Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Need for boards to better monitor executives
Australian company directors should be doing more to ensure their executives stick to the ethical values espoused at board level if they want to avoid a repeat of the poor behaviours exposed at the Hayne Royal Commission.
A ‘Dialogue’ paper, published by the Actuaries Institute but representing the views of the author, Barry Rafe, identifies a serious flaw in board governance practices in large complex organisations.
Rafe said last week (March 11): “Boards need to espouse values that are realistic, can be put into practice, and be monitored by directors. Just as importantly, boards need to be aware of the potentially different values which drive the daily and strategic activities of their executive teams.”
He is a former president of the Actuaries Institute and an expert on governance. The paper, ‘CEOs Say One Thing and Do Another: An insight Provided by a Royal Commission’, says that while boards of directors appear to act ethically, routine actions by executives might not reflect their organisations’ espoused values.
“The Hayne Royal Commission, which investigated misconduct at the most senior levels in the Australian financial services sector, provided important insights into the justifications made for decisions which organisations themselves admitted breached required standards and conduct which certainly fell short of community standards and expectations,” Rafe said.
The key finding of the research was important because it appeared that board engagement in espoused values was a necessary, but not sufficient, condition to prevent organisational misbehaviour.
In his study, which focussed on two case studies from the Royal Commission dealing with activities at Westpac and Commonwealth Bank, Rafe said there was a disconnect between the values of the organisations and the routine actions taken by their CEOs and the senior executive teams.
He said misconduct and poor behaviour could not be blamed on “weak” boards, but on the CEO and executive team’s focus on “maximising profit within the bounds of the law”. Some of his recommendations for boards include:
• establish espoused values that can be put into operation by the senior executive team
• routinely review decisions made by the senior executive team and determine if they align with espoused values, and
• design remuneration systems that penalise senior executives for practising values that do not align with the organisation’s values.
The paper says the stated values set by the board “need to be more than just for branding and marketing purposes; they need to set the tone for how decisions are made. Executives need to be rewarded for making decisions in line with espoused values. “Senior executives need to assess their own behaviours to see if there is a gap between their values and those practised on a daily basis, with any discrepancies being raised with the board,” Rafe said.
