Internal contracts could solve accountability issues

Internal investment committees and teams should be given an investment management agreement by their boards, in order to define accountability, according to Russell Investments expert, Sorca Kelly-Scholte.   There have been many studies, discussions, debates and papers written about fund governance, but putting words into action seems to be a slow process for many funds.

Russell Investments has been a vocal advocate of good governance, and a recent survey of UK pension funds found that while effective delegation and outsourcing is a goal for many funds,  it is still not happening in practice.

Kelly-Scholte, who is Russell’s director of consulting and advisory services, believes funds need to “professionalise” the decision making process.

“Trustee boards are still holding on to decisions like manager selection,” she says. “Investment decisions are taking up a huge proportion of time, often more than half the time. Trustees spend too much time on investment matters.”

Kelly-Scholte says a trustee board should be planning – setting objectives and determining risk budgets as well as developing investment strategy – but not implementing decisions. Instead, the role of developing portfolio structure, active strategy, manager research and selection should be delegated to an investment committee or internal team.

In this way trustees retain control of the overall strategy, but accountability is delegated to those with the most expertise or resources.

“The governing fiduciary should be setting investment beliefs and setting risk parameters, but how that’s implemented, all of that can be delegated,” she says. “It is better to delegate because a lot of the decisions are real-time decisions.”

But as the UK survey revealed, delegation in itself is not the answer: there has to also be accountability.

“We found the larger funds all had more use of indirect resources, and were better at delegating. But when we looked at the different characteristics of funds, the larger funds were delegating more but the accountability was even fuzzier. They have more people who are potentially responsible for decisions. The question of accountability needs to be worked on,” she says.

Interestingly, she noted that the large super-resourced funds, had the least confidence in their decisions/accountability.

“Funds need to sit down and work out a decision matrix. Make people accountable and responsible, work out who has the necessary knowledge, skills, and time requirements. If there is no obvious answer then discuss how to fill that gap.”

She says the trustee body needs to initiate the discussion, and suggests administrative and operational parameters such as concrete agreements in place internally may assist.

“Give your internal committees and resources/teams an investment management agreement, look at professionalising it more,” she says.

She says there are four lessons learnt from the survey: motivation to avoid blame is persuasive; decision-making processes are often poor; background training for boards is often poor; and the resources available to boards are often inadequate.

A similar Russell survey conducted in Australia found the decision-making process around investments was equally muddy, with the results showing not only a lack of delegation but also a “serious” overlap in responsibility and potential lack of accountability. One result was that in 60 per cent of funds, trustees were responsible for portfolio decisions.

That survey concluded that with funds becoming more complex, trustees need to spend more time on strategy and less time on implementation.