What is a board of trustees?
A board of trustees is a group of people—appointed or elected—who collectively supervise and set policy for an organization. Trustees act as the governing authority and are legally responsible for protecting the organization’s assets and advancing the interests of stakeholders (for example, students and donors at a university, or depositors at a mutual bank).
Key definitions
– Trustee: an individual who holds responsibility for managing assets or affairs on behalf of others.
– Fiduciary duty: the legal and ethical obligation to act in the best interests of the beneficiaries or stakeholders, with loyalty and care.
– Endowment: a pool of invested assets that provides ongoing funding to an institution (commonly used by universities, museums, and charities).
– Bylaws: the internal rules that define how an organization is governed (how trustees are appointed, meeting cadence, voting rules, etc.).
– Subcommittee: a smaller group of trustees tasked with focus areas (e.g., audit, investment, governance).
How a board of trustees works (high level)
– Composition: Boards commonly include a mix of insiders (executive officers or employees) and independent external trustees chosen for relevant expertise. Typical board size ranges from just a few members up to several dozen.
– Responsibilities: Set strategy and policy, hire/oversee the chief executive, approve budgets, safeguard assets, and ensure legal and ethical compliance. When the board “holds assets in trust,” it must manage those assets per its fiduciary obligations.
– Structure: Bylaws and applicable regulation set the board’s authority, member terms, and meeting rules. Most boards use subcommittees to divide oversight work and limit concentration of authority.
Where boards of trustees are commonly used
– University endowments: A dedicated trustee group commonly oversees the investment and spending policy for the endowment portfolio and is legally accountable for investment decisions.
– Mutual savings banks: Trustees oversee the bank in the interest of depositors and the community—ensuring deposits are safely managed, that interest is paid per policy, and that customer principal is accessible.
– Nonprofits, museums, associations and some private entities often use a trustees model rather than a corporate board.
How a board of trustees differs from a board of directors
The two terms are often treated as functionally similar, but there are typical distinctions:
– Usage: “Trustees” is more common in nonprofits, trusts, and institutions that hold assets on behalf of beneficiaries; “directors” is the usual term in corporate law for public and private companies.
– Legal/regulatory context: Different statutes and industry rules may impose specific obligations on trustees vs. corporate directors (for instance, banking regulators’ requirements for mutual institutions or securities rules for funds).
– Titles and powers may overlap in practice; the exact duties depend on the entity’s charter, bylaws, and governing law.
How industry regulations affect a board of trustees
Regulatory frameworks can dictate trustee duties, board composition, reporting, independence standards, and governance processes. Examples:
– Banking regulators require oversight practices that protect depositors and the safety of the institution.
– Securities and corporate law can impose disclosure and fiduciary standards for entities that raise capital from the public.
– Nonprofit law sets standards for conflicts of interest, use of charitable funds, and tax-related obligations.
Boards must follow applicable regulation in addition to their own bylaws.
Typical framework and internal organization
– Authority: The organization’s charter and bylaws set the board’s powers, member selection, meeting rules, and committees.
– Size and committees: Boards can be as small as three people or exceed twenty. Common standing committees include audit/finance, investment, governance, and compensation.
– Delegation: Boards may delegate day-to-day management to executives and hire external investment managers, but ultimate fiduciary responsibility remains with the trustees.
Practical checklist for evaluating or setting up a
board of trustees:
Practical checklist — governance & setup
– Confirm legal foundation. Review the organization’s charter (founding legal document) and bylaws (internal rules). Ensure they permit the proposed board size, committee structure, selection process, and delegation limits. Have corporate/nonprofit counsel sign off on any changes.
– Define fiduciary duty and responsibilities. Fiduciary duty (legal obligation to act in beneficiaries’ best interests) typically includes duty of care (informed decisions), duty of loyalty (avoid conflicts), and duty of obedience (follow governing documents and law). Record these duties in trustee appointment materials.
– Create an up-to-date investment policy statement (IPS). The IPS should state objectives (capital preservation, growth, spending), time horizon, risk tolerance, strategic asset allocation targets, allowable instruments, rebalancing rules, liquidity needs, benchmark(s), and performance measurement cadence.
– Draft committee charters. For each standing committee (audit/finance, investment, governance, compensation), write a short charter that lists purpose, membership size, reporting lines, meeting frequency, decision authorities, and deliverables.
– Set trustee selection criteria and a skills matrix. Define minimum requirements (e.g., financial literacy, legal, fundraising, sector experience). Use a skills matrix to score candidates across 6–10 attributes and target an overall mix rather than one dominant background.
– Establish term limits and staggered terms. Terms (commonly 2–4 years) and staggering reduce turnover risk and preserve institutional knowledge. Require re-appointment processes and off-boarding procedures.
– Put conflicts-of-interest rules and disclosure forms in place. Define what constitutes a conflict of interest (personal or financial interests that could affect impartiality) and require annual written disclosures plus recusal rules.
– Adopt meeting cadence and documentation standards. Typical cadence: full board quarterly; critical committees monthly/quarterly. Keep written agendas, minutes, conflict-of-interest recusal notes, and vote records; retain records per law and policy.
– Require trustee orientation and continuing education. Provide onboarding packets: bylaws, recent minutes, financials, IPS, key contracts, and regulatory obligations. Schedule periodic training on fiduciary obligations, cybersecurity risks, and finance basics.
– Put in place internal controls, audits, and independent review. Decide on internal vs. external audits, frequency, and who selects the auditor (committee vs. full board). Require routine internal control reviews for cash, investments, procurement, and payroll.
– Define reporting and transparency practices. Agree on frequency and format of reports to stakeholders (board, donors, regulators). Public entities/nonprofits usually publish an annual report and financial statements; private ones may require confidentiality agreements.
– Prepare succession and emergency plans. Document processes for replacing executive officers and trustees, interim management, and continuity of operations for major disruptions.
– Establish performance evaluation and removal processes. Set objective review cycles for trustees and the CEO/executive director. Define removal/resignation mechanics consistent with bylaws.
– Ensure regulatory and tax compliance. For nonprofits, follow IRS requirements (e.g., Form 990 disclosures) and state charity regulators. For public companies or funds, follow securities and corporate governance rules.
Practical checklist — investment oversight
– Confirm IPS alignment with mission and liabilities. Translate the organization’s cash needs and spending policy into liquidity buffers and target allocations.
– Choose benchmarks and evaluate external managers. Select appropriate benchmarks for each asset class (e.g., MSCI ACWI for global equities, Bloomberg Aggregate for U.S. bonds). Require managers to provide performance vs. benchmark and an attribution report.
– Implement rebalancing rules. Define trigger-based (e.g., +/-5% from target) or calendar-based (quarterly) rebalancing and who executes trades (CIO, investment committee, outsourced OCIO).
– Monitor fees and conflicts. Require full disclosure of fees, soft-dollar arrangements, and third-party payments. Benchmark fees against peer groups and market surveys.
– Use risk metrics and stress tests. Monitor standard deviation, drawdown, liquidity ratios, and scenario stress tests for key tail events. Review concentration limits by issuer, sector, and manager.
Worked numeric examples
1) Rebalancing example (tolerance band)
– Situation: Target allocation equities 60%, bonds 40%. Total portfolio value = $5,000,
,000,000.
Step-by-step rebalancing calculation (tolerance-band rule)
1) Determine current weights.
– Current equities value = $3,300,000 (example where equities have grown).
– Current bonds value = $1,700,000.
– Portfolio value = $5,000,000.
– Current equities weight = 3,300,000 / 5,000,000 = 66.0%.
– Current bonds weight = 34.0%.
2) Check the tolerance band.
– Target equities = 60%; tolerance ±5% means acceptable band = 55%–65%.
– Equities at 66% are outside the band → rebalancing trigger.
3) Decide rebalancing policy: full-to-target vs. to-boundary.
– Full-to-target: trade to bring equities back to 60%.
– Target equities dollar amount = 60% × $5,000,000 = $3,000,000.
– Sell equities = 3,300,000 − 3,000,000 = $300,000.
– Buy bonds = $300,000.
– To-boundary (less trading): trade to bring equities to 65% (upper bound).
– Target equities dollar amount = 65% × $5,000,000 = $3,250,000.
– Sell equities = 3,300,000 − 3,250,000 = $50,000.
– Buy bonds = $50,000.
4) Adjust for trading costs and taxes.
– Estimate transaction costs (commissions, bid-ask spreads) and potential capital gains taxes.
– Example: if estimated costs = 0.10% of traded amount, then full-to-target trade cost = 0.001 × $300,000 = $300.
– If after-tax optimization is required (taxable accounts), compare after-tax benefit of rebalancing now vs. deferring.
Worked numeric note: full-to-target reduces active exposure immediately but incurs larger turnover and costs; boundary rebalancing reduces turnover at the cost of tolerating some tracking error.
2) Fee benchmarking example (manager selection)
– Situation: $100,000,000 invested in U.S. large-cap equity.
– Manager
– Manager A charges 0.60% annual fee and typically generates a gross return of 9.00%; Manager B (passive ETF) charges 0.05% and tracks the benchmark gross return of 8.00%. Assume active trading costs (bid-ask, commissions, market impact) add 0.10% for Manager A. Assume taxable-account additional tax drag on active trading = 0.20% per year (estimate; depends on realized gains). Use $100,000,000 starting capital and a 10-year horizon.
Step-by-step net-return calculations
1) Compute net annual return for each option.
– Active (Manager A) net = gross_active − fee_active − trading_costs − tax_drag
= 9.00% − 0.60% − 0.10% − 0.20% = 8.10% per year.
– Passive (Manager B) net = gross_benchmark − fee_passive
= 8.00% − 0.05% = 7.95% per year.
2) Compute terminal wealth after 10 years using FV = PV × (1 + r)^n.
– FV_active = 100,000,000 × (1.081)^10 ≈ $218,000,000.
– FV_passive = 100,000,000 × (1.0795)^10 ≈ $214,800,000.
– Absolute difference ≈ $3,200,000 in favor of the active manager over 10 years.
Interpretation and break-even math
– Fee differential = fee_active − fee_passive = 0.60% − 0.05% = 0.55% (55 basis points).
– Incremental transaction cost = 0.10%. Estimated tax drag = 0.20%.
– Total incremental cost that active must overcome = 0.55% + 0.10% + 0.20% = 0.85%.
– Therefore, Manager A’s expected gross alpha (gross_active − gross_benchmark) must exceed ~0.85% per year to be preferable on an after-tax, net-return basis under these assumptions. In our numbers, gross alpha = 1.00% (9.00% − 8.00%), which is slightly higher than 0.85%, yielding the $3.2M advantage after 10 years.
Worked numeric checklist for quick benchmarking
– Step 1: Obtain gross returns (manager and benchmark) and reported fees.
– Step 2: Estimate incremental trading costs (look up turnover, apply a cost-per-turnover-rate or use transaction-cost models).
– Step 3: Estimate tax drag for taxable accounts (higher for high turnover and short-term gains).
– Step 4: Compute net