March 12, 2020

Governance In Asset Owner Organizations: Still Room For Improvement

“Organization design does not appear to be on the agendas of many Boards of Directors and CEOs. Since it has been shown to be a driver of organization performance, it deserves a higher profile. CEOs should be accountable for developing, implementing, and maintaining superior organization designs. Boards of Directors should be accountable for ensuring that this happens.”



Making an Old Topic New Again

Since its inception in 1985, this publication has periodically featured both the governance topic and the Ontario Teachers’ Pension Plan (OTPP) organization. OTPP’s creation in 1990 came out of a task force recommendation which was in turn inspired by Peter Drucker’s 1976 book on pension design, governance, and investing titled “The Unseen Revolution”.i After 15 years of strong organization performance, OTPP’s founding CEO Claude Lamoureux would echo Drucker’s message on the critical importance of Board governance in fostering strong organizational design and performance (see quote above).ii

This Letter updates both the definition of organizational governance and what we know about its success drivers, focusing especially on the context of asset owner organizations. We start by posing the deductive question ‘what does logic tell us about the key characteristics and accountabilities of effective organizational boards?’ Next, the Letter addresses the question of what is actually going on in the world of asset owner governance, and its impact on the performance of asset owner organizations. It ends by citing five studies which confirm a positive empirical relationship between good governance and good organization performance.

Board Roles and Selection Criteria

Elliott Jaques is often credited with laying the foundation on which to build and implement effective organization designs (e.g., see Jaques (1996) “Requisite Organization: A Total System for Effective Managerial Organization and Managerial Leadership for the 21st Century”). Ron Capelle has further       developed and enhanced this framework as outlined in his book “Optimizing Organization Design” (2014). This includes the design and implementation of the Board governance function. I have been fortunate to work with him on asset owner organization design projects.

Capelle posits three broad roles relevant to any organization: 1. An ownership/stakeholder function, 2. A Board governance function to represent owner/stakeholder interests, and 3. A management function that implements Board-approved plans to achieve the goals of the organization. This framing immediately raises an important question: what should be the mechanism for identifying prospective Board members?

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