Lingua franca

In many foundations and charities, investment and long-term planning decisions are overseen by a committee – often a finance committee or sometimes an investment committee. A common challenge for small and medium institutions is abrupt variation in investment knowledge. On a typical committee of six members, we might like to think that two members have a high level of knowledge, two medium and two low. The reality is far less balanced. What we often see is that one or two committee members have a reasonably high level of investment knowledge, while the other members have minimal knowledge and sometimes little interest. This creates unrewarded risks in how institutions discuss their investments and make key investment decisions.

Investment not spoken here

When there is no common language of finance and investment, committees find it difficult to discuss investing in a thoughtful manner. Imagine the committee has decided to review its asset mix. A more experienced member wants to discuss changes in the organization’s near-term objectives and program spending, balancing this against market expectations and risks for stocks, bonds and cash. Meanwhile, less experienced members keep jumping in to discuss one aspect of the budget or a single stock. The result is a conversation that veers between the principled and the particular, often not resulting in a clear decision on the matter at hand.

Illusion of consensus

When it becomes difficult to review the investment program and make key decisions, the committee will often be dominated by one or two members. These can be the members with the most experience but they can also be the ones with the strongest opinions or loudest voices. Rather than drawing on a wide range of experience and using a common language to work through decisions, institutions risk having decisions made by one or two members and then presented as if they were made by the committee. This can give too much decision-making authority to individual members, entrench them in their own experience and create blind spots in assessing risks.

Playing together

To improve decision-making, institutions need to make variation in knowledge less abrupt between members of the committee. Instead of two members having an 80% level of knowledge and four members having a 20% level of knowledge, we bring all members up to a 50% level. We do this by selecting members who are willing to learn and then providing them with a common base of knowledge before they join the committee and particularly over the course of their first three meetings. As an example of how to improve the learning process for committee members, our firm has developed a 10-part investment guide, each part of which can be read in 10 minutes. Success with this process is not just that all committee members have a higher level of knowledge; it is that they have a common body of knowledge – a lingua franca. By providing a common body of knowledge, we increase rather than reduce the role that diversity plays in making investment decisions. When committee members are safe in the knowledge that they can talk about asset mix, inflation and other investment matters in a way that their colleagues understand, they are more enabled to share their own insight, more equipped to question assumptions and more engaged in the investment process. These seemingly “soft” factors of human behaviour have a large and lasting impact on the quality of investment decisions made by charitable institutions.