Advance planning and policy creation allow you to make researched decisions at leisure rather than making hurried decisions under pressure. That also provides plenty of time for your attorney and accounting professionals to review your policy for potential legal and financial pitfalls. The biggest advantage, though, is that the planning, writing and annual reviewing of a business investment policy bring management together in a proactive planning session that can be beneficial to the company's financial success.
Goals
You need to establish your company goals in terms of investment. For short-term cash, the goal should be preservation of principal and a reasonable short-term return in line with U.S. Treasury bill rates or rates paid on one-year bank certificates of deposit. For long-term cash and pension fund investments, you may prefer preservation of principal and reasonable return in line with 30-year Treasury bonds and investment grade corporate bonds. Investment grade credit ratings are Baa at the lowest, up to AAA at the highest. Goals for investment in facilities, intellectual property, other companies, research and development or strategic initiatives should take into account realistic industry experience by companies that have undertaken such investments. Again, prudent action should be the rule, with emphasis on protecting the company's financial strength and maintaining a prudent reserve for unexpected expenses.
Restrictions
The Prudent Man Rule directs fiduciaries "to observe how men of prudence, discretion and intelligence manage their own affairs, not in regard to speculation, but in regard to the permanent disposition of their funds, considering the probable income, as well as the probable safety of the capital to be invested." This is the guideline for evaluation of the acceptability of a manager's actions with regard to investment if such actions are called into question in a court of law. Your investment policy should contain specific restrictions on the quality and maturity of your cash investments as well as provide guidelines regarding strategic investments. Indicate whether such investments may be outside your main industry focus and what requirements must be met before the investment transaction takes place.
Process
For cash investments, you should stipulate who is responsible for investing, how the investment transactions are to be documented and the accounting and auditing procedures to follow. Also stipulate when partial and detailed reports are to be presented and by whom. For non-financial investments, outline the due diligence process to follow, the approval process for each step of consideration, who will negotiate and who will have the responsibility for making the final decision.
Remedies
You should stipulate what is to be done in the event of errors, unforeseeable events, discovered or suspected fraud. Create backup checks and balances for all cash investment transactions, but natural disasters or other unforeseeable events require a full business continuity policy. Discovered or suspected fraud requires a policy governing the disclosure of company trade secrets and strategic plans that, if revealed even to law officers, might result in competitive disadvantage for your company.
