Ezra’s guide to good investment governance

Co chair of global consulting at Russell, Don Ezra, says the progress towards best practice in investment governance is painfully slow. He spoke to Amanda White about why that path is worth enduring and some principles for creating a good governance structure.

Don Ezra, co chair of global consulting at Russell, believes a distinction between governance and management is still relevant when it comes to discussing investments.

“Management is about running an organisation, governance is about seeing that it is run well,” he says. “A simple definition of governance is that it is the decision and oversight structure established in any enterprise.”

While that seems a simple definition, it is surprising how many pension funds struggle with governance structures.

Numerous academic studies have found that barriers to excellences in pension fund management have been “poor process”. In the 2001 Myners Review of Institutional Investment in the UK, Myners pointed out two things: One is that decisions should be taken only by persons or organisations with the skills, information and resources necessary to take them effectively.

And the second, as Ezra says is more subtle, is decision-makers do not need to be experts, but they need to know enough to be able to assess the advice they are given by experts, and to have the experience and skill to mount a sophisticated challenge to the advice received.

But Ezra says this lesson has not been broadly learned, as board of trustees often feel they should rubber-stamp recommendations made to them by experts.

It is a fine line between knowledge and interpretation.

“I read somewhere that the difference between data and information is human interaction,” Ezra says. “And a lot of it is common sense and faith. Imagine if you had two situations, one where the decision making was easy, and the other where you were overburdened with structure. The first one would get you better results, you would think.”

Ezra, who has been studying and observing investment governance for some years, has changed his tune about the need for academic research in the area.

“For years I’ve been calling for academic studies on this, but I’ve been stopped because of the thinking by Ram Charam that the quality of dialogue between the board and management is hard to measure,” he says.

In “Boards that Deliver” Charam says: “No matter how sophisticated the math, such research misses how directors actually interact, work together, and contribute.”

While Ezra says boards and executives should assess each situation as it arises, he also says there are two basic principles of good investment governance.

Firstly each type of decision should have clarity as to where the three words ‘inputs’, ‘decides’ and ‘oversees’ go. An overriding theme accompanying this is for decision makers to seek clarity and avoid duplication.

The second principle is for each decision, ask three questions: What are the knowledge requirements? What are the time requirements? Do we have someone, or a group, that meets these qualifications?

He says that for the most part pension funds fall short of good governance by having poor processes and over-elaborate oversight reports.

But this also leads to a Catch-22 situation, where there is insufficient delegation of responsibility because boards and investment committees are not confident of the monitoring processes.

“It’s not easy for those doing the monitoring who may simply want to know if it’s ok and the report is multiple pages long. Big reports are typically given by junior staff to those higher up. It’s like a child boasting to their parents, there are too many levels of complexity in reporting,” he says. “Consultants do it too, it’s like proof and pride of what they’ve done.”

He says boards should dictate that they simply want “the essence” for their monitoring and an alert, and more detail, when it’s not going well.

“Give me traffic light protocols, once a year I’ll look at everything that is green, but if something is amber I want to look at it now, and if it’s red why have we waited this long?”

Decision making is an art, he says, but so is report writing.

“The ideal report for me is a test of whether you can fold it and put it in your pocket.”