The asset owner of tomorrow

The asset owner of tomorrow faces tougher conditions than those they have faced so far. In particular, they should expect many more disruptions from a combination of stresses that are market-driven and supplier or governance related. They will need to be smart and agile to deal with these circumstances. Will they rise to this challenge? Yes, I think it’s clear that they can do so but the critical factor will be strong leadership from their boards and executive teams.

This research view comes from a peer group study: Smart Leadership, Sound Followership which was commissioned by Future Fund Australia and compares the practices of a group of 15 large and influential asset owners. The big asset owners in the study, by developing strong internal terms, have become very good at what they do. While this work was designed to help these funds, the additional application of this research was to identify their best practice features and allow their good work to trickle down to others.  The question of how asset owners across the size spectrum can achieve the same is carried forward in new research, published by the Thinking Ahead Institute, entitled the Asset Owner of Tomorrow.

The increasing speed of changes in technology, demography, globalisation, environment and societal norms is the critical new factor in the picture. Jack Welch of GE put it starkly: “If the rate of change on the outside of your organisation exceeds the rate of change on the inside, the end is near.” Looking ahead it is clear that asset owners cannot afford to stand still. How do they need to change?

There are no blank canvasses for asset owners to work from. All situations have unique considerations at work. The art in this challenge is working with evolving best-practice principles and applying them to unique circumstances. We find four areas where future practice should depart from prior versions in leadership, governance, technology and sustainability.

The first suggestion is that asset owners need to attract and develop a stronger leadership layer. Previously, asset management firms have attracted a much greater share of strong leaders from the industry talent pool. But the leadership opportunity is flip flopping. Asset owners have a natural advantage in exercising a prominent leadership role. With their profit-for-members business model, and their close alignment with underlying savers and investors, they have a mandate to advance more purpose-driven practices.  These attributes should enable certain positive impacts from leadership such as being a truly long-term investor that acts as an active owner and steward through company engagement. Success with such opportunities require the force of leadership to increase. I believe it will.

We often think of leadership being about executives, CEOs and CIOs. It may be so at the biggest funds. But many leadership opportunities lie in better investment committees and boards, particularly with their chairs. Think of the asset owners of the future with boards at least the equivalent in quality as their counterparts at large public corporations.

Second, we identify the evolving model of governance best practice. The board’s responsibility is to get to clear mission, goals, and accountabilities within a far-sighted belief and value system with excellent delivery to stakeholders. So a board should concentrate on applying disciplined oversight and strategic focus. Research shows that most boards struggle with the strategic focus by getting ‘too much into the weeds’. The need to delegate complex real-time responsibilities to the executive function of an asset owner has become more critical over time. This does pre-suppose having quality executive capabilities; internally or through external outsourcing. This evolved model improves on prior versions where boards were more hands-on and less strategic.

 

This is a refocusing on issues of strategic importance. Think of the next board agenda including time devoted to scenarios taken from the big issues that lie ahead: perhaps on technology or social-trend disruptions.

 

Third, technology disruptions are a new factor that asset owners need to pay particular attention to.

The challenges come in two parts: a technology challenge which will be met within a business and economics context; and a human-skills challenge where the advice to ourselves, and our children, is surely about committing to lifelong learning as well as having a machine-friendly outlook.

 

Asset owners have always been powered by various data. A new starting point is for funds to have a coherent data strategy that makes sure that data is sourced, validated, distributed and used in effective ways. Decisions will increasingly be dependent on managing data within investment processes that have higher systematised components. Think of a time when the majority of investment processes are powered by smart algorithms devised by very smart humans.

 

Better technology asks for changed skills but doesn’t displace current jobs. Asset owners should be adding to the size of these teams in the next few years. Data doesn’t deliver insight; you need skilled people for that. While algorithms can usefully create a map of future known possibilities, they don’t deal with the unknowable futures where people with situational fluency are critical. There will always be meaningful work for creative and skilful people. The new paradigm is people plus machine. Top-level thinking on technology, largely ignored by asset owners to date, needs to emerge.

 

Finally, sustainability and ESG are new disruptions. Technology and data are playing a big part in this area. The subtlety is that big data in ESG is a lot more about so-called soft data than the classic sort – basically information that is indirectly observed and in need of interpretation.

 

Sustainability and long-horizon investing are currently practiced by asset owners in a relatively shallow way. While most asset owners are in a position to use competitive advantages to take longer-term views, imperfect mind-sets and incentives frequently get in the way. So opportunities are regularly missed in the overlapping areas of sustainability, ESG and long-horizon investing.

Transformational changes will produce a faster-changing risk environment. That may well argue for certain risks to be more centrally-managed, particularly climate risk. Pressures are set to build in the next five to ten years from both the business case, based on sustainability’s materiality, and from an implied license to operate.

Forces are gathering behind these drivers. The prior blockages including limited data and the restrictions imposed by fiduciary standards are gradually being reduced. In their place funds are being required by regulation to address these issues. In a world of increased stress on climate, resources and societal cohesion, asset owners will be pressured into their wider responsibilities.

To date, boards have been reluctant to engage with the issue and it will be with their leadership that the subject gets appropriate attention.

Asset owners are too important to fail in their mission. They carry a massive burden for the wealth and well-being of billions. They have little choice but to take their financial and social responsibilities seriously, to lead from the front and not to shrink away from the big issues.

Roger Urwin – previously published in IPE