Attempts to Deal with the Problem

Given the many defects of the investment committee as an investment instrument, families (and institutions) have come up with a variety of “fixes.” In this section I will describe the main approaches to taming investment committees, as well as the pros and cons of each “fix.”

Asset Allocation Guidelines and Investment Policy Statements

The usual approach to controlling investment committee behavior is for the full governing board or family to adopt asset allocation guidelines and a written investment policy statement, within whose parameters the investment committee is expected to act. Asset allocation guidelines and policy statements are essential tools in the management of capital, but as instruments for the control of investment committee behavior they are wholly inadequate. The reason is simple: Whenever an investment committee wants to act outside the constraining bounds of a written guideline or policy, the committee simply changes them (or, worse, ignores them). And who is to enforce compliance with these strictures? If the committee simply ignores the restraints, who will know about it? If the committee asks the board to change guidelines or policies, who on the board is going to argue with the investment committee, who are, after all, the anointed experts on such things?

Using Outside Experts to Populate the Investment Committee

Some large-endowed institutions and many wealthy families have given up on the in-house investment committee in favor of an outside investment committee or board of advisors populated by experts selected for their skill and experience in the management of large pools of capital. At Yale University, for example, chief investment officer David Swensen has recruited a sizeable group of experts who serve on what is called the Yale Corporation Investment Committee. Only three of the Investment Committee members need be Fellows of the Yale Corporation, Yale's governing board. There are currently 11 members of the Investment Committee. In other words, instead of accepting full responsibility—and the associated time commitments—of board membership, these experts focus exclusively on the management of the Yale endowment.

Clearly, Yale and the many families who use boards composed of outside experts believe that this approach is far superior to the more traditional investment committee approach. Unfortunately, experts on the caliber of those used by Yale are few and far between (and typically expensive), making it impossible for smaller institutions and families to mimic the Yale approach.

The Separate Investment Management Corporation

Some very large investors—Harvard University, Princeton University, the University of Texas—have abandoned the investment committee approach altogether. Instead, they have established separately incorporated management companies charged with the responsibility of managing the institutions' endowments. These management companies employ many—sometimes, hundreds—of highly compensated investment professionals, and they have typically produced results that are far superior to those achieved by part-time, in-house investment committees. Unhappily for smaller investors, the investment management corporation is not a serious option for anyone managing less than about $5 billion.