Shock! Reckless charity investing

by Gary Snyder

Charities worldwide were hit with massive losses and some were forced to shutter as a result of the Madoff Ponzi scheme. You might think that post-Madoff charities have reflected on the organizational weaknesses that led to that disaster and embraced remedial measures with respect to their investment programs that will prevent similar occurrences. If so, you would be wrong.

Forbes says charities are losing millions annually as a result of mismanaging their investments they should focus more upon management of existing donations, as opposed to soliciting new donor funds. 

“The lessons of Madoff have not been learned,” says Ken Berger, President and CEO of Charity Navigator. “The overwhelming majority of boards do not take their responsibilities seriously and many operate like social clubs. Investments are not managed as thoughtfully as they should be—very conservatively and with great care. If the board is asleep at the switch with respect to investments, trust me, they are not minding the store in other areas. Especially in the current economic environment with less government support for charitable causes, squandering precious charitable dollars is unforgivable and is, unfortunately, leading to donor fatigue.”

Charities continue to pile into high risk, high cost, opaque investments, such as structured notes, hedge funds and private equity and are prone to be victimized by other investment scams because they have failed to acknowledge and address the unique vulnerabilities related to managing the investment portfolios of these types of organizations. Charities are subject to unique pressures, especiallly with respect to their investments.

Any examination of the management of a charity’s investment program must begin with and include a review of the board members and the members of the investment committee of the charity, as well as the investment service providers and investments held. 

Another serious question to ask is whether the charity has any history of investment malfeasance or substantial losses? You need to know all the facts about any past blunders. Was a thorough investigation of the cause of the loss, including whether anyone associated with the charity recommended the investment, or may be culpable in any way, undertaken? It’s easy for the charity to say a matter was investigated, so ask to see the investigative report. It probably doesn’t exist. For a variety of reasons, true investigations of investment malfeasance related to charities are extremely rare. 

Absent a thorough review of any malfeasance, significant losses or sustained underperformance, there can be no assurance that the past mistakes will not be repeated. What remedial measures were instituted following the loss and the thorough investigation of the loss? Unless you see hard evidence of subsequent safeguards, hold onto your checkbook. 

Fiduciary standards related to managing investment portfolios have been heightened in recent years. The overwhelming majority of charities, unfortunately, have failed to respond to these changes, or even institute protections against the next Madoff. If you choose to contribute to charities that are not good stewards of their investment portfolios, expect to give lots of money and often, says the thoughtful article.

Nonprofit Imperative gathers its information principally from public documents...some of which are directly quoted. Virtually all cited are in some phase of criminal proceedings; some have not been charged, however. Cites in various media: Featured in print, broadcast, and online media outlets, including: Vermont Public Radio, Miami Herald, National Public Radio, Huffington Post, The Sun News, Atlanta Journal Constitution, Wall Street Journal (Profile, News and Photos), FOX2, ABC Spotlight on the News, WWJ Radio, Ethics World, Aspen Philanthropy Newsletter, Harvard Business Review, Current Affairs, The Chronicle of Philanthropy, St. Petersburg Times, B, USA Today Topics, Newsweek.com, Responsive Philanthropy Magazine, New York Times...and many more Nonprofits: On the Brink (2006) Silence: The Impending Threat to the Charitable Sector (2011)