As the saying goes ‘No favour goes unpunished!’   However, does the saying have particular resonance for the many who give their time so generously to help their Credit Unions, with particular respect to the investment strategy?

Credit Union Boards are being asked to undertake investment duties which hitherto may have been considered routine.  But do these duties now involve significantly greater responsibilities and consequences?  Was routine practice ever, in hindsight, truly adequate?  If so, is it now adequate, in the wake of the financial crisis, to give comfort in future to Boards pursuing the best investment outcome?

Some questions to consider:

• How often do fiduciary investors attend investment meetings not having been able, for whatever reason, to read and understand all the information provided?
• How many involved in the investment review process cannot give it the focus they feel it deserves?
• How many simply do not have the time they would like to prepare a constructive dialogue with investment professionals?

Are these questions symptomatic of a broader issue for fiduciary investors?   The sheer size, dynamism, and unscientific nature of the global investment markets are not always appreciated.  Just look at how many who are full time market professionals struggle to navigate those markets successfully! 

Is it any wonder then that volunteers on Boards, whose primary responsibilities are elsewhere, are often concerned about their wherewithal to approve the most appropriate investment.  There are parallels elsewhere for pension and charity trustees.  And the issue may not be limited to volunteers only.   Many professional advisors have second thoughts before wandering in to the investment space on behalf of their clients.

What are the downsides?  For example, how would Credit Union members react if they felt inadequate discussion or consideration had been given by the Board to the investment of assets on their behalf?    Are there other potential downsides than just reputational?

Is it now time for a considered reappraisal of how fiduciary investment responsibilities are discharged?  I have asked the question in another article for a different publication – is this an elephant in the room?  Having listened to many who act in a fiduciary capacity – it is already a big issue and getting bigger. 

“Men occasionally stumble over the truth, but most of them pick themselves up and hurry off as if nothing ever happened” – Winston Churchill

There are a number of contributing factors.  At the top of the list is time.  Time is no-one’s friend in the current environment.  It takes time to read an investment proposal or marketing brochure.  But it takes even more time to read such a document with an analytical mindset.  And it can take more time still to prepare a structured response such as an agenda for a meeting to clarify potential issues and orchestrate a Board’s discussion.  And then there is the time needed for the Board to consider its response in light of information clarified.

Some basic questions that might lead to a more productive consideration:

• What is the precise investment objective of the product/strategy 
• Does the objective concur with the Unions objective
• Is this the best means to pursue the Unions objectives
• What are the precise securities held
• What are the principal risks
  

Obviously, this list is far from exhaustive.

A second potential issue is group dynamics.  At various events run by bodies such as the Institute of Directors, Smurfit Business School, the Irish Association of Pension Funds, behaviour in a group environment has been discussed extensively - in particular people attending meetings because of their experience and knowledge, but not making any contribution.  The lack of participation by some immediately reduces a group’s functionality and effectiveness.

The resultant problems can include:

• Meetings dominated by one person or a few within the group
• Inadequate discussion or rubber stamping 
• Inadequate representation of the various interested parties
• Poor governance outcome

Thirdly, too often, too much is assumed.  The involvement of those with a ‘financial’ background is often assumed to automatically bring knowledge on investments.  However, very often their experience is in another area of the financial world which can make them uneasy discussing investment markets – a huge space in its own right.  And often again, it can be assumed that, given their silence, others in the room actually understand the information presented.  Other assumptions result from excessive trust in, or the reputation of, the proponent of the investment.  If nothing else was learned from the financial crisis, the fallibility of many great industry names certainly was.

There are many other factors, but it would be impossible to list them all in the confines of this article.

Simply put, it is not always straightforward to understand investment information.  But is this recognised and accepted?  After all, there are normally very considerable sums of money involved.   What actions are being taken to address the issue? 

When things go wrong in any sphere, almost inevitably the battle cry is more regulation and training.  Perhaps these are needed and will ensue.  But before people plough down these avenues regardless, perhaps a little reflection is appropriate.

Is increased regulation a poor substitute for a proper mindset?  Increased regulation has been a given in the investment industry.  But as regulation has been at its most intensive ever, there still have been flagrant violations of the rules.  Regulation alone does not prevent malpractice.  Does it ensure best practice?  It might make it harder, but the evidence suggests the determined or reckless will still be able to transgress.

A radical change in mindset can play a huge role, and be a much quicker and simpler force for change.  Great intellect is not required – far from it.  But a simple acceptance that understanding investments and the implications of different strategies is not always straightforward or perfunctory, will instantly lead to a more prudent and diligent mindset.  This will help address many similar objectives as increased regulation, and probably quicker.

Training has its limitations too.  How much is actually learned and retained in training?  Is not the best training on the job, when a real life situation has to be understood and managed?  This will result in real and permanent knowledge.  But all too often, the residual knowledge from training does not enable this.

Unless the investment is very straightforward e.g. deposits, or all involved have actual knowledge of the proposed investment – an unlikely scenario, time will have to be made available to realise knowledge and understanding.  Without the allocation of the requisite time, the knowledge to understand or explain to others in the group cannot happen.  Without knowledge, it is very unlikely there will be adequate confidence to ask necessary questions and insist on the full replies to allay concerns. 

Lack of time, knowledge, and confidence are at the root of so much difficulty encountered by so many interfacing with the investment industry.  Recognising and addressing these shortfalls will be a huge first step towards addressing these difficulties.  What difference would taking this first step make to future Board evaluation of investment opportunities?

James Meenan
CEO
JNM Investment Governance
Unit 18 Docklands Innovation Park, East Wall Road, Dublin 3.
t: 01 687 1027
m: 086 257 2646
e: james@jnmresearch.com
w: www.jnmresearch.com