Investment Criteria 3: Structure and Governance
Who doesn't love to read a good legal document? Want to curl up by the fire with a long operating agreement and private placement memorandum?
Anyone...? Anyone...? Bueller....?
If reviewing risk disclosures and considering the finer points of unrelated business income tax do not sound enjoyable to you, then take heart. You can rest easy knowing these are the kinds of things Impact Foundation vets for each investment and you don't have to.
What sorts of things constitute structure/governance?
In the third phase of our vetting, we look at the underlying documents, governance, and leadership of the organization to make sure the investment is structured well to achieve our financial and impact goals. This includes considerations of:
- leadership experience of the management team
- risk management (addressed more below)
- joint venturing - unique issues created when charity owns an equity stake in a business taxed as a partnership
- UBIT - unrelated business income tax created when a charity has income from an active business that is unrelated to its charitable purpose
- fund management fees
- profit/loss allocations and waterfall provisions
- control provisions
- etc. - whatever else we happen to come across
Why so much scrutiny?
Impact Foundation is subject to the fiduciary duties of care, loyalty, and obedience to mission. By moral and legal imperative, the Board and Investment Committee’s fiduciary duties encompass three central responsibilities:
- Duty of care to facilitate prudent stewardship of Impact Foundation’s capital, and to extend that duty of care to beneficiaries by providing capital to enterprises that are aligned with our mission and contribute broadly to society;
- Duty of loyalty to ensure the impartial execution of all the Foundation’s dealings; and
- Duty of obedience to benefit the public and the mission of the Foundation, as declared in the mission statement and encompassed by the corporate charter
Taken together, these duties oblige the Foundation to examine all of our investment holdings for both social and financial performance and to make investment decisions that optimize both together to fully abide by our duty as a custodian of tax-privileged assets.
Like any prudent investor, Impact Foundation seeks to manage risk with an appropriate asset allocation. But at the heart of our approach to investment selection is an emphasis on enterprises, not asset classes. We believe we have an obligation to invest in robust enterprises—whatever their tax status, size, or business—that can perform reliably for the people and communities that we are dedicated to serve.