Trustee Education Series: Governance Structure and the Permanence of Fiduciary Responsibility

Posted on January 3, 2017

Author Name By Mike Welker, CFA

Responsibility–the word is used to convey the fulfillment of one’s promises. When working in institutional portfolios, it can mean the difference between success and failure. With often too many “cooks in the kitchen” on full boards, understanding the fiduciary responsibility of the board (or subcommittees appointed by the board) is intrinsic to the portfolio’s long-term success.

In this blog post, we will help you realize who should be held responsible for both successes and failures, as well as the best communication methods throughout the governance structure.

Fiduciary Responsibility

So often, we hear of boards who simply wish to unburden themselves of the fiduciary responsibility of their portfolio. From monitoring the completion of goals to making tough, strategic decisions, their wish to wash their hands of these worries is absolutely understandable. However, despite these wishes, having “skin in the game” comes part and parcel with being on a board.

Even with a 3(38) advisor or within an OCIO model, which diverts a good deal of day-to-day investment decision-making processes, boards are always required to give the final word on decisions and are ultimately held responsible for the portfolio.

Portfolio Engagement

Now that we have established that fiduciary responsibility ultimately lies with the board, how can a board properly facilitate its portfolio? The answer has to do largely with a board’s capability to invest the time and attention necessary to properly care for a portfolio.

A board must be:

  • Accountable: Boards cannot “pass the buck” and should always be held accountable for successes and failures in the portfolio. If they maintain this attitude, they will approach their duty and fiduciary responsibility with diligence.
  • Transparent: Choices made in regard to the portfolio should be made known to all board members during scheduled meetings, or by an appointed chair.
  • Intentional decision making: The choice to act or not to act should be made with an approved strategic base in mind.
  • Communicative: Boards must be available to communicate their decisions, strategies and updates on portfolio strategy on a regular basis.

Though these attributes are mandatory for the effective management of a portfolio, the real-life logistics of business and scheduling may not make them realistic to achieve for your board. That is understandable, but in such situations, you must elect to have a trusted subset of your board form a subcommittee that can provide the necessary attention and interest in understanding the investment aspect of the portfolio. Potentially, some of the members of this subcommittee may have experience with investments, which is always preferred.

Remember, subcommittees can assess, make judgments and provide opinions and suggestions to the board, but can never make decisions without board approval.

Communication

The communication between board and subcommittee is of utmost importance. There are a few options when it comes to how a subcommittee shares its findings with the full board, but using an executive summary format is often most effective. This information can be relayed by an elected subcommittee chair or simply by the advisor assisting the subcommittee.

Always review and assess your communication channels, ensuring that pertinent information is efficiently and effectively being disseminated across the multiple levels of the governance structure. Your communication method may change and evolve to better fit your board’s wants and needs.

The Importance of Trust

Above all else, there must be a trust between the advisors of a board, as well as those that make up the subcommittee, if one is appointed. If a board is not confident in its ability to effectively handle the portfolio, meetings are bound to be fruitless exercises composed of second-guessing until a competent subcommittee can be formed. If that distrust seeps into the subcommittee, their recommendations may be met with similar difficulty, wasting time and opening the door to long-term challenges in portfolio management.

Though every board is different, the virtues of accountability, transparency, strategic decision-making and effective communication can all go a long way for any group of trustees. Never lose sight of the fact that your board is where the buck stops, holding the ultimate fiduciary responsibility for the wins and losses that your portfolio may face. Own that responsibility and ensure that your board is run on trust and communication; your portfolio will be the better for it.