How big investors can learn from aviation: we need a black box

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Investment organisations are not learning from their experience when it comes to improving investment committee (IC) practices and governance, according to new research from the ‘Thinking Ahead Institute’, a not-for-profit member group linked to Willis Towers Watson. The research, ‘Going from Good to Great’, identifies the aircraft industry’s structured-learning environments as one for pension funds and their service providers to emulate.

Roger Urwin, co-founder of the Thinking Ahead Institute, said: “The aircraft industry ensures the safety of billions of people through learning from experience. Investment committees can likewise provide for the financial safety of billions of people by applying best-practice frameworks to their context. In doing so they will be better placed to tackle the challenges that lie ahead such as systemic risks, performance pressures, complexity management, increased regulatory influence and the growing influences from multiple stakeholders.”

The research explores best-practice governance for ICs and sets out a checklist to follow. For more ambitious and well-resourced organisations, the paper suggests the adoption of the ‘Total Portfolio Approach’ (TPA) to introduce more dynamism and focus on goals in decisions. TPA is a mindset and process which Willis Towers Watson (WTW) and its associated ‘Thinking Ahead’ organisations, have been developing for the past several years. With the aviation industry, safety measures have improved immensely in the past 30-or-so years, including the analytics from the famous ‘black box’, installed on each aeroplane, after a crash.

Urwin said: “Large asset owners are using advanced best-practice governance to unlock the complexities of modern investment, notably when dealing with ESG considerations, and employing TPA helps the integrated thinking required. We believe that this crisis will accelerate the adoption of TPA, and in time, it will become one of the defining innovations of this period.” The paper sets out 10 building blocks investment committees can use for more successful outcomes, including strategic focus, an effective chairperson and a strong culture.

Urwin said: “Retaining a strategic focus is vital for effective board governance and doubly important for investment committees, where there is often a temptation to get lost in the weeds. Key to this discipline is having an effective chairperson. This leadership role is crucial in terms of setting and managing overall strategic direction, facilitating the contributions from all committee members and extracting all the benefits of a strong culture.”

Rebecca Bannan, the director of ‘strategic advisory’ for WTW in Australia, said ICs had one of the most challenging years of their careers so far. “And it is only August”. She said: “Our future is less certain and ensuring that ICs are strong across dimensions of focus, quality, thinking and effectiveness has never been more critical for ensuring organisational and investment success. While we appear to be at the end of the beginning of the current crisis, taking stock of what worked well and what didn’t will ensure that ICs can stay the course through whatever turmoil the future might hold.”

Acknowledging the confines of resources and time, the Institute suggests that taking an IC from good-to-great outcomes is “eminently doable” with strong leadership and an ambitious strategy and identifies key areas where they can make the biggest gains. The institute says the key things to consider are:

  • Getting the right people on the IC ‘bus’, which is critical, especially in the areas of competency, teamwork and accountability
  • Exploiting the opportunities for improved efficiency and collective intelligence, notably: extending the chair role; building the IC teamwork; pinpointing its comparative advantages; restyling the IC process; and developing a richer culture, and
  • Taking the opportunities this crisis presents, starting with exercising more innovative thinking and practice in the conduct of IC meetings, and applying more innovative thinking to the challenges of the future.

Urwin said: “Could investment committees and boards set their sights higher? Absolutely they could. The stakes are too high for them not to take this path. And these current pressurised circumstances make such steps attractive right now.”

Note: The Thinking Ahead Institute was established in January 2015 and is a global not-for-profit investment research and innovation member group made up of institutional asset owners and service providers committed to mobilising capital for a sustainable future. It has 45 members and is an outgrowth of the WTW-owned ‘Thinking Ahead Group’ which was set up in 2002. See: www.thinkingaheadinstitute.org.

– G.B.

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