7. Origins of Financial Illiteracy

Is financial literacy important to competent board decision-making? The short answer is, of course, yes. There are many and frequent trustee educational conferences to help trustees make informed decisions. In attending these conferences, many attendees often feel overwhelmed and embarrassed by their lack of investment knowledge. They should not be. Financial illiteracy is widespread and seen everywhere in the US. Whether it is the low savings rates among aggregate American households, chronically underfunded state and municipal pension systems, or even the federal government’s ongoing tolerance for large budget deficits even in good times, when tax receipts are higher, and public funding needs are less (i.e., for unemployment insurance). Beyond effective board governance, the implications are severe for a society whose citizenry cannot function effectively when making decisions about credit, consumption, saving, and investing. So, why isn’t the US population financially literate? Financial literacy has strong implications for effective board governance. For the 1.6% of the population that make up the fiduciaries and trustees responsible for 80% of the investments made in the US across the many pensions, endowments, and foundations, these people must have the sufficient skills and diligence to at a minimum find and retain the expertise around them to be most effective.