If you think about the difference in the roles between the board and the executives, where managers are responsible for the day-to-day activities of the corporation and the board’s role pertains to planning and oversight, it’s easy to understand the role of the investment committee. The Chief Investment Officer (CIO) and staff in the investment department perform all the day-to-day work of managing the corporation’s investment portfolio whereas the Investment Committee is responsible for planning and oversight. Just as the board takes responsibility for poor decisions and negative results, the responsibility for poor investment decisions and outcomes rests with the Investment Committee.
The primary role of the Investment Committee is to approve the fund’s investment objectives. In doing so, the committee must develop an investment plan according to the financial needs and circumstances of the corporation.
The Investment Committee functions best when they have a trusted working relationship with the CIO and staff.
Role of the Chief Investment Officer
The CIO plays an integral role in the corporation’s investment strategies as a liaison between the investment committee and the investment staff.
The CIO’s first priority is to provide continuing education and updates for the Investment Committee. A qualified CIO will be instrumental in developing a cohesive approach toward investment strategies and will be able to garner a consensus between the Investment Committee and staff so they’re on the same page.
Duties and Responsibilities of the Investment Committee
Several factors may be indicators of the success of the Investment Committee, including the composition of the committee, the committee’s skills and abilities, and their approach to developing objectives, policies and practices. These factors will be spelled out in the committee’s charter.
The size of investment committees is generally reflective of the size of the investment plan. Smaller corporations with small investment plans may have as few as three people on the Investment Committee, whereas larger corporations with large investment plans may have five or more people on the Investment Committees. It’s best for Investment Committees to have an odd number of members to avoid ties in voting.
It may be surprising to learn that not every member of an investment committee has to be a financial expert. Committee members merely need to have the appropriate time to commit to committee work and the ability and desire to support the statement of investment policies. Committee members should have a diverse set of perspectives and have a willingness to be collaborative and open. Boards typically rotate members into the Investment Committee to avoid burnout.
Establishing Objectives and Policies
The Investment Committee is the primary authority on developing the corporation’s investment objectives and corporate policies on investing.
Some corporations allow the Investment Committee to make decisions and others allow them to delegate it to consultants or other designated firms or individuals. The committee ultimately shoulders the responsibility for decisions.
The first task of the Investment Committee is to adopt a written operating policy that defines the membership of the committee, meeting structure and attendance policy. Committee members also make decisions about how they will get information from investment staff and how they’ll feed information up to the board.
Operating policies will clearly define the duties and powers of the CIO and will specify for which actions the CIO needs to seek committee approval.
The Investment Committee also needs to adopt a written statement of investment policies. Investment policy statements usually include one or more benchmark portfolios that serve as a metric to evaluate portfolio returns over several years.
Meeting minutes are an important part of the Investment Committee’s responsibilities. Minutes prove that the committee conducted their duties with due diligence in decision-making. Minutes also provide a historical reference that serves as a guide to discussions for future meetings and provides a base for future decision-making. Minutes should include a list of attendees, the topic of discussions, actions, decisions and processes, as well as describe the committee’s rationale in forming decisions.
Assigning Responsibility for Investment Strategies
Corporations have a couple of options when it comes to assigning responsibility for implementing investment strategies. The size of the corporation plays a big factor in deciding on the best structure for the company’s needs.
Corporations may hire and retain investment managers or delegate the responsibility to the CIO and staff. Investment committees usually rely on the recommendations of the CIO when selecting distinctive investment management firms.
Duties of the CIO and Investment Staff
Investment Committees must recognize that the CIO and investment staff are the primary people who have the latest information on investment strategies. Their daily work in the field is the best resource for providing continuing education and perspectives to Investment Committee members.
The employees who work in the investing department are the best positioned to help the committee follow best practices and to set realistic expectations for strong returns and volatility.
Investment staff should be able to relate every opportunity for their recommendations to the corporation’s investment policies.
While investment staff normally aligns investment opportunities with the corporation’s investor philosophies, staff is prudent to be aware of attractive investment opportunities that don’t line up exactly with investor philosophies. When pursuing such opportunities, committee members need to perform due diligence to prevent unnecessary or disastrous risks. Investment staff needs to temper their enthusiasm for growth opportunities with careful explanations about their findings to the Investment Committee. Occasional “outside the box” moves often add valuable diversification to the overall portfolio.
Investment staff should also be aware of how companies that are similar in size and profitability invest their funds and how those funds are performing by comparison.
Putting It All Together for Responsible Investment Practices
The Investment Committee is responsible for the actions and decisions of the CIO and staff, while the board is responsible for the actions and decisions of the Investment Committee. Each group serves as a means of checks and balances for the others. The success or failure of the corporation’s funds has a direct impact on many parts of the business, including competitive value, quality of operations, potential for growth, employment stability and shareholder value.
As with any investment plan, short-term losses and downturns often lead to long-term gains. Boards and investment committees need to evaluate the performance of funds according to long intervals with multi-year benchmarks.