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Governance matters

It really does

Investments
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By Tim Mitchell, CFA | April 8, 2020

Is a low cost investment that could improve your fund’s performance by up to 1%+ per year with very little risk too good to be true?

A feature that distinguishes the world’s best institutional investors is that they have all paid a lot of attention to their governance. And, as you would with any high return, low risk asset they continue to do so by making small maintenance investments to ensure that their prized asset remains in its best possible shape.

Governance, as a term, is most often focused on Board activities, but to be comprehensive it needs to consider all the people and processes an organisation puts in place to achieve its mission. When sophisticated investors talk about governance they do so with this wider context in mind. That means they’re not just thinking about how to make their Board (or Investment Committee) work more effectively but how the management team (whether internal or outsourced) contributes to mission success and the various frameworks put in place to guide good decision-making.

Investing is a highly competitive activity. The lure of higher returns attracts organisations who are prepared to apply considerable effort to find 101 ways to eke out small performance gains. To do that they will hire well trained (and well paid!) specialists, invest in sophisticated systems and adopt exacting regimes for making decisions (i.e. how they play the game).

Investors that don’t have good governance attributes tend to be inconsistent in their approach. Their goals might keep shifting. They miss key warning signals. Very commonly they look for success in chasing past returns. Often they lose their nerve when times get tough and then fall into playing the ‘blame game’.

In this article, we outline what governance is, the importance of having good governance, how it can impact returns as well as a checklist of factors that help you distinguish if you are one of the best-practice investors.

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Global Head of Governance Consulting, Investments

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