The Chaucer problem in non-profit investing

The document is somewhere.

Maybe it’s in a filing cabinet. More likely, it lives on a shared drive that nobody has opened in years. Or it sits quietly in a board portal alongside meeting minutes, bylaws, and other governance documents that receive attention only when someone remembers they exist.

At some point, it was reviewed and approved. There was probably a riveting discussion about its contents. But that was then. Today, many directors might struggle to recall exactly what it says or why it matters.

Few governance documents have more impact on an organization’s long-term financial health than its Investment Policy Statement (IPS). Yet despite its importance, the IPS occupies a peculiar place in non-profit governance. It is a bit like reading Chaucer’s The Canterbury Tales.

Most people understand just enough words to avoid admitting they’re confused, but not enough to confidently explain what it is they’ve just read.

To be fair, some policies appear to have been written by a committee of lawyers and consultants trying hard to justify their hourly rate.

Consider:

“To provide an optimized balance between capital appreciation, capital preservation, and distributable income through a disciplined strategic asset allocation framework.”

I have an English degree. Indulge me. If Chaucer had penned that sentence, it might read:

“To ordeyne and susteyne a ful convenient accord bitwixe encrees of capitale, sauf kepynge of principal, and income distributable, by governance of a discret and wel-ordered frameworke for departynge of assettes.”

Indeed.

If you want the portfolio to grow, avoid unnecessary losses, and provide money when needed, why not just write that instead?

Unfortunately, governance is not a medieval poetry assignment. Not fully understanding a policy can have real consequences. When markets fall, spending pressures increase, or a new director arrives with strong opinions about investing, the IPS should serve as the framework that guides decision-making during periods of uncertainty. Few board-approved documents sit so directly at the intersection of mission, money, and stewardship.

The challenge is that if an IPS is written in opaque language, it doesn’t actually help the volunteer directors responsible for oversight. Boards cannot effectively govern a policy they don’t understand.

Fortunately, board members do not need to understand every nuance of portfolio construction to govern effectively. They do not need opinions on emerging markets, private credit, or multi-factor investing. They do, however, need to understand the handful of questions the IPS is designed to answer. 

If a director can explain those answers in plain language, they likely understand the document well enough to provide meaningful oversight.

1. Why Does This Money Exist?

One of the first questions I ask a non-profit client is what the money is for.

The answer influences everything that follows. Asset allocation, spending rates, liquidity needs and return expectations should all flow from the purpose of the assets. Boards often jump immediately to performance conversations without first establishing what success looks like.

For some organizations, invested assets function as a reserve fund that provides stability during challenging periods. Others depend on investment income to support annual granting programs or operations. Still others are investing on behalf of future generations.

These are fundamentally different objectives, and each leads to different investment decisions.

A scholarship fund intended to exist forever should not necessarily be invested the same way as a reserve fund that may be needed during the next economic downturn.

An effective IPS begins by clearly articulating the purpose of the assets. Without it, conversations about investment performance can easily become detached from the mission those assets are intended to serve.

I have seen organizations with nearly identical portfolios and entirely different objectives. One foundation may be trying to preserve capital indefinitely. Another may be planning to draw heavily on its assets over the next decade. Those differences matter. An investment strategy cannot be evaluated in isolation from the role the money is meant to play.

2. How Much Risk Have We Agreed to Take?

Every board claims to be comfortable with risk until markets remind them what risk looks like.

When markets are strong, conversations about risk tend to fade into the background. Portfolio growth becomes the focus, and the occasional market setback feels distant. When markets decline, however, risk suddenly becomes the only topic anyone wants to discuss.

An IPS does not eliminate volatility. It establishes expectations.

If boards focus exclusively on return, they often get blindsided by risk when markets pull back. Sometimes, the greatest investment risk isn’t losing money. It’s not having money available when you need it.

A well-written IPS should describe the level of risk the organization is prepared to tolerate and, ideally, explain why that level of risk was selected. Directors should not need a background in finance to understand this section. They should simply be able to answer a practical question:

If the portfolio lost 15% or 20% of its value during a market downturn, would that fall within the range of outcomes we anticipated when we approved this strategy?

If nobody can answer that question with confidence, the board may have approved a risk profile without fully understanding it.

3. Who Makes Which Decisions?

Some of the most valuable sections of an Investment Policy Statement have very little to do with investments. Many governance challenges arise not because a portfolio is poorly constructed, but because responsibilities are unclear. When authority is ambiguous, confusion follows.

Who approves overall strategy? Who monitors investment performance? What authority has been delegated to an investment committee, management team, or external advisor? These may seem like administrative details, but ambiguity in these areas is responsible for countless governance headaches. Consider what type of ongoing reporting would help the board fulfil its governance responsibilities.

One of the most common mistakes I encounter is boards governing portfolios through headlines. An effective IPS helps ensure strategic decisions are made before emotions and market noise enter the room. 

A strong IPS distinguishes between governance and management, between oversight and execution. These distinctions become particularly important during periods of market stress. 

When responsibilities are not clearly defined, organizations can drift toward micromanagement or paralysis. Committees duplicate work. Directors debate decisions that have already been delegated. Advisors receive conflicting instructions.

An effective IPS creates that clarity before difficult circumstances arise. It allows everyone involved to understand both their responsibilities and their limits.

4. How Will We Know If We’re Successful?

Is the portfolio is actually succeeding? The shortcut for many is to simply look at a portfolio’s return, which rarely tells the full story.

That distinction is easy to miss, which is why a good IPS defines success in advance. It establishes the benchmarks, objectives, and time horizons that will be used to evaluate results before anyone sees the numbers. In some cases, it may also articulate how the investments themselves can support the organization’s mission and values.

It may be easy to exclude specific areas of investment in your written policy. For example, a nature-based charity may avoid investing in industries known for excessive environmental pollution, instead investing in a green economy. That’s not a return-based decision, but a values-based decision. This perspective matters because charitable assets are rarely invested for next year alone. They exist to support a mission over extended periods of time.

In my experience, boards rarely get into trouble because returns were one per cent too low.

They get into trouble when expectations and outcomes diverge. A portfolio designed to provide stability will inevitably disappoint someone looking for aggressive growth. A portfolio built for long-term growth will inevitably experience periods of uncomfortable volatility. Neither is necessarily failing. The question is whether the portfolio is doing what it was designed to do.

Success is measured in outcomes, not necessarily portfolio outperformance.

5. What Can We Invest In?

A successful IPS will establish clear guardrails around what the organization can invest in and how capital should be allocated across different asset classes. Directors need to participate in establishing the broad framework and routinely monitor their professional advisors to ensure they stay on track. For example, if the policy states the portfolio will maintain 30-40% in equities, a quarterly report should reveal the actual portfolio composition.

Likewise, if the policy permits private investments with limited liquidity, directors should understand why that trade-off is being made and how it supports the organization’s objectives.

An IPS should not simply identify what can be purchased. It should explain why those investments belong in the portfolio in the first place.

The Plain Language Test

At your next board meeting, try this simple exercise.

Ask directors to review the organization’s IPS before the meeting. Then ask each person to explain, in plain language:

•  Why the organization invests its assets.
•  How much risk has the board agreed to accept.
•  Who is responsible for key decisions.
•  How success should be measured.
•  What types of investments the policy permit and why.

If the answers vary dramatically from one director to another, the issue may not be the portfolio.

Having a well-written IPS is not evidence of good governance. A board’s ability to understand, explain, and apply it is.

Like Chaucer, the words may look familiar.

Unlike Chaucer, understanding them is not optional.