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Ontario's Bill 25 and the power of positive thinking for charities
By John Green
October 12, 1999
This article appeared previously in Canadian FundRaiser
The Ontario government's dissolution for a spring election has temporarily left the passage of the new Trustee Act (Ontario) on hold. However, with its re-election in early June, it is very likely that Queen's Park will pass the proposed legislation during this year. The essence of the legislation seeks to update somewhat outmoded concepts of what qualifies for legitimate investments in trust accounts and how those accounts should be managed. This later aspect has some very immediate and pertinent implications for charitable sector.
Terrance Carter has painted a somber picture of the responsibilities for board members of any charity where there were funds to invest. Let's look again at the reality of the situation to see what this newly proposed legislation will seek to achieve.

The prudent man rule
Trust assets have traditionally required management by trustees according to the prudent man rule. Some would suggest that phrase alone portrays some outmoded thinking, since the modern world of finance and investing has innumerable examples of women in very senior decision-making roles. The age-old question remains, however, as to what constitutes 'investing as a prudent person would'. For many, this equates with investing in assets which are 'safe' because their capital is guaranteed in a variety of ways: by the Canadian Deposit Insurance Corporation for GICs or by investing in bonds issued by the federal or provincial governments.
During the inflation-ridden 80s, trustees could have hidden behind that strategy because nominal interest rates were very high. Real interest rates, after adjusting for inflation, however, were not, but perception is reality at times and the 80s were one of those times for security-conscious investors. The 90s have witnessed a dramatic reduction in interest rates and those old ideas of prudent management have to be revisited. The problem is that now 'prudence' in a financial management sense is essentially related to safety through diversification rather than through concentration. In fact, this has always been a concept of fundamental importance for successful prudent investors, and nothing has caused that to change.
What does this mean for the board members of a charity with money to invest? It means applying the same techniques in planning the money management of its assets as are applied to planning the gathering of those assets through proven fundraising techniques.

What is the essential planning?
Firstly, define your organization's investment mandate the same way you define its mission statement. Do you need the money for income, growth or both, and if the last mentioned, how much of each? How often would the investment portfolio have to make payments and how much? Who is going to manage the money... the board members or a professionally qualified and licensed manager? If the latter, how will board members make the selection? What screening process will you apply to the selection process? How will you measure performance and what protocol do you have to terminate a management relationship with any parties you hire? What parameters would you set up? Would there be restrictions on certain types of investments? How will the board communicate with the manager and how often? Will the board need a qualified consultant to liaise with them and the manager to ensure that communication and monitoring is efficiently and effectively performed?
Larger charities can likely draw upon the necessary resources from the board and volunteer base. These individuals will be sufficiently well-versed to initiate the planning process and most - but probably not all - of its implementation. For mid-size to small charities, this can be a very real challenge, and they may well need independent financial expertise to help them through the process. Prudent management of financial assets will require both proper planning of the investment management process and an understanding of the significance of diversification of a portfolio as the main protection against loss.
In fact, board members who undertake to invest in low interest-paying GICs may be acting without prudence in that they are forfeiting longer term gains on the assets under their management, and thus laying themselves open to the very charge of imprudence which they seek to avoid. Ultimately, the board members will have to make the final decision, but they should do so having undertaken the necessary due diligence and having sought appropriate competent professional expertise. That is what will make for 'prudent rule management' in the new legislative and investment environment for charities once Bill 25 becomes law in Ontario.
John Green is an Ontario-based financial planner. For more information, contact him at jhgreen@interhop.net.