Minutes | Board Finance Committee (BFC) Meeting 23 September 2020

BFC Attendees: Harald Alverstrand, Becky Burr, Ron da Silva (Chair), Lito Ibarra, Danko Jevtović, and Tripti Sinha

BFC Member Apologies: Ihab Osman

Other Board Member Attendees: Avri Doria

ICANN Org Attendees: Michelle Bright (Board Content Coordination Director), Xavier Calvez (SVP, Planning and Chief Financial Officer), Franco Carrasco (Board Operations Specialist), Samantha Eisner (Deputy General Counsel), Vinciane Koenigsfeld (Senior Director, Board Operations), Elizabeth Le (Associate General Counsel), Alex Morshed (Finance Manager), Becky Nash (VP Planning), Shani Quidwai (Sr. Director Finance), Nathalie Vergnolle (Strategic Planning Director), and Victoria Yang (Planning Sr. Manager)

Invited Guests: Representative from Bridgebay Financial Inc.

The following is a summary of discussions, actions taken and actions identified:

  1. BFC Workplan – The BFC reviewed its Workplan, which is on target.
  2. Investment Management Update – The BFC received a presentation from ICANN org regarding the status of the funds under management, which have performed relatively well despite the market volatility during the COVID-19 pandemic. The Reserve Fund, the New gTLD Program Fund, and the Auction Proceeds Fund suffered some loss at the end of March as a result of the impact COVID-19 virus had on the global economy. In response, upon consultation with the BFC, ICANN org to issue revised limited instructions to be in place through 30 September 2020 to the investment managers to limit exposure to market volatility due to COVID-19. The investment managers were also requested to maintain the ESG investment criteria where feasible, but not at the expense of the identified short term volatility mechanics. Through a combination of the temporary revised instructions and the rebound in the markets since March, the values of the funds, particularly the Reserve Fund, have increased significantly over the past few months. The BFC discussed the possibility of a market correction on the horizon and ICANN's options to protect the Reserve Fund. The first option allows for preservation of capital, although it does not allow for exposure to growth trends in the market. The second option provides exposure to loss, which can be mitigated with a conservative investment approach, and allows for exposure to market growth trends. The BFC agreed that the second option is a reasonable strategy for several reasons: (i) the current investment policy is sound and conservative to minimize risks; (ii) there was limited negative impact on the investment funds from the market downturn in early 2020 under the existing policy; and (iii) ICANN was able to benefit from the market recovery in the months following the downturn because it had remained in the market.
  3. Presentation from External Financial Advisor on New gTLD Application Fees and Auction Proceeds Investments – The BFC received a briefing from ICANN's external advisor, Bridgebay Financial, Inc., on the new gTLD application fees and auction proceeds investments, as part of the Committee's role in overseeing ICANN org's management of ICANN's investments. Bridgebay conducted an independent review of the fixed income investment program for the auction proceeds and new gTLD application fees. The reviews of each investment portfolio included compliance check with the ICANN Investment Policy, investment quality and safety, liquidity, controls to reduce risk, and performance of the investments. The auction proceeds and new gTLD application fees are invested in only U.S. fixed income securities or bonds. The investments are managed by three large highly experienced premier bond managers.

    With respect to the new gTLD application fees, the current market value is USD 83.9 million, with an annual total rate of return of 2.33%, which is good given that interest rates are exceptionally low. The three bond managers are providing reasonable rates of returns considering the conservative investment nature of the portfolio, and they are meeting the objective of preservation of capital and liquidity. The portfolio complies with the Investment Policy and is being managed at a double A average credit quality.

    With respect to the auction proceeds, the current market value is USD 211.8 million. The annual total rate of return is 2.08%, which is slightly lower than the rate of return for the new gTLD portfolio on account of the more conservative investment nature of the portfolio; the total rate of return from inception to date is 2.55%. The portfolio is being managed at a double A+ average credit quality. The portfolio complies with the Investment Policy.

    • Action(s): Bridgebay to provide comparison information of benchmark compared to actual performance results.
  4. Financial Updates

    1. FY20 Year End Review - The Committee received an update on the FY20 financials. The FY20 actuals of USD 140.7 million in funding is under budget by only USD .6 million driven by the resiliency of the domain market notwithstanding COVID-19. Total cash expenses for FY20 of USD 126.1 million is under budget by USD 11.1 million driven by primarily by travel-related savings for the ICANN67 and ICANN68 meetings that were conducted virtually and lower than anticipated levels of day-to-day operations due to the pandemic. Another reason for lower than budgeted expenses was lower staffing costs as ICANN org has slowed down hiring given the uncertainties of impact to the org caused by the pandemic. The FY20 Operating Fund balance at the end of FY20 increased due to a reimbursement transfer of USD 20 million from the New gTLD Program application funds, net excess in FY20, and higher than anticipated collections. It was noted that ICANN org is currently undergoing its annual audit, which is anticipated to be completed in October 2020 with no significant changes to financials.
    2. FY21 Forecast – The BFC received a briefing from ICANN org on the FY21 forecast. Actual funding for the first two months of FY21 is higher than budget due to the resilience of the domain market and better than anticipated collections. Total actual expenses are lower than budget driven by reduced travel for the org as a result of heightened travel restrictions. Because the budget forecast was derived in the March timeframe when there was still much uncertainty around the pandemic and its impact to the economy and ICANN, ICANN org took a conservative approach in forecasting. The approach accounted for a loss of fixed fees from contracted parties and lower transactions that have not been realized. As the funding analysis and modeling is an evolving process and the pandemic is ongoing, ICANN org will continue assessing funding projections and controlling costs strictly. The BFC reviewed the operating cash summary, which shows that net collections are approximately USD 13 million higher than budgeted. Total expenses are USD 7 million lower than budgeted driven by expense write offs and travel related savings. The BFC requested that ICANN org prepare a comparison of the FY21 forecast to FY20 actuals, and a detailed breakdown of "payments to vendors" category.

      • Actions:

        • ICANN org to prepare a comparison of the FY21 forecast to FY20 actuals, and a detailed breakdown of "payments to vendors" category.
        • ICANN Global Domains Services department to provide detailed forecasting information for FY21 outlook and FY22 budget development, including any sensitivities around region or country-based assumptions.
  5. FY22 Planning Process – At the outset, ICANN org provided the BFC with an overview of the new Planning Department that was formed in July 2020. The Planning Department was formed to lead all planning activities across ICANN org and to prioritize and organize with all participants in the ICANN ecosystem (org, Board, and community). The long-term objective of the Planning Department is to continuously develop the effectiveness of ICANN org through adequate planning and measurement of the delivery against the plans. The creation and evolution of the Planning Department will accomplish one of the Operating Initiatives, which will contribute to achieving the FY21-25 Strategic Plan.

    The FY22 planning process is currently on-going. Internally, ICANN org kicked off the planning process in August and is in the development stage with the objective of proposing to the community an Operating Plan that includes progress on a number of activities that pertain to the entire workload of the org, Board and community. ICANN org will be conducting a community webinar on the planning process during prep week for ICANN69. A key deliverable is ICANN's community-led activity roadmap, which was first published as part of the Five Year Operating Plan during the FY21 planning process. ICANN org will continue to publish the community-led roadmap three or four times a year. ICANN org will also use the roadmap to develop a methodology and process for the prioritization of ICANN's work needs. It is anticipated that the BFC will be presented with the draft plans in early December 2020, consisting of the Five Year Operating and Financial Plan for FY21-26 and the FY22 Operating Plan and Budget, and those plans are expected to also be published December. Following the close of the public comment period in February, it is anticipated that the final plans will be presented to the BFC in April 2021 and to the Board for adoption in May 2021. The BFC was also informed that the Strategic Planning Board Working Group will conduct an assessment of this year's strategic outlook trend results, with a focus on evaluating potential short- and/or long-term impacts of the coronavirus pandemic on ICANN's FY21-25 Strategic Plan.

Published on 3 November 2020