Two week ago we shared our thoughts about what nonprofits should consider before starting an endowment. If you’ve worked through the pros and cons, and your organization plans to start an endowment, how do you get started? Your Board must agree on the role of the endowment, authorize its establishment, and put several essential policies in place. This week, a look at these important steps.
1. Agree on the purpose. Why does your organization want an endowment? You may be surprised that Board and staff have different ideas about the role an endowment would play. Is it to provide some relief from fundraising? Pay for new programs? Start a satellite office? What you use it for will help you figure out how big your endowment should be.
2. Authorize the endowment. This is a Board move, signaling its commitment to create the fund and hold the money in perpetuity. The endowment becomes part of their financial responsibility, and will be included as a separate line item in financial reports.
3. Create an endowment policy. You must create a policy that specifies how the interest income from the endowment will be used. The challenge of creating a policy is to make it broad enough to meet your needs without being too vague. Take time to think through the details, and include how the endowment will apply to expected change and growth.
4. Create an invasion policy. It sounds violent, but “invasion” refers to using the endowment principle. You wouldn’t do so unless circumstances are dire or you would be using it to pay for another long-term asset, like a building. Most policies stipulate that the principal can only be used if the organization is in danger of closing. Some Boards rule that the principal can be used to balance the budget for one or two years, and others rule that it can’t be touched at all, ever. It’s also important to detail how much of the principal can be taken and when it must be paid back. Last, invasion policies should specify who has the authority to decide whether to use the endowment principal—the whole Board, a percentage, the executive committee?
5. Develop a gift acceptance policy. You may have a gift acceptance policy in place before you start an endowment. But whether you’re adapting an existing policy or starting fresh, you’ll need to decide what types of gifts you’ll accept, who has the authority to accept them, and under what circumstances. Will you take buildings? Land? Expensive collectibles you may not be able to sell? If you decide to accept stock, are there sectors or companies that you don’t want to support? Complications associated with non-monetary gifts are why some experts recommend nonprofits start with a policy to accept cash, securities, and life insurance only.
The gift acceptance policy is also where you’ll have to explore the possibility of restricted gifts. If someone wants to endow a particular program, what will you do?
6. Establish an investment policy. An investment policy will state whether you’ll invest entirely for income or you’ll have a mix of investments to grow the principal and income. Will you require socially responsible investing, choosing screens to filter out tobacco or gun companies, or those that don’t support unions, for example? And how will you set or rank these priorities?
7. Create an investment committee. Once your endowment is established, your Board should create an investment committee. Non-Board members such as donors can be part of the committee as well. Although the committee manages the fund, the Board must still take responsibility for monitoring it. It’s important to have strong faith in the knowledge and intentions of the committee.
With your endowment authorized and policies in place, you can announce the fund and start including it in your fundraising efforts. You can also conduct an endowment campaign, with specific goals and timelines, which we’ll cover next week.