As readers of this blog know, I spend a great deal of time waxing on about institutional governance, organizational design, risk management, investment decision-making, and zzzzzzzzzzz. Yes, I’m well aware that these issues are far less sexy than the business of actually making bets or taking risks. However, I’m convinced…to the core of my being…that if a fund can get the boring stuff right, the sexy stuff will fall into place. So, despite receiving many pleas from dinner guests, airplane passengers and random passersby, I will continue to talk about (and research) these mundane aspects of institutional investment.
Anyway, I bring all this up (again) because I was recently with the CIO of a sovereign fund, and this individual actually agreed with me on this point (…stop the presses…). In fact, this person’s single greatest challenge was to keep the fund’s Board focused on “what matters” rather than on “what’s fun”. In this individual’s estimation, upon arrival at the fund, the Board was spending 1% of available resources and 10% of available time on the things that generated 90% of value for the fund: governance, asset allocation and risk tolerance. Instead, they were spending all of their time on the sexy stuff; investments and mandates. Not good.
Because most Boards are comprised of representatives rather than pure finance experts (i.e., bureaucrats, politicians, unions, teachers, firemen, policemen, what-have-you), they often don’t have the background to credibly assess the merits of a given investment or mandate. So why spend all this time doing so? On the other hand, these Boards could focus and have a real impact on improving policies, refining process, selecting allocations, choosing risk tolerance, etc. etc.
All this is to say that while Boards may enjoy spending their time on vetting sexy investments, they should really be focusing on what matters. At the very least, we need to dramatically change the 1, 10, 90 ratio to something more like 30, 60, 90.