Strategic Risk Management: A Practical Guide to Portfolio Risk Management

CHAPTER 2

Governance Risk

It is usual that investment funds have investment committees to oversee investment activities. The nature of the oversight function differs by type of fund. At one end are family trusts where the investment functions reside with the trustees but usually lack a formalized investment committee structure. At the other end are employer sponsored defined contribution and defined benefit plans. These plans tend to have large, formalized investment committees comprised with employer representatives, employee representatives, and independent trustees. The oversight functions of endowment and foundation funds tend to differ depending on the purpose of the fund, and the size of the fund's assets.

Nevertheless, whenever a group of individuals are entrusted with the management of a fund's assets a number of governance related issues arise: is the investment committee adequately structured? Is there sufficient delegation? Is the oversight of investment management arrangements adequate?

WHY GOVERNANCE MATTERS

Proper and effective functioning of any fund depends on governance. ­Governance is about the oversight and decision-making processes of a fund. Good governance however cannot guarantee good performance. Investment performance can be either good or bad. Likewise governance can be either good or poor. Good governance can result in bad performance. However, bad performance does not mean that governance is poor. This is because investment outcomes involve making decisions ...