On top of the stock market vortex, there are the investment scandals involving Bernard Madoff bankrupting foundations and nonprofits across the nation, Tom Petters eviscerating nonprofit assets largely in the Twin Cities area of Minnesota, and most recently, R. Allen Stanford whose purported investment shenanigans have reportedly had negative impacts on charities in Memphis.

So what does a nonprofit manager do to navigate between the Scylla and Charybdis of a crummy investment climate and sleazy investment fund managers?  If there were an iron-clad solution, we’d all be armed.  But in the absence of any guarantees, here are some thoughts and tips:

First, don’t take anything your investment managers tell you for granted.  You have an obligation to do your own thinking and research.  Remember, much of the Madoff imbroglio was due to nonprofit investors trusting their investment advisors too much, not looking to see whether there was any substance to their recommendations.

Second, if it’s too good to be true, it usually is.  No, that’s wrong.  It ALWAYS is.  Not only were some Madoff investment advisors too close to Madoff, some simply bought into the hype and got swept up in the resulting detritus.

Third, do your own research, even to simply check out an investment fund’s operations.  Remember, lots of Madoff’s practices, forget his actual investment performance, were questionable.  There were responsible investment advisors warning against Madoff based on the investment fund’s mechanics, not on its performance, but too few charities heeded the semaphores.

Fourth, maybe you ought to think about socially responsible investments.  For nonprofits and foundations that have watched 20, 30, or 40 percent of their assets disappear in the last year’s bear market, they couldn’t have done much worse than to invest in socially responsible funds, in socially responsible businesses.  While the social equity fund indices haven’t been great, there is a huge difference between their operations and transparency and the likes of Madoff’s investment fund.

Fifth, be careful about conflict of interest among your investment advisors.  We have all seen too many instances of investment managers sitting on nonprofit boards, including community foundation boards, where they put the nonprofits’ moneys into their own investment vehicles.  Any hint, any whiff of conflict of interest should not be tolerated, no questions asked.

Sixth, don’t be a patsy.  Nonprofits around the nation are finding themselves at the mercy of funders who are suddenly “discovering” that they don’t have the moneys to fulfill their grant obligations.  Increasingly, some funders are posting open letters on their websites with their intention—intention—to fulfill current obligations, though the scuttlebutt in the sector is that some funders are asking their grantees to accept less or nothing at all.

Almost half of nonprofits in the U.S. have no reserves whatsoever, another third of nonprofits probably have less than three months of reserves at their disposal.  Those lucky nonprofits with endowments are asking their state governments to loosen the regulations so that they can tap otherwise untappable assets to maintain their operations during this obviously longer-than-anticipated global economic recession.

Foundations should be prepared to fulfill their obligations, down market or not, even if it means dipping into their endowments.  Fulfilling the commitments they’ve made to grantees is part and parcel of their mission, their raisons d’être.  Reneging on grant commitments, especially to the nonprofits on the front lines of assisting people in need, is not an option and should not be abided by the nonprofit sector.

Nonprofit and foundation managers have to be smart and thoughtful and wary about their investments.  But when the availability of capital of nonprofits relies on foundations to fulfill their commitments, that isn’t a question of a bad market or a Madoff/Petters/Stanford scandal.  That’s a matter of delivering on the resources that foundations owe their nonprofit grantees.

[Reprinted from the March 10, 2009 issue of Open Doors: Key Information for Mid-South Organizations, the newsletter of the Alliance for Nonprofit Excellence based in Memphis TN, http://www.npexcellence.org]