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How can IC governance step up in the current crisis conditions?

Investments
COVID 19 Coronavirus

April 29, 2020

Trustees boards and investment committees can rise to the current challenge

Best practice governance delivers a product that is more than the sum of its parts. It involves empowered people coming together to make well-judged interventions on big issues. Good governance always sets organisations (including pension schemes) apart, and in crisis conditions it can do so more if it flexes to respond to our crisis circumstances in new ways – think of best practice governance in crisis circumstances as flexing to be same where possible, different where necessary (and let’s be clear some change is necessary).

The governance in our investment industry setting is focused on investment committees (IC’s), both in asset owners and asset manager settings, where best practice has evolved considerably.

IC governance has improved over time, but in the current circumstances it needs a step up. To help, here are five suggested ways to consider:

  1. Balance the urgent with the important. We must work on the critical short-term agenda, but do so showing respect for the critical issues in the medium and long term. We cannot afford to lose sight of the longer-term mission. The fundamental temptation here is to over-do the anxiety, but the step up to better governance here is to apply ourselves to meeting the long-term mission through a balance in our time horizons.

    The best example here is about holding your nerve on a well configured strategy. As long-term investors, being patient is crucial, safe in the knowledge that you can stay the course through the turmoil markets throw at you. Current market volatility is scary, and there is a chance it will get worse, but history should confirm our beliefs that we will be okay in the longer term.

  2. Try to see around corners. Investment committees can weaponize their skill through anticipating future trends and patterns. In present uncertain times we must work harder on the unexpected as many more issues ‘lurk’ out there. When we think we see the light at the end of the tunnel, we should not relax, and the focus should still be on ‘seeing around corners’ – good governance’s most prized asset.

    An example is the diligent use of scenario thinking. In addition, investment beliefs remain the mainstay of good IC practice and some may need updating now. There are the long-term core beliefs that only need light refreshing, but there are ‘the world has changed’ beliefs which need serious work.

  3. Reprioritise. Staying true to core principles and beliefs is important, but good governance should be adaptable around its edges. This suggests doing a few things more deeply and letting lesser stuff drop away. We must respect the idea that a governance budget is finite.

    Doing a few critical things well is the key principle here. This environment means we are experiencing a series of squeezes everywhere, for example liquidity, capacity, communication, resilience and wellbeing. Accepting that there are constraints to what is possible is critical to ensure the actions IC’s take actually add value. This means reprioritising strategic agendas and focussing on activities that have highest impact relative to the effort involved.

  4. Communicating deeper, wider, better. IC communications must pick up pace at times of crisis. Many aspects of good communication are timeless. Central concepts here are managing expectations through communications frequency and cadence. But at times of uncertainty, the key is to communicate even more, even when it seems like there is fundamentally less to say given the uncertainty.

    One practical example: IC meetings need an innovative re-tread to ensure the best-practice elements translate into a virtual setting. To this end we have set out below a new physically-distant but socially-connected model for governing through virtual meetings without compromising on the best elements of inclusive decision making. This builds on previous thinking on more effective meetings and is therefore ambitious. It is possible to trial aspects of the model before adopting it more formally. We believe this model is useful near-term, but has longer-term appeal to complement physical meetings once they resume. One could envisage adopting a 50% “in person” and 50% virtual meeting cycle.

  5. Live your values. Values set the tone for behaviours, the behaviours drive the actions, the actions drive the outcomes, simple.

    At a time that is presenting massive dilemmas everywhere, people and purpose come ahead of profits and performance. This is a key element in governance thinking. In current times with life and death playing out, people must come first. And profits will surely follow in the long run if we can cluster around a stronger purpose.

Governance is a construct that is brought to life by good people, leadership and culture working well together. Better governance can emerge from our current adversity through a mix of effective design, focus and leadership. The opportunity for that leadership beckons.

Footnote

1https://www.thinkingaheadinstitute.org/en/News/Public/News/2020/03/Rising_to_the_challenge

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