The University of Michigan has in place a meaningful series of controls for its investment functions, a conclusion that is based in part on a review of specified non-financial investment functions performed by accounting firm PricewaterhouseCoopers.
The university acknowledges there are certain areas for improvement and has identified the changes it will make, including several that were immediately implemented, with others being adopted in the months ahead.
“The university, with rare exception, is functioning in accordance with a robust set of policies designed to assure responsible governance oversight of our investment activity,” says President Mark Schlissel. “But we also know we can continuously improve and will proceed quickly to implement the recommendations.”
The university plans to have external parties do specialized reviews of investment functions periodically as a supplement to the controls currently in place, according to Schlissel.
“As stewards of the university’s assets, it is reassuring to know we have a solid operation, from front to back,” says Regent Katherine E. White, chair of the Finance, Audit and Investments Committee of the Board of Regents.
The Finance, Audit and Investments Committee regularly reviews U-M investment operations, along with other finance and audit functions. Other regents who serve on the committee are Mark Bernstein and Ron Weiser.
U-M goes beyond what peer institutions consider is necessary by presenting new investments to the Board of Regents in public session to be approved before the investments are executed.
A more common practice would be for the Board of Regents to annually approve the types of investments that are appropriate for U-M and what percentage of total investments are appropriate for each investment type. Once this so-called model portfolio of investments is approved, the chief investment officer and the chief financial officer would typically decide on individual investments.
To be more in line with common practice, White said the university would consider amending its approach to primarily focus on decisions that are of strategic importance to present for Board of Regents approval — such as the model investment portfolio and performance benchmarks.
The following is a summary of the changes that the university plans to make based on its own assessment — including through discussions with peer institutions held by members of the Investment Office and prior experience working at peer institutions — and the exceptions identified through PwC’s review in each of the noted areas:
Governance: The Board of Regents is responsible for approving allocation ranges for the different types of investments held by the university (stocks or bonds). The allocation of fixed-income investments had recently fallen below the range that was previously designated by the Board of Regents, an issue previously addressed at the May board meeting. The board had been informed of the actual allocation.
The university will at least annually present the allocation ranges for each class of assets to the Board of Regents for approval. Part of that presentation will include a comparison of the current investment portfolio to the approved ranges.
Maintaining current documentation about divergence from the approved asset allocation will allow the Board of Regents to keep current on the risks associated with the investment portfolio and further mitigate risks associated with noncompliance with university policy.
Due diligence and documentation: Although appropriate background investigation of investment opportunities is performed, some documentation of the due diligence could be recorded in a more timely fashion within the office’s established documentation system. To avoid losing access to important information, the Investment Office already has established a tighter timeframe for when information must be recorded.
Additionally, the university will make refinements to the process of recording information contained within financial statements received from fund managers. The annual process of reviewing financial statements received from fund managers is performed by the Financial Operations team that is separate from the Investment Office.
Authorization and funding commitments: The university will establish a more formal protocol to record financial commitments to funds and will add a process to make sure that financial commitments are carefully verified.
Additionally, the university will require tighter adherence to an already established process of segregation of duties on who is authorized to sign off on investment purchases.
Conflict of interest and conflict of commitment documentation: The university in the spring changed its process for documenting any conflicts of interest with members of the university’s Investment Advisory Committee.
The university will enhance the conflict of interest disclosure policy to disclose any new potential conflicts as new investments are made.
Travel and expense reimbursement and third-party gifts: The university determined there were two changes it would make in these areas, both of which have been implemented by the university.
Regarding travel, while the university has not identified any systemic or significant issues, the Investment Office has reinforced the importance of timely submission of expenses and that supervisors approve only their own employees’ expenses.
Although persons doing business with the Investment Office are advised that university officials cannot accept gifts, such gifts are sometimes sent to the office regardless of this policy.
The university’s practice of maintaining a gift log is a leading practice. However, the importance of the practice has been reinforced to its staff as the university is aware of certain instances where all necessary information related to a gift was not properly recorded. Additionally, a new process already is in place for managing gifts where all gifts will be forwarded to a central university location for final disposition.
Additionally, there are two opportunities for improvement that would enhance existing processes, gain efficiencies and further strengthen the control environment.
One concerns how follow-on investments are reported to the Board of Regents and one concerns how to further improve the working relationship between personnel at the university and those at the outside investment fund managers.