Endowment Oversight Best Practices 

Responsibilities when managing an endowment

An endowment is not just an investment account, it is a long-term promise to donors, governed by law, policy, and fiduciary responsibility. Understanding how endowments should be managed and where things can go wrong will help an organization fulfill their mission while reducing risk. Effective board oversight and management responsibility play an important role in ensuring the proper management of an endowment.

Board oversight versus management responsibility

Board responsibility should include establishing and regularly reviewing the investment policy to ensure assets are managed prudently, as well as defining a spending policy that aligns with both organizational goals and donor intent. The board also has the ultimate responsibility for ensuring compliance with donor intent: to honor the restrictions placed on endowment funds and avoid misapplication of resources.

Management is responsible for monitoring investment performance on a more daily basis and accurate financial reporting to the board. Management’s responsibility should also include clear and consistent communication with donors about how their contributions are being managed. This helps maintain transparency and foster trust with stakeholders to support long-term organizational success.

Common misconceptions to address

“We cannot ever touch endowment funds.”

The notion that endowment funds can never be accessed is not accurate. While there are legal and policy-driven restrictions on principal withdrawal, endowment policies often allow for the prudent use of funds, including original gift value.

“All endowments are permanently restricted.”

Endowment funds that are designated by the board are not restricted. While these funds are typically invested and spent in accordance with policy, the board retains authority to modify or reallocate these assets if organizational needs or priorities change. For financial reporting purposes, these funds have no restrictions.

“Organizations with endowments are flush with cash.”

The idea that endowments represent surplus cash available for immediate operational use is misleading. Most endowment assets are subject to donor-imposed restrictions or board policies, meaning they are generally invested for long-term growth and only a limited, predetermined portion may be used each year, typically in accordance with a spending policy. Further, there may be purpose restrictions imposed by a donor.

Endowment risks

Critical risks are the most common source of audit findings, donor issues, and regulatory scrutiny. They are largely controllable through policy, documentation, and oversight. Strategic risks deserve immediate CFO and board attention.

Key points about critical and strategic risks

Critical risks related to endowments primarily stem from misunderstandings or violations of donor restrictions. These include:

• Failing to clearly document donor intent, which can lead to misuse of funds.
• Improperly tracking endowment assets.
• Making unauthorized changes to restrictions without the necessary donor or legal approvals.

Confusing board-designated funds with donor-restricted funds can result in inaccurate financial reporting and governance errors, further complicating compliance and oversight.

Strategic risks often arise from the absence of formal or updated policies. Without a clear spending policy, organizations may make inconsistent withdrawals, undermining responsible management of resources. Outdated investment policies or limited board understanding of endowment restrictions can also jeopardize long-term sustainability. Other risks include basing spending on short-term investment performance and neglecting to adjust spending rates when the organization’s financial situation evolves, both of which can impact the endowment’s intended purpose and financial health.

Other challenges and considerations for endowment management

Investment management pitfalls

Investment management challenges often include insufficient diversification, the temptation to chase high returns, lack of thorough monitoring of investment managers, and hidden fees that erode returns.

Operational and internal control issues

From an operational perspective, issues such as poor documentation, inadequate segregation of duties, and manual recordkeeping outside the general ledger can weaken internal controls. Additionally, a lack of coordination between development and finance teams may create inefficiencies.

Audit and compliance pitfalls

Organizations may encounter unexpected findings during audits, inconsistencies in applying UPMIFA guidance, and insufficient documentation to support board decisions. Addressing these areas proactively can strengthen financial management and ensure adherence to best practices.

Managing endowments can be challenge, but our team is ready to assist you. Contact your Opportunity Advisor or Email | Call: 804.747.0000