April 2, 2015

Pension Funds: Good Governance Linked to Long-Term Investing

This new KPA Advisory report, based on a recent survey of over 80 major pension funds, identifies a positive correlation between the quality of institutional investors’ internal corporate governance practices and their long-term investment practices. The findings further suggest that better internal governance actually drives long-term investing.

Unfortunately, however, it appears (based on the current as well as prior surveys) that there are significant governance deficits and long-term investing “aspiration vs. reality” gaps that need to be addressed to minimize short-termism and – instead – promote a long-term investment approach.

Principle governance deficits include:

Board selection and improvement processes continue to be flawed in many cases.
Board oversight function in many organizations needs to be more clearly defined and executed.
Competition for senior management and investment talent is often hampered by uncompetitive compensation structures.

Barriers to long-term investing include:

Regulations that force short-term thinking and acting 
– Short-term, peer-sensitive environment that makes it difficult to truly think and act long-term 
– Absence of a clear investment model, performance metrics and language that fit a long-term mindset 
Alignment difficulties in outsourcing, and compensation barriers to in-sourcing

This CFA Institute blog – which discusses short-termism factors identified in the report, as well as the short-termism problem more generally –  suggests that the time has come for a global set of standards and curricula to govern fund fiduciaries.

See also this 2013 Focusing Capital on the Long Term initiative-driven study revealing perceptions that short-term result pressures have been intensifying – which was the impetus for the current KPA Advisory project.

Building a Board for the Long-Term

This new Spencer Stuart publication is part of a more comprehensive essay collection reflecting the views of CEOs, directors, investors and regulators about what it will take to change current behaviors among companies and investors that compromise long-term growth for short-term gain. The paper provides guidance to boards on how to avoid succumbing to short-termism pressures and act – instead – consistently with a long-term view.

The essay collection is part of the broader Focusing Capital on the Long Term initiative co-founded by CPPIB (Canadian Pension Plan Investment Board) and McKinsey in 2013 to develop practical approaches for longer-term behaviors among both companies and investors.

More on “The Mentor Blog”

We continue to post new items daily on our blog – “The Mentor Blog” – for members. Members can sign up to get that blog pushed out to them via email whenever there is a new entry by simply inputting their email address on the left side of that blog. Here are some of the latest entries:

– Cybersecurity Guidance for Directors
– Directors Logging Many Hours for Board Service
– OECD’s Draft Updated Principles Support Proxy Access
– Under Attack: The SEC’s Use of Administrative Law Judges in Enforcement Actions
– Fine-Tuning Your Section 16 Reporting


– by Randi Val Morrison