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04 Feb 2009
If 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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