In September 2008, the Reserve Primary Fund, run by the man who invented the money market fund, held $785m of Lehman Brothers paper on the day Lehman filed for bankruptcy. The fund famously “broke the buck”, repricing below a dollar a share, and redemptions froze. Corporate investors who thought they were holding cash spent months finding out they weren't. In boardrooms afterwards, one question kept coming: who approved putting operating cash there? Too often, when things go south, the first instinct is to find a culprit. A clear investment policy avoids this, and helps protect those tasked with implementing it.
What a policy actually does
An investment policy does 3 things:
- It permits: which instruments the company may hold, by name, with everything else excluded by default.
- It limits: how much with any counterparty, at what minimum rating, for how long.
- It assigns responsibility: who can invest, up to what amount, who reviews, and what happens when a limit is breached.
For most companies, a good one fits on a page or two. This section covers how to build a good one.
The policy protects the person, not just the cash
Imagine all of your cash sits in a bank that is forced into a resolution. If that holding was inside a board-approved policy, that's a bad week for the treasurer, and maybe bad luck choosing a counterparty. If it was an ad hoc decision, the treasurer loses the faith of their superiors or worse, has a career problem. Without the guidance of a policy either every future decision gets escalated upwards until nobody makes any, or someone risks their career for the sake of pragmatism.
It gives people the ability to act quickly and confidently inside boundaries they trust, without fear of repercussion.
Dead policies are worse than none
A policy written for the 2019 rate environment and unreviewed since gives false comfort while permitting things nobody would approve today. The governance process matters as much as the document. A review process (annual is sufficient), exception reporting when limits are approached, and a standing agenda item that takes ten minutes when nothing is wrong.
Segmentation comes first
The policy question “what may we hold?” only makes sense after the prior question: what is this cash for? Operating cash, reserve cash and strategic surplus have different jobs, different horizons, and deserve different rules. We'll discuss this further in future articles.
The same job at three sizes
Start-up. Investment decisions are a luxury most early-stage start-ups wish they had. … read more show less
But the policy needs to be in place before the cash from the first major raise lands. The policy only needs a paragraph: a second bank, one money market fund, who signs, and a monthly balance report to the board. Ten minutes of work can prevent the concentration risk we saw with Silicon Valley Bank.
Established mid-market. One page with real numbers: named instruments, counterparty limits, credit ratings, tenor caps, and liquidity. … read more show less
An approval matrix, a benchmark and a quarterly review process. A good policy should give the financial controller enough information and confidence to act on it without needing to escalate, and sufficient clarity to avoid mistakes.
Large corporate. Investment committees, delegated authorities, external manager mandates, country limits. … read more show less
Benchmarks grow into KPIs, investments in multiple currencies, portfolio liquidity, credit concentration, automated compliance monitoring. The policy should be proportionate to the business's complexity, but no more so. Length is not control.
A final note on implementation
Your investment policy should free up time. You agree your investment thesis and constraints once, document it, and the policy allows them to be applied consistently without revisiting for each investment. It allows you to delegate.
If every investment decision gets re-hashed or debated (either before or after execution), your policy isn't giving your subordinates the freedom to act and isn't saving you time.
If you find yourself questioning or second-guessing investment decisions once a policy is in place, you either need to adjust the policy to address your concerns, or you need to let go.