New attention being showered on investment panels

Thanks to greater focus on compliance, governance and regulation, investment committees at pension plans, endowments and foundations are getting much needed attention from their sponsors.

Keith Hocter, a co-founder of Montclair, N.J., investment consulting firm Bellwether Consulting, said working with institutions on their investment committees has become one of his firm's most common engagements.

"In part it's because there's more attention to the subject right now given things like litigation," he said, referring to the fact that investment committees have been sued for failing to uphold their fiduciary duty when managing assets.

"But even that aside, in the normal course of running an organization, you have personnel turnover, reorganizations in which functions and responsibilities get moved around," Mr. Hocter said. "It's surprisingly easy, even in big, well-run organizations, for things like the investment committee to get off track."

Steve Voss, a principal at pension consulting firm Ennis Knupp & Associates, Chicago, said he also is getting more requests for help reviewing investment committees, particularly from public plan sponsors. Those requests typically result from a fiduciary audit or governance review by the institution, he added.

Investment consultants agree that two key factors can prevent an investment committee from running aground: the chairman and the agenda.

Committees that are most effective have strong leaders who understand all the issues the committee faces — investments, fiduciary responsibilities, managing external relationships — and can build consensus and move the decision-making process along. In addition, meeting agendas focused on making decisions rather than on reviewing material will lead to more effective committees.

"The leadership function of any well-structured committee is critical," Mr. Voss said. "We tend to try to focus on agendas that are action-oriented and not simply a review of data that by the time we have a meeting is relatively stale."

Other experts said an effective investment panel needs more than just a strong leader and agenda.

"The most effective committees are where there are multiple points of view," said Byron Wien, chief investment officer at Pequot Capital Management, Westport, Conn. "Strong passions and multiple points of view so the committee doesn't take the lead from one or two people."

Mr. Wien, who said he sits on the investment committee of six endowments and foundations, agreed the agenda is important.

A third key factor relates to the people on the committee, observers said.

Members should "really take joy in success and pain in failure and discuss each at the right time," Mr. Wien said. "In other words, don't pat themselves on the back when they're doing well, but question whether or not they should be more cautious when they're doing well" and vice versa.

He added that to be effective, committee members need to ask the "hard questions" about the investment strategy and also need to ask hard questions of the investment consultants.

Mr. Voss at Ennis Knupp agreed that evaluations of both the committee and its external consultants and managers are key to keeping an investment committee on track and functioning effectively.

"What's become a best practice is to conduct self evaluations so they hold themselves accountable to their strategic plan, hold their internal experts — staff — accountable and hold their external providers — investment consultants, actuaries and investment managers — accountable for the execution of the strategic plan," Mr. Voss explained.

But for members to be able to ask those questions, they need to be trained, which Mr. Voss said is becoming another industry standard.

"The need for training is true for both the situation where you have laymen on the committee, but also where you have CFOs and heads of HR (human resources) on the committee," Bellwether's Mr. Hocter said.

He listed three key training areas: investment basics; the fundamentals of fiduciary responsibility; and an understanding of the objectives, limitations and history of the committee.

"Whenever a new person comes in, having that formal training, it keeps the committee operating smoothly," he said.