A charity received a gift of $100,000 last year to fix the roof of its building. The Board invested the gift along with its endowment while the market was going up but it’s now worth only about $70,000. Is the Board liable to make up the difference when it starts the project shortly?
An interesting question that raises a lot of issues. If you are asking about personal liability for the loss, directors are generally not personally liable for market losses on prudent investments. If they were personally liable in this economic climate, a lot of good people would be jumping out of windows.
The Board has a fiduciary duty to monitor the investments, but that does not necessarily mean that it has to change its investments if there is a prudent reason for keeping them as they are at the moment. Prudent investor laws generally say that they do not judge prudence by ultimate results. They look at the information available at the time the decisions are made. The key to self-protection is continued vigilence.
With volunteer protection statutes and director limitation of liability laws, the directors are not normally liable even for imprudent investments in the absence of gross negligence, willful misconduct or self-dealing.
As a practical matter, however, if the cost of the project remains the same, the organization has to come up with the additional resources to undertake the job. It is not able to use these temporarily restricted funds for other purposes.
The problem illustrates the value of having different investment policies that depend on the time horizon for expending the investment. Many organizations will invest solely in bank CDs, money market funds (although even some of them have been suspect lately) or short-term Treasuries or other bonds if the funds will be needed for a project within a year or so. They believe that the volatility of the stock market is just too great even in more normal times to assure that the funds will be there when needed. If the money won’t be spent for four or five years, they may assume the risk of stock market volatility for a portion of the fund. The stock market is better suited to permanently restricted and quasi-endowment funds where the infinite time horizon and historically greater returns make the long-term risk-reward calculation more favorable.