Governance pays off

Good governance translates into big dividends for institutional investors, according to the latest research released by Watson Wyatt.

The research, conducted by Watson Wyatt’s Roger Urwin and Professor Gordon Clark of Oxford University, found that improving governance from bad to good is worth 100 to 200 basis points a year.

The researchers point out that for a $1 billion fund, the impact of achieving good governance is worth $10 million a year.

The research involved case studies of 10 funds across the world that were handpicked for their exceptional reputation and strong sustained performance. Central to research findings was the identification of 12 best practice factors for future success in meeting institutional goals, with six of the factors being assessed as being within the reach of most funds.

Commenting on the research outcome, Watson Wyatt Australian investment consultant Amy Grimes said the potential return advantage should be a strong motivator among institutional funds to improve governance and then align it with investment strategy.

“However, it is clear that for many funds the ‘governance gap’ — insufficient governance for the complexity of investment strategy — is widening due to lack of focus on these core attributes, coinciding with the greater complexity of prime investment opportunities,” she said.

The research showed that the most common constraints were inherited regulations and systems of control and the competing claims of multiple stakeholders.

It also showed that the industry was unprepared to consider in-house resources as anything other than highly visible ‘costs’ whereas external spending on managers and transaction costs tended to be seen as ‘performance benefits’.