Already overburdened investment committees are being stretched even further by the pressures of the pandemic, according to Willis Towers Watson senior investment consultant Rebecca Bannon, and corrections are required to keep them fit-for-purpose or beneficiaries will be adversely affected.
A decade ago, outsourced CIOs were commonplace and internal investment committees (ICs) owned the strategic asset allocation of funds but largely left investment management to external providers, Bannan (pictured) says.
“Fast forward a few years and we have huge internal teams,” she continued. “The realms of the investable have completely shifted and what is required in oversight from an IC has grown hugely, but what hasn’t changed as meaningfully is the time commitment.”
Bannan discusses the mandate for ICs and how it has been expanding during an interview on Investment Magazine’s Market Narratives.
That time commitment has now come under even more pressure as the pandemic has ramped up market volatility while creating havoc with global processes.
“Life was already challenging for ICs over the last 6 months, and now the stakes have only got even higher,” Bannan said. “We are in a situation where there’s so much need for information, there’s so much uncertainty, there are so many decisions that can be made and so many items for consideration.”
Doing too much
One of the major problems for investment committees at the moment, Bannan explained, is that there are so many items on the agenda members are making more and more independent decisions, rather than relying on the people around them.
“They’re just doing too much,” she says. “The stakes are so high they think they need to make all of the decisions themselves, rather than trust that decision-making to other parties, whether its internal teams or external providers.”
Trust, Bannan believes, is a fundamental axis the IC must depend on.
“You need to trust that they’ll make good decisions on your behalf and you need to believe that they have the talent and ability to do so,” she explained. “Without that how can an IC in their fiduciary duty actually delegate their decision making?”
This trust element is crucial for committee members that are being bombarded with information and need to create enough available bandwidth so that they can focus on oversight. This is especially so in the middle of a pandemic, she said.
“I see information overload as a major challenge that ICs are facing the world over in the last few months,” Bannan stated, adding that the tsunami of information can leave people paralysed against making informed decisions. If they can’t learn to trust, and delegate, they are wasting time.
“Trust the experts you’ve put in place to make decisions and come up with solutions,” she said. “It isn’t the IC’s job to sift through tonnes of data that may or may not be useful.
“Rather than the IC owning all of the decisions it should focus on acting as a sounding board, making periodic interventions and [being] catalysts for new thinking, and ultimately holding teams and providers to account,” Bannan continued.
“My advice to ICs would be – do you really need to be talking about this or can you leave it to your internal team, your asset manager and asset consultant to work it out between them?”
The efficiency edict
The need for trust, Bannan explained, is part of a broader palette of efficiency issues that also includes the need for clear guidance and directions.
If ICs are to utilise the investment research resources at their disposal, those resources need to provide committee members with concise, relevant information that doesn’t take an age to decipher.
“Papers to the IC should be as short and sharp as possible and remain strategic,” she says. “We often see 100, 200-page IC decks and it’s almost impossible to be across all that information.”
In turn, she adds, the IC members need to provide sharp directives that spell out exactly what they need. “That mandate and those parameters for the external or internal teams need to be so clear,” Bannan continued.
Getting the committee right
Before all else. the investment committee itself needs to have the right make up if it is going to achieve its objectives, Bannan explained.
Here, she said, diversity is key.
“We’re seeking diversity of thought and strong capabilities that drive to a greater collective intelligence than the individuals on their own,” Bannan stated.
But increasing diversity shouldn’t lead to an overly large investment committee, she said, or you run the risk of watering down the input of the people involved.
“It can’t be too big – if you have too many people it’s almost impossible to get diverse thinking with bona fide decisions,” she said.
The need for diversity is linked to having the right culture – one that encourages freedom of thinking, a spirit of cooperation and a willingness to embrace new ideas.
“Culture also becomes important,” she said. “If everyone just nods and agrees, opportunities for betterment slip through the gaps.”