Good governance by institutional asset owners makes a significant incremental difference to value creation as measured by their long-term risk-adjusted rate of return. Drawing upon best-practice case studies, it is argued that the principles of good governance can be summarised by organisational coherence, including an institution's clarity of mission and its capacities; people, including who is involved in the investment process, their skills and responsibilities; and process, including how investment decision-making is managed and implemented. Using the case studies to develop the principles and practice of good governance, there are a number of lessons to be learnt from our exemplars whatever the nature, scope and location of the institution — summarised through a set of 12 findings about global best-practice with implications for large and small institutions. Implications are also drawn for the design and management of sovereign funds, which are increasingly important for national welfare in global financial markets. In conclusion, we see the challenge of governance as having two facets: to facilitate adaptation to the functional imperatives of operating in global markets given the heritage of an institution and, over the long-term, to undertake reforms such that institutional form and structure are consistent with the principles developed herein.
This is a preview of subscription content, access via your institution.
Buy single article
Instant access to the full article PDF.
Price excludes VAT (USA)
Tax calculation will be finalised during checkout.
Here, we refer to data collected by Watson Wyatt through the Global Pension Asset Study of 2007; further details are available at www.watsonwyatt.com.
See also the recent commitment shown by the CFA Institute in promoting a code of conduct for pension scheme governing bodies wherein the code will require members to ‘take actions that are consistent with the established mission of the scheme’ and ‘regularly review the efficiency and effectiveness of the scheme's success in meeting its goals’. See www.cfainstitute.org.
Note that we focus upon governance principles and policies in this paper and ignore, for the moment, the distinctive regulatory and legislative environments within which our chosen funds operate. This is not because we think this is irrelevant, quite the contrary. Rather, our emphasis on principles and policies is such that we believe that over the long term the regulatory environment ought to enable best-practice rather than constrain best-practice. See Clark (2007a, 2007b).
Ambachtsheer, K. (2007a) Pension Revolution: A Solution to the Pensions Crisis, John Wiley, New York.
Ambachtsheer, K. (2007b) ‘The Three Grades of Pension Fund Governance Quality: Bad, Better, and Best’, mimeo, Rotman International Center for Pension Management, University of Toronto, Toronto.
Ambachtsheer, K., Capelle, R. and Lum, H. (2007) ‘The State of Global Pension Fund Governance Today: Board Competency still a Problem’, mimeo, Rotman International Center for Pension Management, University of Toronto, Toronto.
Black, B. (1992) ‘Agents Watching Agents: The Promise of Institutional Voice’, UCLA Law Review, 39, 811–893.
Clark, G. L. (2003) European Pensions & Global Finance, Oxford University Press, Oxford.
Clark, G. L. (2004) ‘Pension Fund Governance: Expertise and Organisational Form’, Journal of Pension Economics and Finance, 3, 233–253.
Clark, G. L. (2006) ‘Regulation of Pension Fund Governance’, in G. L. Clark, A. Munnell and M. Orszag (eds.) The Oxford Handbook of Pensions and Retirement Income, Oxford University Press, Oxford, 483–500.
Clark, G. L. (2007a) ‘Expertise and Representation in Financial Institutions: UK Legislation on Pension Fund Governance and US Regulation of the Mutual Fund Industry’, 21st Century Society: Journal of the Academy of Social Sciences, 2, 1–23.
Clark, G. L. (2007b) ‘Governing Finance: Reconciling Functional Performance with Stakeholder Representation’, Working Paper 07-08, Oxford University Centre for the Environment, Oxford.
Clark, G. L., Caerlewy-Smith, E. and Marshall, J. (2006) ‘Pension Fund Trustee Competence: Decision Making in Problems Relevant to Investment Practice’, Journal of Pension Economics and Finance, 5, 91–110.
Clark, G. L., Caerlewy-Smith, E. and Marshall, J. (2007) ‘The Consistency of UK Pension Fund Trustee Decision-Making’, Journal of Pension Economics and Finance, 6, 67–86.
Clark, G. L. and Monk, A. H. B. (2008) ‘Conceptualizing the Defined Benefit Pension Promise: Implications from a Survey of Expert Opinion’, Benefits Quarterly, 24, 7–18.
Clowes, M. J. (2000) The Money Flood: How Pension Funds Revolutionized Investing, Wiley, New York.
Cocco, J. F. and Volpin, P. F. (2007) ‘Corporate Governance of Pension Plans: The UK Evidence’, Financial Analysts Journal, 63 (1), 70–83.
Engel, C. and Weber, E. U. (2006) ‘The Impact of Institutions on the Decision How to Decide’, MPI Collective Goods Preprint No. 2006/19. Available at SSRN: http://ssrn.com/abstract=93502.
Gertler, M. S. (2001) ‘Best Practice? Geography, Learning and the Institutional Limits to Strong Convergence’, Journal of Economic Geography, 1, 5–26.
Jensen, M. (2000) A Theory of the Firm: Governance, Residual Claims, and Organizational Forms, Harvard University Press, Cambridge, MA.
Kahneman, D. and Tversky, A. (1979) ‘Prospect Theory: An Analysis of Decisions Under Risk’, Econometrica, 47, 263–291.
Langbein, J. (1997) ‘The Secret Life of a Trust: The Trust as an Instrument of Commerce’, Yale Law Journal, 107, 165–189.
Lerner, J., Schoar, A. and Wongsunwai, W. (2007) ‘Smart Institutions, Foolish Choices: The Limited Partner Performance Puzzle’, Journal of Finance, 62, 731–764.
Merton, R. and Bodie, Z. (2005) ‘The Design of Financial Systems: Towards a Synthesis of Function and Structure’, Journal of Investment Management, 3, 1–23.
North, D. C. (1990) Institutions, Institutional Change and Economic Performance, Cambridge University Press, Cambridge.
O'Barr, W. and Conley, J. (1992) Fortune and Folly, Wiley, New York.
Roberts, J. (2004) The Modern Firm: Organizational Design for Performance and Growth, Oxford University Press, Oxford.
Roe, M. J. (2006) ‘Legal Origins, Politics, and Stock Markets’, Harvard Law Review, 120, 460–527.
Shiller, R. J. (2002) ‘Bubbles, Human Judgement, and Expert Opinion’, Financial Analysts Journal, 58 (3), 18–26.
Sunstein, C. (2005) ‘Group Judgements: Statistical Means, Deliberation, and Information Markets’, New York University Law Review, 80, 962–1049.
Urwin, R. (1998) Avoiding Disappointment in Investment Manager Selection, International Association of Consulting Actuaries, London.
Urwin, R., Breban, S., Hodgson, T. and Hunt, A . (2001) ‘Risk Budgeting in Pension Investment’, Annals of the Faculty of Actuaries, 7, 319–364.
Wagner, R. K. (2002) ‘Smart People Doing Dumb Things: The Case of Managerial Incompetence’, in R. J. Sternberg (ed.), Why Smart People Can Be So Stupid, Yale University Press, New Haven, 42–63.
Watson Wyatt (2004) Remapping, Reigate.
Watson Wyatt (2006) Changing Lanes, Reigate.
Williamson, O. (1996) The Mechanisms of Governance, Oxford University Press, Oxford.
The authors wish to thank the funds and institutions that participated in the study recognising that most requested anonymity and, as such, cannot be formally identified. The authors also wish to thank their colleagues at both institutions including Emiko Caerlewy-Smith, Tessa Hebb, Lisa Hagerman, John Marshall, and Dorothee Franzen (at Oxford) and Michael Orszag, Carole Judd and Lloyd Raynor (at Watson Wyatt). Keith Ambachtsheer, Charles Ellis, Adam Dixon, and Ashby Monk made useful comments on a previous draft. Research on pension fund governance at Oxford has been supported by the National Association of Pension Funds (United Kingdom), the Lupina Foundation (Toronto), and the Rockefeller and Ford foundations. None of the above should be held responsible for any comments or opinions expressed herein, especially any misapprehension of the lessons to be drawn from particular instances of best-practice value-creating investing.
2graduated from Oxford University (Merton College) with an MA in Mathematics and an MSc in Applied Statistics. He qualified as a Fellow of the Institute of Actuaries in 1983. He worked as an investment consultant for Bacon and Woodrow and headed William Mercer's investment practice before joining Gartmore Investment Management in 1987, where he was the Director responsible for two fields: business development and quantitative investment. He joined Watson Wyatt as a partner in 1989 to head up the firm's UK investment consulting practice, taking on the role of the first global head of practice when this was formed in 1995 and he remains in this role with a worldwide team of over 300 in his charge. He has responsibility for a number of the firm's major investment clients, both in the UK and internationally, advising them on all investment issues. He has increasingly concentrated on policy issues, particularly those relating to asset allocation. His clients include a number of big UK pension funds, but he has also done project work for several institutional funds outside the UK that are working to globalise best practice principles. In particular, he has had client consulting involvement in the US, Canada, Netherlands, Switzerland, France, Ireland, Hong Kong, Malaysia, Singapore, Korea and Japan. More recently, he has had greater involvement advising the headquarters of multinational companies.
Case study exemplars
Shown below are brief sketches of the institutions that were the basis of our case studies. Inevitably, these sketches are shallow and indicative rather than definitive, and properly so given our undertakings regarding confidentiality. Whereever possible, interviews were conducted with the CEO or CIO of the institution, or nominee; certainly, someone with insight regarding its investment performance and knowledge of the nature and scope of the governance issues encountered therein. The procedures governing the interviews including the stages of the process are explained in more detail in Clark (2003) and conform to standard social science practices.
Funds ranged in size from $5bn to $100bn. Five funds were located in North America, three in Europe and two in Asia-Pacific.
Fund A: a large, multi-employer, state-sponsored fund investing on behalf of the participating public sector defined benefit pension plans.
Fund B: a large, multinational company cross-listed between three stock exchanges, with substantial consolidated pension liabilities principally DB in nature.
Fund C: a very large, multi-employer industry fund offering a range of retirement plans including hybrid versions of defined benefit and defined contribution plans.
Fund D: an industry fund operating in a competitive national market for investment management and related services in the defined contribution environment.
Fund E: a corporate defined benefit pension plan with an in-house investment division to manage its pension assets.
Fund F: a global company with significant worldwide pension assets in particular with large US DB plans.
Fund G: a major endowment fund with a long-term commitment to the growth and stability of its university sponsor.
Fund H: a leading global endowment fund with a mandate in perpetuity in the interests of research.
Fund I: a national pension and retirement savings institution operating on behalf of national and the second pillar of government investment provision.
Fund J: a national pension fund operating in a unitary state, with responsibility for the investment of mandatory individual contributions for supplementing the basic pension.
Rights and permissions
About this article
Cite this article
Clark, G., Urwin, R. Best-practice pension fund governance. J Asset Manag 9, 2–21 (2008). https://doi.org/10.1057/jam.2008.1
- pension funds
- investment management