March 1, 2019

Rethinking Asset Owner Performance Measurement: Insights From The Integrated Reporting Framework

“What gets measured gets managed”

ATTRIBUTED TO PETER DRUCKER

Rethinking Performance Measurement

This Letter continues to make the case that the broad adoption by asset owners of the <IR> Framework would foster clearer, more concise narratives about the value these organizations (e.g., pension funds, sovereign wealth funds, endowment funds) create for their own stakeholders and for society at large. The January Letter described the <IR> Framework and adapted it to an asset owner context. The February Letter dug more deeply into defining ‘value-creation’ in that asset owner context, and into the requisite business model features required to successfully produce it. This third Letter follows from the logic of Peter Drucker’s observation that ‘what gets measured gets managed’. Specifically, this Letter addresses two questions: 1. What does the <IR> Framework tell asset owners they should measure?  and 2. What metrics do they need to meet this obligation?       

What Should Asset Owners Measure?

Following the logic of the January and February Letters, let’s start with a list of value-creation activities that are candidates for measurement. The Letters made a clear distinction between micro and macro asset owner value-creation:

  • Four Micro Value-Creating Activities: 1. Explaining organizational purpose and mandate to stakeholders and how intergenerational fairness is enforced, 2. Making and explaining promised payments and placing them in context for members, 3. Creating and enforcing an investment risk management framework and protocol that reflects stakeholders’ ability and willingness to bear investment risk, 4. Generating risk-adjusted long-term net investment   returns in line with expectations.
  • Two Macro Value-Creating Activities: 1. Setting out the principles of sustainable investing and how the organization is adhering to these principles. 2. Setting out the UN’s Sustainable Development Goals, and how the organization is contributing to their achievement. 

Saying is one thing, doing another. What metrics do asset owner organizations need to meet these <IR> Framework reporting obligations?

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