Giving time to investment governance

Roger Urwin, global head of content at Towers Watson and governance specialist, says most organisations don’t spend enough time on it, but transformational change is all about giving time to investment governance.

Culture and leadership, for example is so self-evidently important in people organisations and yet it is understated in asset owners, he says.

“The soft stuff really matters. You have to get the right people on the bus, but you also have to get the wrong people off the bus,” he says. “Culture and leadership, and talent and reward are not talked about. Why not? They are key to asset owner performance. This industry has strong managers, but not strong leaders. Leadership is principled, prioritised and very personal, and we need it in the community.”

Effecting change

Before a board embarks on investment policy work, Towers Watson’s transformational change model says mission, values and goals need to be established, and organisational effectiveness needs to be looked at. This includes culture and leadership, talent and reward and the value chain relationships.

Then investment policy work, including strategy, asset allocation, manager selection, and client delivery, can be honed. Execution, which includes actions and decisions, and measurement and review is the last step.

Urwin has recently worked with RailPen in the UK, CalPERS in the US and a large UAE sovereign wealth fund on transformational change and says execution plays a key role in success.

“These funds are all interesting to learn from. They all had big journeys and have come out feeling confident about their future. The key is execution; not what you did, but how you did it.”

This is all supported by a research paper conducted in 2007 by Urwin and Professor Gordon Clark from Oxford University that shows the key differentiator of the top performing funds was they were excellent in execution: whatever they did, they did well. But Urwin says it has to be self-generated change.

“We are living in a world of complexity and competition. There is a war for talent, it’s a low-yield environment and there is intense competition for returns. Also the bargaining power of external managers means large asset owners have an opportunity to do something different.”

The strength of differentiation, alignment of strategy and good execution are all part of this journey.

“Funds need to recognise the importance of investment governance, incorporating a new investment model, transforming organisational design and behaviours through top-down and bottom-up work.”

Super majority rules

Urwin works with boards, investment committees and the executives of funds to facilitate change.

He says investment beliefs have to be established at the board and executive level then brought together in a system that allows for the ambiguity within which investment decisions lie.

“Consensus is the lowest common denominator in boards, but it’s the dominant governance model,” he says. “There is a lot of inertia around the existing situation and not a lot of action. That’s a culture that’s grown up which should be challenged. A super majority is a good ploy.”

In establishing its investment beliefs, the CalPERS’ board recently used this strategy, with the votes requiring a two-thirds majority to be passed.

“Investment is decision making under uncertainty, so it is always marginal. A 3:5 vote is commensurate with that type of situation.”

The big elephant in the room, according to Urwin, is that investment committees tend to have many promising discussions, but few good decisions are actually made.

“It’s not time well spent on committees. There is too much oversight without insight. There needs to be more insight and engagement with executive teams who are increasingly senior people, so the investment committees need to be more like peer-to-peer relationships.”