Must Try Harder: Long-Termism and Governance Still Lacking, Study Finds

Investors are paying lip service to long-term investing and there is room for significant improvement across the board, say two influential consultants.

Pension funds and other major investors are failing to act sufficiently to promote good governance and long-term investing, according to a new study.

KPA Advisory co-founders Keith Ambachtsheer and John McLaughlin this month published two reports in tandem, using data from a survey conducted in June 2014. They found there had been some improvement in governance of pension funds and other major investment institutions, but many “major concerns” still remain.

“Despite evidence that board effectiveness is marginally improving, much work still needs to be done.” —Keith Ambachtsheer and John McLaughlinThe authors also reported a significant gap between the long-term investment aspirations of asset owners and the reality of their strategies’ implementation. The two areas are very likely linked, they added, as there were “statistically positive relationships between the governance quality rankings and the long-horizon investment quality rankings.”

Ambachtsheer and McLaughlin’s studies followed a “Focusing Capital on the Long Term” initiative launched in 2013 by Dominic Barton, global managing director at McKinsey, and Mark Wiseman, CEO of the Canada Pension Plan Investment Board.

Barton and Wiseman’s initiative was aimed at promoting long-term investing and identified governance as key to its success.

Ambachtsheer and McLaughlin updated previous governance surveys to add force to the initiative, quizzing 81 major pension funds with total assets in excess of $5 trillion.

“Despite evidence that board effectiveness is marginally improving, our survey-based study conducted in 2014 finds that much work still needs to be done,” the authors wrote.

Among their governance concerns, Ambachtsheer and McLaughlin listed “flawed” board selection processes, unclear board oversight functions, and uncompetitive pay packages hampering recruitment and retention of talent.

“It will require a concerted, ongoing joint effort by pension plan stakeholders, pension organization boards, regulators, and legislators to change the current situation,” the pair said.

On long-term investment, the authors said there was “broad consensus” among respondents to the survey that a longer investment timescale was “a valuable activity for both society, and for their own fund.”

“A concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”“However, there is a significant gap between aspiration and reality to be bridged,” Ambachtsheer and McLaughlin added.

“Here too a concerted effort—both inside pension organizations and among them—will be required to break down these barriers.”

The authors listed the barriers to long-termism: some areas of regulation, a “short-term, peer-sensitive environment”, a lack of clear investment processes and performance metrics, and difficulties in aligning interests with outsourcing providers.

The full paper can be accessed here.

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