Academic journal article Journal of Accountancy

The Endowment Goose and Its Golden Eggs

Academic journal article Journal of Accountancy

The Endowment Goose and Its Golden Eggs

Article excerpt

Remember Aesop's fable about the magic goose that laid golden eggs? The more eggs the goose laid, the richer the owners became. Unfortunately, they didn't think they were getting rich fast enough--they wanted all of the gold immediately. So they cut the goose open, only to find there were no eggs inside. Impatience for immediate wealth destroyed any chance of future riches.

Whether a not-for-profit organization (NPO) has a small or a large endowment goose, it relies on its golden eggs today and anticipates more eggs will be available tomorrow. NPOs are the stewards of nearly $325 billion of endowment investments. What must these institutions do to ensure the endowment goose remains healthy so it can continue to supply golden eggs? Is legal guidance available?

The answers to these questions have changed over the years. The Uniform Management of Institutional Funds Act (UMIFA) outlines how NPO endowments should be managed. This article describes what led to UMIFA's passage and discusses the law and its practical application. CPAs either employed by NPOs or retained by them can play an important advisory role by understanding the law's intent and how an organization sets and complies with its investment policies.


The basic endowment challenge is found in the Oxford English Dictionary definition of endow: "To enrich with property; to provide, by bequest or gift, a permanent income." Because many institutions still pursue investment policies that include elements of the past, the history of endowments can help explain current spending patterns.

The first endowments were land. Land produces rents, which are spendable income that satisfies current needs. Land tends to increase in value over time, and rents increase accordingly. In the past, rent increases enabled endowed institutions to keep pace with operating needs. Land-based endowments and simple spending policies enabled institutions to balance immediate needs with future ones.

By the beginning of the twentieth century, bonds had replaced land as the primary endowment investment. As land does, bonds produce spendable income. Unlike land, however, bonds do not maintain their purchasing power during periods of inflation. (Since a typical bond pays only interest and its nominal value remains fixed, the real value declines in inflationary periods.) Because inflation was not a constant factor in the United States until after World War II, few institutions knew that by shifting from land to bonds they were sacrificing their ability to maintain endowment purchasing power.



As endowment investments changed, what prevented endowed institutions from investing in stocks that would have allowed them to keep pace with inflation? The legal standard of fiduciary responsibility applicable to trustees of endowed institutions comes from a 1830 case, Harvard College v. Amory. Known as the prudent man rule, it requires a trustee to "observe how men of prudence...manage their own affairs...considering the probable income as well as the probable safety of the capital to be invested."

Interpretation of the prudent man rule gradually narrowed. By 1900, endowment scales had tipped in favor of maintaining the safety of the corpus--the value of the original gift. Bonds were considered safe because their values generally did not fluctuate.

Before securities regulation and the advent of the Securities and Exchange Commission, many considered investing in stocks to be imprudent. Socalled legal lists of permissible institutional investments were compiled; stocks were not included. In fact, New York State did not outlaw legal lists until 1970.

After World War II, inflation ravaged the value of bond portfolios. Endowed institutions desperately needed to reallocate assets in a way that would provide future growth by maintaining purchasing power. They needed to invest in stocks, but fiduciary responsibility had evolved in favor of maintaining the original gift's value with no inflation provision. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.