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Source: ICANN Finance Public Dashboard - Link
Source: ICANNIf you visit the new dashboard on ICANN’s web site, you see some nice bar charts, including one rather large negative number of $4,462,000. If you click the little arrow at the top of the Financial Performance chart, a footnote window pops open where the last sentence is:
The large variance to budget is due to investment losses of $4.6 mil.
Investment losses? Yup, ICANN’s been speculating in the stock market, and has lost $4.6 million, or to put it in concrete terms, the 20 cent fee from 23 million domain registrations.
Way back in 1998, ICANN’s bylaws said they should establish “reasonable reserves for future expenses and contingencies reasonably related to the legitimate activities of the Corporation”. This is perfectly reasonable, any company needs a cash cushion to deal with unforseen bumps in revenue and expense. Fast forward to 2002, when ICANN’s finances were still somewhat precarious, due to its bureaucracy expanding faster than its revenues. In his ICANN reform proposal, Stuart Lynn proposed $10 million as an adequate level of reserves to be built up over three years, which still sounds reasonable. As time passed, the money started to flood in a lot faster, so by the 2007-2008 budget year ICANN had $25 million in spare cash, and the reserve goal had now become a full year’s revenue, which is ridiculous. (How likely is it that ICANN’s income will drop to zero for a full year, and even if it did, there’s only a few key functions like IANA and Compliance that couldn’t be deferred over a crisis.)
At its November 2007 meeting the ICANN board approved an investment policy, which is where they went off the rails.
RAJASEKHAR RAMARAJ: ...
One is that the money that—a portion of that annual reserve fund has actually been accumulated so far. And there is an opportunity cost attached to it which seems considerable, because of want of this investment policy.
The investment policy will focus actually on safety and performance. That’s based on community feedback on that issue, focused on safety, principal safety and performance.
STEVE GOLDSTEIN: Thanks. And to add to what my two colleagues have already said, the opportunity cost of just leaving that money in a money market fund as opposed to investing it wisely, depending on what assumptions you make, but it is of the order of a million dollars a year. So it’s very important that we have a good investment policy.
It appears that ICANN doesn’t understand the difference between a reserve and an endowment. A reserve is accumulated surplus cash, held to deal with emergencies. An endowment is a permanent fund where the income (and in unusual circumstances, the principal) supports the operation of the organization. Reserves have to be there when you need them, so they belong in cash: money market, bank deposits, and the like which don’t fluctuate. Endowments are typically invested for the long term, with the organization getting some fraction of the income. Unfortunately, ICANN seems to think that its Reserve Fund is an endowment, so according to the 2008 annual financial report, they bought about $16.5M in bonds, and $8.5M in stocks. We don’t know in detail what happened between then and now, but it’s reasonable to assume that their portfolio tanked with everyone else’s, producing the $4.6M investment loss. Well, uh, oops, let’s hope they can get by on $20.4M, and the way the market’s going, perhaps somewhat less than that.
Lest it be unclear, I am not saying that ICANN should have forseen the market crash (well, any more than everyone else in the world should have.) I’m saying that their investment policy is irresponsible. If they could afford to lose $4.6M from their reserves, why did they collect it from us in the first place?
(Thanks to Danny Younger and George Kirikos for noting the $4.6M and suggesting where to look for background.)
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If the fund amount is (the cash equivalent of) $20.4m, and the loss is $4.6m, then the decline in portfolio value is roughly 22.54%. I’m not getting the logic around why this isn’t in line with expectations and investment policy. That loss percentage seems to indicate that they followed their policy as stated.
If they were wildly speculating, might we expect to see a smaller gap between bonds and equities? I’m not convinced that there’s an issue here or that this situation is a standout as compared to non profits across the board.
As far as their cash reserve requirements go, I know that ICANN has some peer organizations that have similar cash reserve requirements for the same time period. I wouldn’t mind seeing how the they came to that requirement and what happens if accumulated cash including the reserve exceeds that requirement i.e. funneled back to the community in lower costs?
Thanks as usual and best regards,
Martin
Why doesn’t it surprise me that VeriSign alumni are so poor at basic math?
The fund started at $25 million. The loss is $4.6 million. 4.6 divided by 25 = 0.184 or 18.4%. 22.54%, by contrast, is the gain that would be required from the current balance in order to get back to break-even.
That being said, the funds, as John rightly said, were argued for as an emergency contingency fund, not “free money” that can be speculated with, or used as a permanent endowment. Just like the emergency fund that people have in case they lose their job and need to pay their bills—those should be placed in highly liquid low risk T-bills, CDs or GICs, rather than placed into the stock market or bond markets which are volatile.
If the funds were not emergency funds, then that excess cash should not have been collected in the first place, i.e. fees for domain registrants should have been $25 million less.
George, thanks for the correction. I appreciate the assistance since it’s somewhat hard to follow some of the logic that is being presented here treating ICANN’s cash management functions as a special case. I’m not an investment advisor, nor am I an accountant.
You’re not making much sense as far as the investment strategy goes. Since I have no opinion on the source of the funds nor do I think it relevant to their cash management procedures, the way I’m reading it is that a) ICANN publicly stated what they were going to do with the reserve funds, and b) they followed that strategy, and c) the result was a fairly transparent unexpected loss.
How is their cash management approach controversial as compared to other non profits and what’s different about ICANN that they shouldn’t invest idle funds in the markets?
Best regards, and thanks for contributing your financial expertise.
Best Regards,
Martin
They said they had an investment policy, and they tossed around words like "prudent", but other than a line in the annual report, they never said what the policy was. In retrospect it appears they don't understand what prudent investment is.
Speaking as one of the sources of those funds, I'm not pleased to learn of this. When I was on the CIRA Board we had a reserve fund: it covered 9 months of operating expenses and we later increased it to one year's worth. It was for emergencies and it was in all cash, all the time. Guess what, it still is and it's still all there! ICANN falls prey to the conventional "wisdom" that it is somehow wrong to "leave money on the table", everything has to be fully invested to get that maximum growth. Why? If it's an emergency reserve the prime objectives are preservation of principal and liquidity, so it's there when you need it. If it's just excess cash then ICANN should be lowering fees or rebating excess back to the registrars. This also begs the question: what were the funds invested in? If it hasn't been disclosed already it has to be disclosed immediately and there had better not be any conflicts like mutual funds with registrar or registry holdings, or companies affiliated with any board members. In lieu of any disclosure we're just looking at a "black box" that vaporized north of 4 million worth of registrars' money. Thanks guys.
Mark, if you still have any sway at CIRA, perhaps you can get them to stop making voluntary ccTLD contributions to ICANN that will just be squandered. According to the latest report for the year ending June 2008, CIRA contributed $63,750 USD dollars, money that could have been better spent reducing .ca fees or improving service. Symbolically, they could reduce the voluntary contribution to $1, if they didn't wish to eliminate it entirely.
-- not registrars' money! Registrars just get the many benefits of collecting it as a middleman.
Martin, Might you define "principal safety", and map that term onto (a) equities, (b) T-bills, (c) a bank account. One of these things is quite unlike the others.
You’re right, the decline is what you’d expect for someone who was 1/3 in stock and 2/3 in bonds. But reserves shouldn’t be in stock in the first place, they should be in cash, because they’re reserves. Even if ICANN had done this two years ago and made a bundle in the market, it would still have been irresponsible.
By the way, if you know any other non-profits that put their reserves in the market, I’d be interested in hearing about it. All the ones I know that have a reserve keep it in cash.
Martin, it goes back to the basic premise as to whether the funds were for emergency contingencies (like people who put aside 6 months of expenses in case they lose their job), or are an endowment (like Harvard’s endowment, a permanent source of long-term funding). As you noted, they did follow their publicly stated investment policy, but that policy, as John rightly noted, is where they “went off the rails.” The excess funds (if they were truly not for contingencies) should have simply been returned to domain registrants, in the form of lower fees. If the funds were truly for an emergency, then they should have never issued the policy to begin with.
As others have noted, people “can lose their own money in the stock market” they don’t need ICANN’s help!
So is it safe to say that the point is better related to ‘why’ they have such a large amount of cash (equivalents) on hand and the potential inappropriateness of the investment strategy related to their mission? So a non profit shouldn’t be maximizing profits through investment strategies, rather, they should be protecting the assets and in the process carrying out their responsibility to keep costs low?
Thanks John, and George, for explaining this.
Best Regards,
Martin
It’s great that you were able to discover the ICANN dashboard information and Board meeting minutes. We have been publishing more information on ICANN’s financial information on the dashboard for a number of months including performance of ICANN’s investment Reserve Fund.
Why is there an ICANN Reserve Fund?
In short, the strategic plan for ICANN calls for ICANN to strive for financial stability. A reserve fund, (or a “rainy day” fund) is a responsible use of funds in a budget to anticipate unforeseen expenditures, and is widely recognized as a pillar to a financially secure organization and effectively a requirement for a non-profit organization. In late 2007, ICANN, under the guidance of the Board Finance Committee, developed an Investment Policy, approved by the Board, to ensure that a Reserve Fund be established and managed professionally. ICANN hired an outside financial advisor, not our investment manager, to help develop an Investment Policy appropriate for an organization like ICANN. In retrospect, investments look unattractive but leaving the funds in cash accounts would not be wise, and may not be as risk free as one might think. After a study of scenarios ranging from no risk to high risk, the risk profile chosen was “moderately low” with 65% invested in bonds. Historically, in any five year period this investment profile did no worse than a 3% gain and in most cases far out performed cash investments. The moderate risk profile has yielded significant losses but much better than the equity markets on the whole. The Reserve Fund level is still over $28 million as of today, and is invested in a highly diversified mixture of bonds, stocks, and cash. The Board Finance Committee and finance department continues to monitor the performance of the Reserve fund including a formal presentation/analysis from the investment advisors scheduled during the Mexico City meeting.
I personally am committed to accountability and transparency at ICANN. Recently we provided more detailed expense reporting on the dash board. I welcome your constructive suggestions on how we can improve in these areas.
Best regards,
Kevin Wilson
Chief Financial Officer
ICANN
Hi, Kevin. Thanks for your condescending yet impressively ill-informed comments. I am frankly astonished that ICANN's CFO can't tell the difference between a reserve and an endowment, and if you don't get it at this point, I doubt that anyone can explain it. George is right on the point, estimates of five year volatility (which must have been based on an unrealistically short time horizon) are utterly inappropriate for a rainy day fund. As I commented to someone else, I used to be on the audit committee of a NASDAQ listed company with revenues roughly the size of ICANN's and if our CFO had suggested putting our reserves in anything more aggressive than treasury repos, we'd have thought he'd gone insane. The point of a reserve is not to maximize estimated long term gains, it's to have the money there when you need it. Too bad nobody at ICANN seems to understand that, and we pay for it by having our registration fees frittered away.
ICANN has a duty to disclose what the money is invested in.
Some of the failed banks, say, or SIFY (the indian tech company that crashed and burned after it turned out its founder bled all the cash reserves out to speculate in real estate - nasdaq listed ADRs), or Madoff? As for the bonds, how many of them were backed by mortgage securities? Is the portfolio published anywhere at all?
As you were looking for specific constructive suggestions, there really are only two possibilities:
A. Return the funds to registrants (through lower fees), or
B. Kill the investment policy, and put all funds into government guaranteed short-term investments. If one wanted to seek out higher yielding CDs instead of T-bills, but still stay within government guarantee limits, one way to accomplish this is to use something like CDARS which places the funds at multiple financial institutions, all below the FDIC limits, with up to $50 million in deposits (although you should do your own due diligence on CDARS, just to be safe).
Personally, choice A makes the most sense to me, combined with other cost cutting measures (i.e. employee salaries using non-profit instead of for-profit comparables, creating a culture where efficiency and cost-savings are rewarded, etc.).
By the way, if the reserve fund is truly for “rainy days” the Board Finance Committee, the entire Board, and the outside financial adviser should not be using a 5-year time horizon when assessing risk. That’s incompetence, plain and simple. As Mark suggested above, the proper time horizon is much, much shorter, and that’s why short-term investments are the appropriate securities.
I did a search with Google, and could not find any public comment period or public consultation associated with the Investment Policy. Thus, it would appear the blame falls squarely upon the folks who crafted it and approved it.
Going back to the actual Board resolution, I also do not see any reference to the public having participated in the decision.
Reading the actual text of the Investment Policy, it even states plainly that “The Reserve Fund is only used for emergencies” and “The Reserve Fund is the pool of investments held by ICANN that is restricted for use for “rainy day” emergencies only.” (emphasis added) There are 13 references to “emergency” or “emergencies” in the document. This confirms the inappropriateness of a 5-year time horizon, which should have been obvious to anyone without advanced financial training.
The document also directly mentions the “Areas of Responsibility” naming the parties responsible for this faulty policy. ICANN needs to make people accountable for this loss, including firings, resignations or reprimands as needed. They can either do this now, or wait until the NTIA next seeks public comments on ICANN, where this incident will be one of the highlights. The choice is clear, say you dealt with it when it came up, or have a lot of explaining to do later. Since the Board approved this, some of the Board members might find it appropriate to tender their resignations, if they were there in November 2007. Or, they can find more directly responsible individuals to reprimand.
Our funds are now still at risk. It’s time to cut the losses, and pick choices A or B above. Even if the funds were to go up in value, investing them in the first place in risky assets was entirely inappropriate.
If ICANN has the free time to spend making spin-doctor videos about new gTLDs (had the appearance of a deer in the headlights, to me), they certainly have the time to make an official statement on the ICANN website, after calling an emergency Board meeting. In their next video, they might want to use the words “we’re sorry” in the first sentence.
Allegations of corruption seem like a huge over-reaction to this issue.
As I see it, ICANN has made surpluses which have resulted in reserves. Its the responsibility of the ICANN Board to manage those reserves responsibly and prudently and having an investment policy and independent investment advisers is the standard way of doing this. We have a very similar arrangement in .uk. It is not best practice to keep reserves purely as cash.
The more strategic discussion that I hope is taking place somewhere is whether ICANN has more income than it requires for current and planned operations, strategic priorities and reserves etc and if so, what options would be acceptable to the community for dealing with this going forward. We had a similar situation in the UK. We also have a constraining requirement that any price change should be agreed by a registrar vote, which with widely divergent views on pricing means that the price has been unchanged since 1999. The option that met with most community support was to create a charitable foundation to give back funds to the Internet community via project funding etc. YMMV.
Nominet's investments are doing better than some. However, as we announced in the December Nominet Board communique, in the light of the current economic climate, we are reviewing our investment policy. Our accounts will be published in due course when they are put to members. Re ICANN's reserve/endowment, I think I was agreeing that this should be reviewed.
Sigh. Once again you are confusing an emergency reserve with an endowment. See previous discussion.
I agree that it is a very open question whether ICANN realistically needs so much spare money.
Thanks for the comment John. Actually, I was not confused, I was responding to your earlier comment re not for profits where you said: 'All the ones I know that have a reserve keep it in cash' and my point was that one would not usually keep funds (whether it be an emergency reserve or an endowment or some other accounting treatment) purely as cash. Putting accounting treatments and their varying degrees of liquidity to one side, perhaps Kevin would be able to advise whether the calculations to determine the size of the ICANN reserve fund are available, when it is estimated that the reserve requirement will have been met and what plans are in place for any excess funds following that date?
Lesley: I'm sure John wasn't referring to "cash" in the literal sense of under the mattress cash or non-interest bearing chequing accounts, but instead the broader category of highly liquid and safe investments that would include government insured short-term bank CDs, T-bills, etc. (securities with a duration of under 1 year that have no exposure to credit risk or FX risk, if you seek greater precision). If the funds are truly for an emergency reserve fund, as they are purported to be by the 13 references to "emergency" or "emergencies" I noted above, then it should be very clear that any exposure to stocks or long-term bonds in any amount is simply irresponsible. Any "excess funds" should be returned to domain registrants through lower fees, instead of building golden domain palaces for ICANN staff, funding extravagant world travel, or other boondoggles that say "mission creep."
Thanks for your comment, Lesley. In fact your timing is excellent. We are including much of this kind of detail in the proposed Framework for the FY10 Operating Plan and Budget to be published soon so it can be discussed for initial consultation in Mexico City. Draft FY10 Budget is to be posted on 17 May for adoption in Sydney in June. With respect to the question you raised about reaching a certain level for the Reserve Fund and the plans for surplus funds: Under the plans that we have been running for several years, we have prepared budgets designed to build up to one year of operating expenses. As this post has extensively noted, the balances have fallen due to the unfortunate state of the economy; I predict that it will be several years before we reach the agreed upon reserve level. Once ICANN reaches that level, the Finance Committee will need to review any next steps, and should it relate to use of surplus funds, a discussion with the community in relation to budget planning will occur. I look forward to your and the community’s input on the FY10 Operating Plan and Budget in Mexico City and beyond. Thank You Kevin
Thanks for the info Kevin. I'm in full agreement re the need to retain reserves. However, one could query the basis on which it was determined that these should equal one years operating expenses. Was this an ICANN Board decision or is it a US accounting standard or something? Also, I suggest that it would be a good idea to start a community discussion about what to do with surplus funds a considerable time before that point has been reached (or whether there should be measures to reduce the likelihood of surplus funds). From experience, I expect that there will be many divergent views and it will take quite some time to build community consensus. Thanks, Lesley
Thank you, Lesley. We have seen studies of reserve fund sizes (as a function of operating expenses) indicate a range from 3-6 months to multiple years. So, no, there is not one US Accounting standard. There has been discussion of this from time to time, and was part of the budget development process, including community input, and Board approval that set the amount to one year of operating expenses. I agree that the surplus funds discussion should be formally initiated early and deeply to ensure that it's done as correctly as possible with transparency and accountability. I hope to learn more about Nominet's experiences on this topic. Thank you Kevin
Managed funds that have a guaranteed rate of return (by investing in money market, tbills and other government backed paper <- note, not junk bonds like fnma / fmac that pretended to be equivalent). If cash then certainly not in a single currency, but in a currency basket, the way countries retain their cash reserves. And spread across multiple banks so one bank going bust doesnt break all your resources. In any case, emergency reserves are NOT meant to be placed on the stock market. I am not sure if ICANN staff would prefer that their 401k plans, say, be placed in anything other than the safest possible money market and government backed paper. If they feel the same urge to gamble as the ICANN board has by playing the equities market with their emergency funds .. well, entirely up to them.
ICANN posted its Strategic Plan today. Page 6 lists their priorities. Bottom of the list? “Ensure financial accountability, stability and responsibility.” They should be comedians.
I don't understand the kneejerk mentality where everything that ICANN does is Evil. In a numbered list, one has to be last, wouldn't it be prudent to list the non-core business stuff last? If they listed "Ensure financial accountability, stability and responsibility." first, I'm sure you would have complained that they didn't list the essential stuff first. I for one WANT them to focus on "security, stability and resiliency in the allocation and assignment of the Internet’s unique identifiers" BEFORE they "ensure financial accountability, stability and responsibility." I agree with Lesley:
Hiring independent investment advisors is a reasonable thing to do so long as you give them reasonable instructions, which in this case would have been "invest this for capital preservation", not "invest this for long term growth." A proper investment policy would have been considerably simpler to implement than what they did. FYI, it is my understanding that Nominet, which Lesley heads, has a similar reserve investment policy, with similar disastrous results, a 2 million pound loss of their reserves.
I agree with you that hiring independent investment advisors is reasonable, as well as giving them broad instructions (as opposed to detailed instructions which in the UK would be known as 'having a dog and barking yourself'). However, it is well known that the very turbulent economic global climate has had/will have an adverse effect on the performance of long term investments and ICANN, Nominet and others will be no different in this respect. But one should not confuse accounting provisions for prevailing market values (which are prudent and in line with international accounting standards) with realised losses or profits, which only occur when the investments are realised. Perhaps Kevin will be able to clarify whether the ICANN figures are provisions or realised losses. Also, whilst I think it is known that the Nominet investment policy is about investment for long term growth, as I commented earlier, I am unable to disclose or discuss Nominet financial information in advance of it being fully audited, signed off by the Board and then being published and made widely available. Happy to do so following that.
Unrealised losses are certainly just as "real" as realised ones, given these are all highly liquid traded securities. The mark-to-market value is real. It's only an ostrich with their head in the sand who would see any difference between them. Knowing more than just "buzzwords" is what separates the real financial professionals from mere posers.
ICANN has opened up a Question Box for Mexico City’s meeting. Here’s the question I just asked of them.
(ICANN limits it to 30 words, so I used exactly 30)
It’ll be interesting if they take it on in Mexico, although I expect they’ll just give a canned “non-answer” given they have weeks to prepare their non-answer. If others feel that ICANN should answer a related question in Mexico, fill out their form and we’ll see what happens.
ICANN has sunk to another low. In the main article above, there was a bar chart indicating the $4.6 million loss.
In the most recent dashboard (Updated Financials as of January 31, 2009), the bar chart with the investment losses has disappeared (it used to be next to “Contributions”)! I’ve created an annotated screenshot archive showing the missing bar chart. So much for ICANN transparency!
They are probably switching over to new "mark to myth" accounting practices. Everybody's doing it.
It’s a bit picayune and late, but 4.462 is a whole lot closer to 4.4 than it is to 4.6
Rounding it up to 4.5 makes sense. Rounding it up to 4.6 is unsupportable by the facts you expound on at length.
Exaggerating the claim doesn’t help your case at all.
As for the substance of your critique, I am sure you have a point, but I don’t really need my money back. If it is now only half or two thirds of that amount (I suspect the percentage of my fees left would be more, unless there were only exactly 23 M domain names extant currrently) then I guess I think it is better that it should be put to use keeping the DNS operating.
I made the deal I made with the Registrar(s) I paid. I wasn’t conned, and I have received the value I expected. It’s not like I had any expectations of what ICANN would do with the money. I was barely aware of it’s existence until the early 21st century. To now suggest that they should return moneys they lost because of a financial choice you disapprove of seems a bit, I don’t know, maybe picayune.
The idea that some may have been lost in the market? I crushes my soul, but I guess I will get over it.
You’ve misread the chart. $4.462 million was not the size of the loss, $4.6 million was, by ICANN’s own numbers (now up to $4.7 million if you visit the current dashboard updated as of January 31, 2009 and check their “note”). The negative $4.462 million bar graph is comprised of other line items (that were positive and offsetting, i.e. bank interest). Note that ICANN has now eliminated that bar chart (see comment #42 for a screenshot). Thus, no claim was “exaggerated” as the numbers came directly from ICANN itself.
As for the rest of your comment, if you consider a $4.6 million loss to be “picayune” (i.e. “paltry” or “a trifle”), then perhaps you’ll write a cheque to everyone who doesn’t feel the same way. To most people who work hard for their money, $4.6 million is a lot of cash to have been squandered on speculation that should not have taken place at all given it’s an emergency reserve fund. The greater principle involved is that the funds should have been kept in safe liquid funds, yet even now ICANN continues to speculate with that money.
Thank you for setting me straight, George. I was simply going by what I saw on the page here. I assure you, I do not think that 4.6m is a paltry or trifling number. Perhaps if you compare it to the amount of wealth that has been lost in the markets this past year it would be, but I think that anyone sane, whether they work hard for their money or get paid for breathing, would agree that 4.6 million dollars is a substantial sum of money. Still, I will be glad to write you a check for 4.6 million dollars. It will be a bouncy bouncy check, but if it will make you a happier person, I am glad to do it. Please get me that list of "everyone who doesn't feel the same way." Also, please, their mailing addresses. And, perhaps, an explanation of how you decided it made sense for me to write a check equal to the total amount lost by ICANN to each and every person in the group "everyone who doesn't feel the same way". It seems rather inequitable to me. On a related note, this may take a few generations, so I hope you are more patient than you seem. Have a nice day.
Folks who follow the ICANN Blog will note that I asked why the investment losses weren’t updated monthly.
Kieren wrote in the comments “That said, I will look into whether the note accompanying the figures is also updated monthly.”
Instead, if one looks at the current dashboard, they’ve eliminated the note entirely!
In Poland, people were fired over similar losses of over $4 million. Why isn’t anyone at ICANN being held accountable?