Investment Conflict of Interest
(Added 2/1/2013)
One of our trustees is also an investment manager for our planned giving assets - all of our gift annuities and some of our remainder trusts. His firm gets paid money to manage the assets and I know he's making a bundle. When at a board meeting another trustee brought up the issue of a possible conflict of interest, the investor trustee explained how his investments had done better than the market and had indeed performed better than the rest of the endowment portfolio. In addition, he clamed, the fees his firm collects are discounted because of his influence. My boss, the director of development, who attends board meetings, says I shouldn't worry because no one is being hurt - financially or ethically. I'm not sure why I don't feel better about this.
It's quite possible that you can't shake the name Bernie Madoff, under whose name we often feel compelled to dump everything fraudulent when it comes to investments. Your question is far more nuanced than asking about someone who created a Ponzi scheme, but we're sensitized to connecting the dots now: when the person deciding who is to do the investing is the same person who actually does the investing, trouble might be brewing.
Or it might not. Someone has to do the work, and if you have a competent investor at your board table it might make sense to use his expertise. I'm not sure how large your organization - or your board - is, but investments at many small charities benefit greatly from someone who knows what he's doing. That is, just because he's on your board does not mean he should not do the work. Generally, however, the larger the organization, the larger the endowment and planned giving pools - and so the more likely that an unconnected firm will be available and affordable, and the conflict made unnecessary. A conflict of interest is not in itself an evil. Problems arise when the conflict is not disclosed or relevant facts about the relationship are kept hidden. And it sounds, in your case, as if the trustee has provided transparency. The key thing is to be sure everything is known by the rest of the board: the professionalism and the fees must be constantly monitored. Also, every two or three years, the board should invite other investment companies to tell their story.
As it seems to often be overlooked, keep this in mind too: one argument that does not support the trustee is his investment successes. This might sound counter-intuitive, as we all want our investment managers to get the best returns possible. But, unless poor performance is the result of incompetence, investment results cannot be guaranteed or even reliably predicted by anyone. In addition to monitoring the results, your board - and you, and then your donors whose gift money is tied up in those results must have faith that the underlying decisions are made properly. The board should develop guidelines that show the prudence of the decisions, taking into account the goals of each investment. Not all unitrust and annuity trust goals are the same (I take your charity is acting as trustee?), and few of them are the same as a gift annuity pool's goals. Another reason it is to the trustee's benefit not to base his argument on success: Would he want his firm to be fired if he had a down year, measured against either the previous year or the rest of the endowment?
Right now, it sounds as if everything is all right. But that doesn't mean it will be tomorrow. Any time a person close to an organization benefits from the organization, special care needs to be taken to be sure all conflicts are disclosed and dealt with.