Best-Practice Investment Management: Lessons for Asset Owners from the Oxford-Watson Wyatt Project on Governance

Abstract

Good governance by institutional fund asset owners makes a significant incremental difference to value creation as measured by their long-term risk-adjusted rate of return. Drawing upon best-practice case studies, it is argued that the principles of good governance can be summarised by organisational coherence, including an institution's clarity of mission and its capacities; people, including who is involved in the investment process, their skills and responsibilities; and process, including how investment decision-making is managed and implemented. Using the case studies to develop the principles and practice of good governance, there are a number of lessons to be learnt from our exemplars whatever the nature, scope and location of the institution - summarised through a set of 12 findings about global best-practice with implications for large and small institutions. Implications are also drawn for the design and management of sovereign funds that are increasingly important for national welfare in global financial markets. In conclusion, we see the challenge of governance as having two facets: to facilitate adaptation to the functional imperatives of operating in global markets given the heritage of an institution; and, over the long-term, to undertake reforms such that institutional form and structure is reformed to be consistent with the principles developed herein. In either case, funds can create more value if they correctly assess their governance and determine an investment strategy commensurate with their capabilities.

JEL Classification: D71, G12, G23