Well, it looks very simple on paper. Just a group of experienced, skilled individuals working together to achieve a common purpose, making better decisions as a whole than they would on their own.
But like so many simple things, it's not that easy to achieve in practice. And many boards get it very wrong. A recent survey* of directors showed that, whilst they rated the best boards they'd sat on within the 7-10 out of 10 range, the worst languished between a 1 and a 7, with many scoring towards the lower end. Poor chairing, box-ticking and dysfunctionality were the principal culprits.
Avida International interviewed some of the largest and most successful pension investment organisations to understand how their boards navigate some of these pitfalls. They do not have all the answers, and the best boards have the humility to recognise this and to strive for continual improvement. But taken together, their learnings can progress pension scheme governance towards the gold standards of clarity of purpose and effective decision-making, whilst bringing their multiple stakeholders along with them.
So what did they say?
For a pensions board, purpose is about being able to add value by enhancing the security of members' benefits, not simply being seen to fulfil a governance function. To do this, the board needs to be able to operate in good faith and, in particular, free from political interference. And politics comes in many guises, from small ‘p’ company politics to the large ‘p’ variety facing sovereign wealth funds and public schemes. To circumvent this bear trap, the most successful boards have established independent committees to make investment decisions. Populated by investment professionals and industry experts, this has allowed them "to build a culture of professionalism" which is recognised and respected by the political forces they face.
At the same time, delegating to experts enables real-time decision-making. In the fast-paced world of capital markets, this is crucial for implementation and opens the door to tactical investing and maximising potential investment returns. Timely decisions are often no-brainers, as one board member observed: "important decisions rarely need a vote".
There is now an overwhelming body of research demonstrating that the best decisions are synthesised through the creative friction of diverse experiences, views and knowledge. But it can come at the price of camaraderie: humans tend to like people who are like them and be suspicious of those who are different. The best boards harness the power of diversity - a "good bunch of people with diversity of thought" - by celebrating the frictional rub, allowing diverse individuals to debate freely in a space where it is psychologically safe for them to disagree and to admit to knowledge gaps. This requires a healthy culture of respect between low ego individuals who are prepared to listen, overseen by a benevolent chair who enables debate.
Large pension organisations typically have multiple stakeholders. And as the number of stakeholders increases, so does the volume and complexity of their interactions and, with it, the scope for dysfunctionality: "A complex governance structure contributed to tensions". Having clearly-defined roles and responsibilities helps to manage conflicts and expectations: if unchecked, these can lead to slow and muddled decision-making and mounting frustrations for an “operating company that isn't allowed to do a lot without the approval of people who know little of the business". Great boards are thinking carefully about board dynamics and stakeholder management. They strive to hire collegial individuals with high EQs to complement their IQs, who are motivated by achieving good outcomes optimised across stakeholders, rather than simply furthering their own agendas.
* On Motivation: Board Effectiveness & Culture - Jenny Segal, kdp, 2023
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