Not long ago, I was asked to make a presentation on Investment Committee Development. As I prepared for this presentation, I drew on my own experience with investment committees. I also found several interesting research sources. One was a Trustee Primer produced by the CFA Institute, which to some still remains the final word on best practices in investment management. The primer starts with a quotation from the venerable investor Warren Buffett:

“As the old saying goes, what wise men do in the beginning, fools do in the end.”

Putting yourself in the shoes of a trustee, you can interpret the saying like this: policies and strategies that have been successful for a period of time are often adopted at later stages without the insight and careful judgment of the wise man, often resulting in unfortunate outcomes. For investment committees, a key takeaway might be that committee members “own” the responsibility for prudent and thoughtful oversight of investment assets. This does not mean that you need the investment expertise of a Warren Buffet on your committee (wouldn’t it be nice). It does mean that a) you should have a thoughtful process to form an investment committee, b) charge this committee with developing investment policy, which in turn provides the framework for a prudent investment process.

It Starts With Process

Investment committee members do not necessarily need to have investment expertise, but should have the willingness and ability to learn basic principles of investing related to investment policy, asset allocation, manager selection and performance review. (A good investment management consultant should be able to convey the basic and relevant principles of investing to the committee.) It is important to note that investment committees are not charged with managing the day-to-day activities of investment portfolios but should understand the framework of the investment process in order to provide oversight on policy, asset allocation, manager selection/monitoring and performance reporting.

Separating Investment Instincts From Committee Instincts

At times, investment committees are blessed with an investment practitioner. Sometimes this is a mixed blessing, as practitioners have the difficult task of separating their investor instincts from their fiduciary role. The best investment practitioner committee members I have seen do not attempt to micro-manage the portfolio. Rather, they often serve as translators and important facilitators of debate between consulting professionals and non-expert committee members. It is important (and healthy) that all committee members feel comfortable discussing and debating all aspects of the process. In this way, committees “own” the investment process and are truly acting in a fiduciary capacity, as opposed to blindly following what wise men did in the beginning.

I’ve summarized several other takeaways from my presentation:

  • The process by which you arrive at decisions is, in many ways, as important as the actual decisions. In particular, you should take ownership of your oversight responsibilities. Delegate to those who have the required expertise, experience, and authority to do their jobs. Hold all parties accountable for actions that they take (or fail to take). I have found that this basic philosophy distinguishes strong governance structures from weak ones (Source: Adapted from CFA Institute)
  • Trustee approaches can range from an unhealthy involvement in the smallest operational decisions to a similarly unproductive disengaged attitude (Source: Adapted from CFA Institute)
  • The best investment committees employ common sense and discipline

A Few Thoughts on Behavioral Dynamics

  • A group’s size, its members’ expertise, approach to conflict resolution and member productivity all have an impact
  • Heterogeneity is critical to group effectiveness
  • Recognize that investment theory is often at odds with potentially self-defeating behavioral tendencies. Committee members should maintain a disciplined approach, remaining focused on objectives and Investment Policy

(Source: Adapted from Investment Committees: Vanguard’s View of Best Practices)