Publisher Description

Governance is a word that is increasingly heard and read in modern times, be it corporate governance, global governance, or investment governance. Investment governance, the central concern of this modest volume, refers to the effective employment of resources—people, policies, processes, and systems—by an individual or governing body (the fiduciary or agent) seeking to fulfill their fiduciary duty to a principal (or beneficiary) in addressing an underlying investment challenge.

Effective investment governance is an enabler of good stewardship, and for this reason it should, in our view, be of interest to all fiduciaries, no matter the size of the pool of assets or the nature of the beneficiaries. To emphasize the importance of effective investment governance and to demonstrate its flexibility across organization type, we consider our investment governance process within three contexts: defined contribution (DC) plans, defined benefit (DB) plans, and endowments and foundations (E&Fs).

Since the financial crisis of 2007–2008, the financial sector’s place in the economy and its methods and ethics have (rightly, in many cases) been under scrutiny. Coupled with this theme, the task of investment governance is of increasing importance due to the sheer weight of money, the retirement savings gap, demographic trends, regulation and activism, and rising standards of behavior based on higher expectations from those fiduciaries serve. These trends are at the same time related and self-reinforcing.

Having explored the why of investment governance, we dedicate the remainder of the book to the question of how to bring it to bear as an essential component of good fiduciary practice. At this point, the reader might expect investment professionals to launch into a discussion about an investment process focused on the best way to capture returns. We resist this temptation. Instead, we contend that achieving outcomes on behalf of beneficiaries is as much about managing risks as it is about capturing returns—and we mean “risks” broadly construed, not just fluctuations in asset values.

The metaphor we use for this investment governance process thus emphasizes the defensive aspects of solving the investment challenge, especially defending the beneficiary from risk events and/or uncompensated risks (as well as capturing returns). Given the uncertainty involved in investment decision making, the fiduciary investor is left to rely on a robust process.

To underscore the idea of defense, we have adopted a Latin word used to describe field defenses, operis, as the way to remember the key steps of our investment process. OPERIS spells out the steps in the process—Objective, Policy, Execute and Resource, Implement, Superintend—and we devote the remainder of this volume to exploring the how of investment governance with reference to our three organizational contexts: DC plans, DB plans, and E&Fs.

By the end of the book, we hope it will be clear to the reader that the individual fiduciary and the governing body to which the fiduciary is appointed each face a difficult task. How might one both represent the interests of beneficiaries and make complex investment decisions in the presence of uncertainty and competing interests? In such a context, we submit that a high probability of success is perhaps the best that can be hoped for.

We set out to provide fiduciaries with some ideas that might help them increase the probability of success. Almost all our suggestions point to the need for a good process that is defensible, repeatable, and documented and that can be used as evidence of diligence in fulfilling the role of fiduciary. Applied diligently by the fiduciary body through time, this process seeks to maximize the probability of achieving the objectives set on behalf of beneficiaries.

In making the case for good process, we offer a high-level outline of the process we use when consulting and counseling our fiduciary clients. We find that this process provides a nearly universal blueprint for addressing the issues investors face, noting that the investment challenge—and the investment policy statement that flows from it—can vary widely depending on the context and/or the nature of the beneficiary. We are the first to emphasize that we are not advocating our process as the only possible path to defensible fiduciary practice. Instead, we contend that is more important to have a process than to necessarily have this process.

This book is the fruit of the last 25 years or so of professional experience across industry and academia, during which we have worked—mostly with each other—on matters of investment governance. Our professional collaboration began when we worked as the senior investment governance officers of a pension fund that offered both DB and DC plans and where the investment function was substantially delegated to external parties (some of which were related). The investment governance ecosystem in which this fund existed was formative in our views on the subject. We began as staff acting as gatekeepers for lay fiduciaries, faced with the best (and worst) the industry has to offer during the best and worst of times (including the global financial crisis).

Now, as independent consultants and fiduciaries, we see the same issues from a slightly different perspective. Some of our views have been confirmed, others challenged. What has become patently obvious to us is that good process has common elements and (near) universal application irrespective of the fiduciary role and the underlying investment challenge.

A book about investment governance for fiduciaries is important because the task they face is of increasing importance the world over. Fiduciaries are trusted with being stewards of other people’s money, money that has been set aside for important societal purposes, be that the retirement savings of thousands of workers, the wealth of nations, or the legacy and good works of a charity.

The intent of this book is thus to share with fiduciaries ideas that may help them fulfil their duties to beneficiaries (and other stakeholders). Asset consultants and investment managers may find it useful in establishing their credibility among, and pitching their services to, fiduciaries. What is sure is that this book has been written for fiduciaries, who, in our experience, take seriously the underappreciated role for which they are appointed (often on a pro bono basis). While some of the words will grate on some industry players, we have challenged the industry to follow the advice of Charles D. Ellis, CFA, in his well-known Financial Analysts Journal paper, “The Winners’ Game” (2011, vol. 67, no. 4): Prioritize the values of the profession (i.e., serve those it should be serving) over the economics [original emphasis] of the business (its own commercial interests).

We trust that this book contributes to raising the standards of fiduciary practice among stewards of wealth.

Business & Personal Finance
22 April
CFA Institute Research Foundation
Research Foundation of CFA Institute