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Home > Corporate Governance Best Practice > Best Practice in Investment Governance for Pension Funds

Corporate Governance Best Practice

Best Practice in Investment Governance for Pension Funds

by Roger Urwin

Table of contents

Executive Summary

  • This article demonstrates the influence of governance by institutional fund asset owners on their performance.

  • Using examples from across the whole spectrum of institutional funds by type and geography, we illustrate the principles and practice of good governance.

  • A number of lessons can be learned from our examples, and we boil these down to a set of 12 findings about global best practice.

  • We suggest best-practice models for funds that employ significant investment staff and a separate model for those funds whose decision-taking is done by boards and investment committees.

  • We conclude that funds tend to perform better when they correctly assess their governance and determine their investment strategy commensurate with their capabilities. Although there are ways to adapt the governance budget over time, with implications for likely investment performance and pay-offs, there is currently an unpreparedness in the industry to consider in-house resources as anything other than highly visible “costs,” whereas external spending on managers and transactions costs tend to be seen as “performance benefits.” This has always seemed like a case of tortured logic and a false economy.

  • It is only at the high end of this spectrum that we see funds succeeding with the challenges of running complex multi-asset and multi-manager program.


There is increasing evidence to support a link between superior investment performance and an institutional investor’s strong governance. Recent research conducted jointly by the author and Gordon Clark of Oxford University, entitled Best-practice investment management: lessons for asset owners, further clarified this link and identified 12 best-practice factors as being indicative of future success in meeting institutional goals.

The research focused on 10 of the top institutional funds around the world. All had made the move up from being seen as ‘good’ in their field to something close to ‘great’ by committing passion and excellence to their mission through their governance structure. If there is one marker of this excellence, it seems to lie in having a strong investment leader or CIO on the staff, but sadly most funds don’t take this step.

Many pension funds are beginning to realize that their governance arrangement should be a top priority, not only through responsibility to literally billions of individuals, but also because it creates an opportunity for wealth creation. At the same time, it is important to point out that while strong governance (with “governance” defined quite broadly as all the resources applied to investment decision-making) is hugely important in institutional investment, it is a very difficult area to get right, with only the most conscientious and gifted succeeding in all areas. Among this number are some prominent institutional investment funds that made the right sort of strides with their governance arrangements and have successfully shown the world that very good performance can come from those strides.

For a long time governance has been seen simply as a constraint. Funds have learned to simply get by without being adequately resourced. However, the investment world has now changed irrevocably, and the last 10 years have added more complexity than any period in history. Greater regulation, product proliferation, and much competition for effective investment strategies and products have complicated the sorts of decisions that funds have to face. Among the critical issues to be faced are: how much risk, what types of risk, what types of return (absolute or relative); what types of strategy (mainstream or alternatives), beta or alpha. But, stepping back, the managers of institutional funds must first deal with a higher-level question: how much time and resource should be committed to governance, and how should this effort be organized?

According to our research, only a minority of pension funds worldwide have investment strategies and governance arrangements that are aligned. The research shows that the more common misalignment is to be overambitious in their investment structures, introducing too much complexity for their governance to cope with.

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Further reading


  • Ambachtsheer, Keith. “How much is good governance worth?” The Ambachtsheer Letter 245 (June 2006). Online at:
  • Ambachtsheer, Keith, Ronald Capelle, and Tom Scheibelhut. “Improving pension fund performance.” Financial Analysts Journal (November/December 1998): 15–21.


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