote on the recommendation prior to the meeting. This he
should avoid. Advance preparation should lead to questions, not pre-
conceived minds.
I have found it helpful at meetings if the adviser reviews each recom-
mendation page by page. This does not mean reading each page out loud.
Every committee member should already have read it. Instead, the adviser
should discuss brie¬‚y the meaning”the “so what””of the page. This
tends to elicit more and better discussion and gives greater assurance that
no key considerations have been glossed over.
Once each year, the adviser should give a thorough review of the over-
all fund and of each individual manager. The adviser should explain why
each individual manager should be retained and why that manager remains
the best the fund can obtain in his asset class.

Committee Leadership
Successful investment committees require a strong leader who is focused
and able to keep discussion on track, and who can bring committee mem-
bers to ¬nal resolution of issues. In planning the agenda, the chairman
should schedule the most important items ¬rst. If the committee can™t ade-
quately resolve all items on the agenda without rushing, the chairman
should strongly consider calling a special meeting in, say, two weeks
rather than wait possibly a few months until the next scheduled meeting.

Committee members should understand that by not making a decision,
they are actually making one, and sometimes that can be costly.
At the end of each meeting, a careful record of all decisions should be
prepared and retained in a permanent ¬le, together with a copy of the ad-
viser™s recommendation for those decisions.
Long-time Morgan Stanley strategist Barton Biggs has suggested that
many investment committees make misguided judgments because of the
negative dynamics of group interaction. “Groups of highly intelligent
people are reaching bad decisions that re¬‚ect the easy, prevailing consen-
sus of what has worked recently. . . . Groupthink plagues every commit-
tee, and most don™t even know it. . . . The more compatible the group,
the more its members respect and like each other, the bigger the commit-
tee, and the more ˜spectators™ that attend meetings, the likelier it is to
make bad decisions.”8

Recommendations to the Committee
Jay Yoder, writing for the Association of Governing Boards of Universi-
ties and Colleges, contends that “policy implementation . . . should be
delegated to a chief investment of¬cer. This senior investment profes-
sional should be authorized to take any actions that are consistent with
the investment policy, including hiring and ¬ring managers and rebal-
ancing the portfolio.”9
Still, many investment committees reserve to themselves decisions on
hiring and ¬ring managers. In that case, they should lean heavily on their
In making a recommendation to hire an investment manager, the ad-
viser should be expected to cover concisely the key questions the com-
mittee ought to ask about the manager. Generally, such a presentation
should provide:

The precise recommendation, including the full name of the invest-

ment manager, the amount of money to be assigned to its manage-
ment, and the particular asset class it will manage.

Yoder, op. cit., p. 42.
Ibid., p. 49.
Interaction of Committee and Adviser

How does the manager ¬t into the portfolio™s overall asset allocation

and policies? The adviser should include information about the asset
class itself if the asset class is relatively new to the committee.
Who is the manager? What are the corporate af¬liations, date of

founding, location of of¬ces, size of staff, and so on?
How does the manager invest? What distinguishes his investment ap-

proach from that of other managers in his asset class?
The manager™s past performance, and why the adviser thinks it has

predictive value.
Risks in the manager™s approach and how to deal with them.

Who are the key people, and why do we have con¬dence in them?

How deep is the staff, how long have they been with the ¬rm, and
what turnover of people has the manager experienced?
Why do we think the manager is the best we can get in that asset class?

Who are the manager™s other clients, especially for the same kind of

program we are recommending? (This consideration is often overem-
phasized, since it is not the actions”or inactions”of other funds that
should determine what we do.)
What™s the fee schedule, and why is it appropriate?

The presentation should cover only the salient points, not try to snow
the committee with the whole study nor, in fact, provide any more than a
committee member might be expected to absorb. Does the committee re-
ally need to know this? The adviser should not try to cover his tail by giv-
ing an information dump. Of course, the adviser should have a rich depth
of additional information and background so that he can answer brie¬‚y
but with authority any reasonable question that might come up.

Meeting with Investment Managers
It is customary for many committees to meet the recommended manager of
a separate account or commingled fund . . . and sometimes to meet several
“¬nalist” managers one after the other in what I call a beauty contest. The
committee can, at best, determine how articulate the manager is. But artic-
ulateness has a low correlation with investment capability. In 20 to 30 min-
utes, a committee™s interview can be little more than super¬cial. Committee
members cannot bring the perspective of having met with hundreds of
managers, as the adviser can, nor can they do the kind of homework the
adviser should have done. Ultimately, the committee™s decision comes

down, after discussion, to whether the committee has con¬dence in the ad-
viser™s recommendation.
I don™t even recommend bringing managers to the committee for rou-
tine performance reports”for much the same reasons. I have sat through
countless manager reports to committees. These reports generally cover the
manager™s outlook for the economy (which may have little to do with his
investment approach), his interpretation of the account™s recent perfor-
mance, and the particular transactions he has made recently. The reports
are super¬cial, usually highly myopic, leaving the committee members with
little more than the general feeling that they have “done their ¬duciary
duty.” A cogent, concise report by the adviser can do a better job of surfac-
ing issues and placing things in a helpful perspective for education and de-
cision making.
Bringing a manager to meet with the committee can on occasion be a
useful part of the committee™s education. It can broaden the minds of com-
mittee members and help them feel more connected to the investment
world about which they are making decisions.

Working with New Committee Members
Whenever a new person is appointed to the committee, the chairman
should devote much effort to bringing the newcomer up to speed quickly
with the rest of the committee. The new member should immediately be
given key documents, such as the fund™s objectives and policies, and its Pol-
icy Asset Allocation, together with their underlying rationale.
Understanding the “why” of everything is critically important, and the
above documents may well need to be supplemented by one-on-one ses-
sions with the adviser.

An issue at some committee meetings is, if the committee is using sepa-
rately managed accounts rather than mutual funds, who should vote the
proxies for the many common stocks in the portfolio. Certainly, as share
owners, we should see that our proxies are voted responsibly.
But who should vote our proxies? I feel strongly that the investment
manager who holds a stock in his account should be the one to vote it. He
is in the best position to know what vote would most likely promote the
value of that stock.
Social Investing

If we invest in mutual funds, the adviser is in the best position to vote
mutual fund proxies.


A number of endowment fund sponsors”churches and others”overlay
their investment objectives with a set of social goals that constrain them
from investing in the stocks and bonds of certain kinds of companies.
This practice was most publicized in the 1980s, when many funds
avoided securities of companies that did business in South Africa. Other
fund sponsors are sensitive to companies that do business in one or more
other categories, such as cigarettes, alcoholic beverages, munitions, chemi-
cal fertilizers, and so on. Still other funds consciously allocate a small part
of their endowment funds to minority-owned enterprises or other compa-
nies they view as performing a particular social good.
Overlaying our investment policies with social objectives is one way to
“put our money where our mouth is,” and as such, is perfectly appropri-
ate”provided the majority of constituents of that fund sponsor agree with
the social objectives and with the costs in terms of lower investment re-
turns. Social investing probably does more to enable investing institutions
to be consistent with their principles and probably less, from a practical
standpoint, to effect social change.
But how can an organization gain the consensus of its constituency as
to what industries to avoid? Tobacco companies might be easy. And maybe
munitions . . . but should we even avoid companies for whom munitions
are only 1% of their business? How about industries that pollute the envi-
ronment? Which industries are they? Where should we draw the line?
If a fund sponsor is to take a social investing approach, everyone in-
volved must be realistic about the fact that exercising social investing is
likely to be costly, for the following reasons:

Competent investing is dif¬cult enough. Avoiding any set of compa-

nies adds to complexity and reduces the investment manager™s range
of opportunities.
The best investment managers are competitive people and are driven to

achieve the best they can. They tend to avoid clients who want them to
observe any particular constraints.
Very few mutual funds observe social investing constraints and be-

come eligible for consideration. Those few mutual funds that do

social investing have”over the long term”achieved performance that
is much closer to the bottom of the pack than the top.
We must consider whether the social objectives of any social invest-

ment mutual fund are the same as our social objectives, those of the
fund sponsor.
Without the use of multiple mutual funds, it is dif¬cult to achieve the

wide diversi¬cation I believe institutional investors should strive for.
If we are using a separate account rather than a mutual fund, then so-

cial investing has an unintended byproduct: Most large companies are
so diversi¬ed that social-investing limitations eliminate many of them
from consideration. Our remaining universe therefore is more heavily
weighted toward small stocks, companies we know less about.
Social investing may also limit us to investments in U.S. companies, be-

cause we may be too unfamiliar with speci¬c foreign companies to
know whether or not they meet our social investing criteria.
Members of the fund sponsor must expend a lot of effort to maintain a

complete, accurate, and timely list of companies to avoid. Members
must be willing to devote the time.

In short, it is unrealistic to expect as good long-term total investment
return from a socially invested investment fund as from one that has no
such constraints.
Whether or not an endowment fund pursues social investing, I still rec-
ommend that the endowment fund use the Imputed Income method for
recognizing income (see Chapter 9). But whereas endowment funds with
unconstrained investments might use an Imputed Income formula of 5%10,
I would recommend no more than 4%, perhaps less, for an endowment
fund limited by social investing constraints.
The sponsor™s board should recognize this reduced investment expecta-
tion and buy into it explicitly by lowering the Imputed Income formula.
And I think the board has a moral obligation to inform the fund sponsor™s
constituents and make sure they agree.
If everyone agrees, then of course the board should go ahead with its
plans for social investing.
Some fund sponsors try to pursue their social objectives through proxy
voting. They have at times introduced and supported motions on a com-

Of the average market value of the endowment fund over the past ¬ve years.
Appendix 1: Example of an Investment Committee™s Operating Policies

pany™s proxy to effect some social or environmental change. I believe such
efforts have done more to sensitize companies to the issues than to effect
change directly”and that has probably been the realistic expectation by
the fund sponsors.
The investment downside of this approach is that we can only vote a
company™s proxy if we are direct owners of its stock, and that constrains us
from using mutual funds or other commingled funds, which are such a
convenient and effective means of gaining strong investment management
and broad diversi¬cation.
The issue of social investing does not arise for pension funds, which are
required by ERISA to make all decisions “solely in the interest of participants
and bene¬ciaries” of the pension plan. For funds not governed by ERISA,
¬duciary responsibilities seem to suggest that social investing be avoided un-
less there is a compelling mandate from the plan sponsor on speci¬c issues.


All who are involved in decisions for an investment fund are ¬duciaries

and are held to a very high standard.
Decisions are usually made by an investment committee that typically

devotes a relatively few hours per year to the fund. The committee
must have a competent adviser to rely on.

Example of an Investment Committee™s Operating Policies

1. The Committee will consist of [number] members, appointed by
[whom]. They will serve [staggered] terms of [number] years and may
be reappointed for [number] terms.
2. To be eligible for appointment as a Committee member, a person
should be familiar with investments”at least to the extent he or she
participates in an employer™s de¬ned contribution plan or an IRA, or
has other investments in stocks or bonds. He or she should also have a
broad and open mind with a willingness to learn, be willing and able to
attend all meetings of the Committee, and be prepared to review care-
fully in advance any materials distributed in preparation for meetings.

3. The chairman will be [appointed by whom or elected by a majority
vote of the Committee members].
4. The Committee is to hire
“ A Chief Executive Of¬cer (CEO) who will hire staff and manage the
entire investment program, subject to the oversight of the Commit-
tee, or
“ A consultant who will advise the Committee on investment policy,
asset allocation, and the hiring and monitoring of all Investment
5. The Committee is to meet at least [four times] a year and at any other

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