NZ Super's Rishab Sethi (Photo: Matt Fatches)
NZ Super's Rishab Sethi (Photo: Matt Fatches)

Creating governance structures built to outperform is a matter of developing culture, continuous education, collective buy-in around strategies and processes, and responsibility within roles.

A panel of experts from Australia and New Zealand formed this view after analysing the elements necessary to develop a strong governance system at the Fiduciary Investors Symposium in Victoria in November.

Session chair Ross Kent, head of global institutional distribution at NAB Asset Management, opened the session by referencing academic research into pension fund governance by anthropologists John M. Conley and William M. O’Barr, in their paper “The Culture of Capital: An anthropological investigation of institutional investment”.

Kent explained: “The quote from their book, back in 1992, was that after observing the behaviour of nine major US pension funds over a two-year period, they concluded that the aim of the funds appeared to be more focused on responsibility deflection and blame management than on good governance and creating value for fund stakeholders.

“Through Amanda White’s good work a couple of years ago, she reported on the Top1000funds.com [website] the update of some research that was done by The Centre for Pension Management, which looked at what sort of improvement had happened over the last 20 years, not only in our market but globally and, unfortunately, not a lot [happened].”

The panel also brought in the expertise of Rishab Sethi, manager, external investments and partnerships, at the New Zealand Super Fund. Sethi explained that the function of the board at NZ Super had evolved, and that while the board mad significant decisions, “a fantastic amount of decision authority” rests with management.

“We’ve had boards over our 15-year history that have been really neck deep in figuring out which manager we allocate how much to, how we monitor their performance and so forth, and now that is substantially pushed down, not just to high-level management, who of course have the ultimate authority and responsibility for it, but pushed all the way to individual portfolio managers,” Sethi said. “What does the board actually do? It thinks around the strategic issues, the long-term issues, gives itself risk management and oversight, and looks at the legislation itself.”

Prime Super investment committee chair Gerard Parlevliet noted that members of his committee weren’t necessarily investment specialists but were curious and ask questions, which he considered essential qualifications.

“I see my role as making sure that when decisions have been made – and they could be made by management or they could be made by us – the people are on the same page about why that decision has been made and the main parameters around it,” Parlevliet said. “In a collective group of people, if things don’t go the way you plan, and that quite often happens, you don’t want them to be at loggerheads and basically doing a blame culture.”

Respond to change

Boards evolve over time, through renewal and in response to changing contexts, which is why governance structures can’t stay static, JANA consultant Els Termaat said.

“There are many ways of structuring governance, and there’s no right or wrong way,” Termaat said. “It’s about how thoroughly it’s implemented, and it’s not something that’s a set-and-forget exercise. It’s something that needs to be revisited.

“[For example], where there has been quite a lot of turnover at the investment committee or even at the board level, people coming on don’t necessarily buy into the objectives and strategies and the full governance structure that has been set in place.”

Termaat also cited examples of style drift.

“You might have a board that’s adopted a conservative approach for good reasons and implemented in their investment strategies, but as time goes by, the performance is slipping and there’s the start of a reach for yield, and they sometimes forget why they set their objectives where they set them.”

Panellists agreed that continuing education and evaluation of individual and whole-of-board skills were essential. Sethi noted that 15 per cent to 20 per cent of board meetings focus on education

Rachel Alembakis has more than a decade of experience writing about institutional investments, asset owners, custody and administration for a variety of publications.