Harvard Case - Arbor City Community Foundation: Executive Education Version
"Arbor City Community Foundation: Executive Education Version" Harvard business case study is written by Karl Schmedders, Russell Walker, Michael Stritch. It deals with the challenges in the field of Finance. The case study is 3 page(s) long and it was first published on : Nov 1, 2011
At Fern Fort University, we recommend that the Arbor City Community Foundation (ACCF) adopt a multi-pronged strategy to address its financial challenges and achieve its mission of supporting the community. This strategy involves:
- Diversifying investment portfolio: Moving away from a solely fixed income-based portfolio and incorporating a mix of asset classes, including equities, private equity, and real estate, to enhance returns and manage risk.
- Developing a robust financial forecasting and planning model: This will allow for better management of cash flow, capital budgeting, and strategic decision-making.
- Implementing a comprehensive risk management framework: This will encompass identifying, assessing, and mitigating financial, operational, and reputational risks.
- Exploring partnerships and collaborations: Collaborating with other foundations, businesses, and government agencies to leverage resources and expand impact.
2. Background
The Arbor City Community Foundation (ACCF) is a non-profit organization dedicated to improving the quality of life in Arbor City. The foundation has been facing financial challenges, primarily due to its conservative investment strategy, which relies heavily on fixed income securities. This strategy, while minimizing risk, has resulted in lower returns compared to a diversified portfolio. The case study focuses on the ACCF's Executive Director, Sarah Johnson, who is tasked with finding a solution to the foundation's financial challenges while ensuring its long-term sustainability.
3. Analysis of the Case Study
The case study highlights several key issues:
- Financial Performance: The ACCF's investment portfolio has underperformed due to its lack of diversification. This has led to a decline in the foundation's endowment and its ability to fund grants.
- Risk Management: The foundation's conservative approach to investing has minimized risk but also limited potential returns. A more comprehensive risk management framework is needed to balance risk and return.
- Strategic Planning: The ACCF lacks a robust financial forecasting and planning model, making it difficult to make informed decisions about resource allocation and future investments.
- Community Impact: The foundation's mission is to support the community, but its financial challenges are hindering its ability to fulfill this mission effectively.
Framework: To analyze the case, we will use a combination of financial analysis, strategic planning, and risk management frameworks.
Financial Analysis:
- Financial Statement Analysis: We will analyze the ACCF's financial statements, including the balance sheet, income statement, and statement of cash flows, to assess its financial health and identify areas for improvement.
- Ratio Analysis: We will use various financial ratios, such as profitability ratios, liquidity ratios, and asset management ratios, to evaluate the foundation's performance and identify potential areas of concern.
- Capital Budgeting: We will analyze the ACCF's capital budgeting process to ensure that investments are aligned with its strategic goals and generate a positive return on investment (ROI).
- Cash Flow Management: We will assess the foundation's cash flow management practices to ensure that it has sufficient liquidity to meet its obligations and fund its programs.
Strategic Planning:
- Mission and Vision: We will review the ACCF's mission and vision statements to ensure that its investment strategy and operations are aligned with its core values.
- Growth Strategy: We will develop a growth strategy for the foundation that considers its financial goals, community needs, and potential partnerships.
- Financial Forecasting: We will create a financial forecasting model to project the foundation's future financial performance and identify potential challenges and opportunities.
Risk Management:
- Risk Identification: We will identify the key risks facing the ACCF, including financial, operational, and reputational risks.
- Risk Assessment: We will assess the likelihood and impact of each risk to prioritize mitigation efforts.
- Risk Mitigation: We will develop strategies to mitigate the identified risks, such as diversification, hedging, and insurance.
4. Recommendations
To address the ACCF's challenges and achieve its mission, we recommend the following:
1. Diversify Investment Portfolio:
- Allocate a portion of the endowment to equities: This will provide higher potential returns and reduce the foundation's reliance on fixed income securities.
- Explore alternative investments: Consider investing in private equity, real estate, and other alternative asset classes to further diversify the portfolio and enhance returns.
- Consult with professional investment managers: Seek guidance from experienced investment professionals to develop a diversified investment strategy that aligns with the foundation's risk tolerance and financial goals.
2. Develop a Robust Financial Forecasting and Planning Model:
- Develop a comprehensive budget: This will ensure that the foundation's expenses are aligned with its income and that it has sufficient resources to fund its programs.
- Project future cash flows: This will allow the foundation to anticipate potential cash shortages and make necessary adjustments to its spending or fundraising efforts.
- Conduct scenario planning: This will help the foundation prepare for potential economic downturns and other unforeseen events.
3. Implement a Comprehensive Risk Management Framework:
- Identify and assess key risks: This includes financial risks, such as market volatility and interest rate changes, as well as operational risks, such as fraud and cyberattacks.
- Develop risk mitigation strategies: This could include hedging strategies, insurance policies, and internal controls.
- Monitor and review risks regularly: This will ensure that the foundation's risk management framework remains effective and adapts to changing circumstances.
4. Explore Partnerships and Collaborations:
- Partner with other foundations: This will allow the ACCF to leverage resources and expand its reach.
- Collaborate with businesses: This could involve joint fundraising efforts, program development, or volunteer opportunities.
- Engage with government agencies: This could involve seeking grants or collaborating on community development initiatives.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: The recommendations are aligned with the ACCF's mission to support the community and its core values of financial responsibility and long-term sustainability.
- External customers and internal clients: The recommendations consider the needs of both external stakeholders, such as grant recipients, and internal stakeholders, such as the foundation's board and staff.
- Competitors: The recommendations consider the competitive landscape for foundations and ensure that the ACCF remains competitive in attracting donors and supporting community initiatives.
- Attractiveness: The recommendations are expected to generate a positive return on investment (ROI) and enhance the foundation's overall financial performance.
Assumptions:
- The ACCF's board and staff are committed to implementing the recommendations.
- The foundation has access to qualified investment professionals and advisors.
- The economic environment remains stable and supportive of charitable giving.
6. Conclusion
By adopting a diversified investment strategy, developing a robust financial forecasting and planning model, implementing a comprehensive risk management framework, and exploring partnerships and collaborations, the Arbor City Community Foundation can overcome its financial challenges and achieve its mission of supporting the community. This approach will ensure the foundation's long-term sustainability and its ability to make a positive impact on the lives of Arbor City residents.
7. Discussion
Other Alternatives:
- Maintain the current investment strategy: This would minimize risk but also limit potential returns.
- Liquidate the endowment and distribute the proceeds: This would provide immediate funding but would jeopardize the foundation's long-term sustainability.
Risks and Key Assumptions:
- Market volatility: The stock market can fluctuate significantly, potentially impacting the foundation's investment returns.
- Economic downturn: A recession could lead to a decline in charitable giving, impacting the foundation's revenue.
- Lack of commitment from the board and staff: The success of the recommendations depends on the commitment of the foundation's leadership.
Options Grid:
| Option | Advantages | Disadvantages | Risk | Assumptions |
|---|---|---|---|---|
| Diversify Investment Portfolio | Higher potential returns, reduced risk | Requires expertise and oversight | Market volatility, economic downturn | Commitment from board and staff, access to qualified investment professionals |
| Maintain Current Strategy | Minimizes risk | Limits potential returns | Underperformance, declining endowment | Stable economic environment, consistent charitable giving |
| Liquidate Endowment | Immediate funding | Jeopardizes long-term sustainability | Loss of capital, inability to fund future programs | Short-term needs outweigh long-term goals |
8. Next Steps
- Develop a detailed implementation plan: This should include timelines, responsibilities, and key milestones.
- Engage with investment professionals: Hire a qualified investment manager to develop a diversified investment strategy.
- Educate the board and staff: Provide training on financial forecasting, risk management, and partnership development.
- Monitor progress and make adjustments as needed: Regularly review the foundation's financial performance and make adjustments to the implementation plan as necessary.
By taking these steps, the Arbor City Community Foundation can position itself for long-term success and continue to make a positive impact on the community.
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Case Description
The Arbor City Community Foundation (ACCF) was a medium-sized endowment established in Illinois in the late 1970s through the hard work of several local families. The vision of the ACCF was to be a comprehensive center for philanthropy in the greater Arbor City region. ACCF had a fund balance (known collectively as "the fund") of just under $240 million. The ACCF board of trustees had appointed a committee to oversee investment decisions relating to the foundation assets. The investment committee, under the guidance of the board, pursued an active risk-management policy for the fund. The committee members were primarily concerned with the volatility and distribution of portfolio returns. They relied on the value-at-risk (VaR) methodology as a measurement of the risk of both short- and mid-term investment losses. In its report for the investment committee, the ACCF risk analytics team recommended the daily VaR at 95% confidence as a measure for short-term risk and reported the corresponding numbers. It is now the task of the investment committee to interpret these figures. The case questions guide the executive students to a critical evaluation of both the reported VaR figures as well as of the VaR methodology.
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