Can you say fiduciary duty? Jewish nonprofits must follow new rules


Based on all reports, the evil criminality of Bernard Madoff has decimated the portfolios of hundreds of individuals and charitable organizations. The consequences for ongoing charitable programs and future gifts will be felt for many years to come.

While there should be no limit to the outrage at Madoff, the Jewish not-for-profit community must recognize that this crisis has highlighted grave shortcomings in professional controls in place related to the investment of their funds. Judging from press reports and public communications from numerous institutions, it seems apparent that the basic standards of fiduciary oversight were not in place. Both professional staff and lay leadership should undertake comprehensive reviews of their policies and take responsibility for their shortcomings.

Complete Madoff CoverageAs the community looks forward, it is imperative that the oversight of investments be executed in a manner that meets the highest fiduciary standards. After all, those responsible for overseeing the investments quite literally have the future of many of the most important programs in the Jewish community in their hands.

The large, often undiversified allocations to Madoff indicate that the foundations fell into the worst pitfalls that trap individuals into unwise investments. Among these are: lack of diversification, belief in “genius managers” who promise to deliver above market returns with minimal risk, not understanding the strategy of the funds in which they invest, investing based on reputation rather than doing due diligence and not monitoring the investment activity. While it is bad enough to find individuals who fall into some or all of these traps, to find evidence that those overseeing large sums for the community were no better is very disturbing, to put it mildly.

It also seems from this affair and my research on the investing policies of not-for-profits that many of these institutions joined with the fad of not-for-profits investing in “alternative investments.” Enticed by the success of Yale and Harvard’s enormous endowments they sought to “be like Yale and Harvard” and invest in hedge funds, private equity funds, venture capital, commodity funds and other products despite little real knowledge or professional staff. Yet even David Swensen, Yale’s esteemed manager, has written that neither individuals nor small institutions should follow Yale’s strategies since they lack the large professional staff and resources required to properly screen and manage such investments.Yale has 19 full time professionals overseeing their investments, Harvard Management has a full- time staff well over 100.

A Business Week article in May 2006, “Big Risk on Campus,” reported on smaller endowments investing like the big guys, noting that larger endowments (averaging $1 billion or more) had an average of 21.7 percent of their assets in hedge funds. In second position in the article’s table of smaller endowments with big hedge fund stakes was Yeshiva University’s $1.1 billion endowment with 65.3 percent. Yale’s allocation to hedge funds is 23 percent; Harvard’s, 18 percent.

Ironically, while many foundations concentrated on seeking out exotic, high-risk “alternative” investments, they did not look into allocating a portion of their investments to a better “alternative,” such as investments that would not have entailed above-average risks. Examples would include: socially responsible index funds, a broadly diversified index fund of Israeli stocks or investments in indices of companies investing in clean energy. The vast majority of foundations ignored the opportunity for “doing well by doing good” in their quest to find a “hot hand” to manage their money.

Looking forward, it is imperative that our institutions draft clear investment policy statements and establish appropriate policies and controls. Ideally, the foundations would wind up with an investment portfolio in line with the “best practices” of investment strategy and not much different than that of a prudent individual: broadly diversified with low cost, transparent and liquid index instruments.The parameters of such policies would include:

  • A target allocation for the portfolio among international and domestic stocks, bonds and cash, along with controls for keeping the portfolio within those parameters.
  • No investments in bonds below investment grade.
  • Restrictions on investments in asset- backed securities.
  • Restrictions prohibiting any investments that make use of leverage or derivatives.
  • Restrictions on investments in illiquid investments, such as venture capital and private equity, and on investments that do not have transparent pricing and valuation.
  • No investments in any entities affiliated with members of the investment committee, the board or the professional staff. As a consequence of this one policy, the New York Jewish Community Foundation had no investments with Madoff.
  • Ability to price all investments in the portfolio on a daily basis. Confirmations of all transactions by the next business day.
  • Transactional activity and financial reporting performed by different individuals.
  • Monthly performance reports available to all investment committee members.
  • Annual audit of all investments and procedures by an independent third party.

In addition to the above, serious consideration should be given to an even higher level of transparency: complete posting on the Internet of the full portfolio and its value and performance. Given the extreme lack of controls evidenced by the Madoff affair, such an easily implemented step would go a long way to restoring confidence in the community and in fact may be essential for any success in raising the funds necessary to keep many programs afloat.

Lawrence Weinman is an independent registered investment advisor working with individuals and institutions. He teaches a course on investment management for nonprofits at the AJU and has worked with Jewish nonprofits in their investment strategies. He blogs at www.sensibleinvestments.blogspot.com.

An Inch Late, a Dollar Short


“Well?” prompts my wife, gliding down the stairs in a black satin evening dress. I give her the elevator eye,
approving until my line of sight crosses her ankles to find … Payless flats.

“No heels?” I ask.

“I can’t,” Lina sighs, meaning: “I’d tower over you.”

At 5 feet 7 inches, Lina and I stand eye to eye. When I first asked her out, I thought our parity would please her; I was wrong. It troubled her when she leaned in for our first kiss. It troubled her when we stood beneath the chuppah — she in 2-inch white heels, me just reaching her in my black boots.

My wife’s aversion to height-challenged men has been passed to my 14-year-old, 5-foot-7-inch stepdaughter, Vicki. But she enjoys wearing pumps.

Although fewer boys will measure up, she explains, “I won’t be asked out by runts.”

In fairness, women everywhere prefer having a mate they can look up to.

After splitting from Tom Cruise, 5-foot-11-inch Nicole Kidman told an interviewer, “Finally, I can wear heels.” Winning the lanky Aussie’s hand had come easily for the charismatic Cruise. But send him incognito to a Jewish singles weekend, and 5-foot-7-inch Tom might be as likely to score as Tom Thumb.

“A tall mensch,” sighs Marla, a contracts lawyer, “is hard to find.” Marla shared that lament in 1993, two years before I got remarried. But judging from reports from my single friends, Jewish women’s calculus hasn’t changed one newton.

Forget Shorty

“The first time I ran an ad,” says Richard, 32, “I got zip replies. The next time, I omitted one fact; six replies.” The fact he omitted? That he’s 5 feet 4 inches tall.

Richard’s experience is echoed by Tuvia, a Chasid. Firmly in the modern world, Tuvia is a highly paid computer jock. But his stature — 5 feet 6.5 inches tall — has cost him more than one shidduch. “I tell them by phone I’m 5 feet 7 inches tall,” he says with a grin. “But if a woman has a problem with my height, she’s probably not for me.”

When applying to meat markets, singles must sometimes state their height. How low will an applicant stoop? Arlene, a petite sales rep, confesses, “I write that I’m 5 feet 6 inches tall so they’ll pair me with a tall guy.” And they say that men lie.

Why won’t Marla and Arlene even consider dating a Dudley Moore? They offer up some curious arguments, notably, “I like to feel protected.”

Could a 6-foot-2-inch bouncer protect them from a .44-caliber Magnum? “Maybe not,” they stammer, “but I’d feel more protected.” Ah, you want to feel protected? How about 5-foot-5-inch Stu, a third-degree black belt?

Nyet.

In competing for tall men, tall women claim dibs. When my 5-foot-1-inch sister is on the town with 5-foot-11-inch hubby, statuesque women glare. Save him for us! their furled brows snipe.

My sister, Diane, frets. She explains that Howard’s height was irrelevant. “We just fell in love.”

Sister, what’s love got to do with it, the tall women ask. “You stole one of ours.”

Marilyn vos Savant, whose weekly column in Parade helps readers think clearly, was asked why women are loathe to date shorter men. Their prejudice, she explained, is a vestige of a bygone time of hunter-gatherers, when height conferred a survival advantage. Today, she noted, the gatherers’ reasoning doesn’t wash. It’s as indefensible, she asserted, as the modern hunters’ prepossession to favor women with large breasts.

Ouch.

The Tall and the Short of It

Ladies in waiting: Solitary from holding to your lofty character standards? Tired of remaining a bridesmaid because the nicest groomsmen are an inch — or a dollar — short?

Richard and Tuvia offer two words of advice: Grow up.