In my previous blog, I addressed the fiduciary duty of investment committees. Here, we’ll take a look at their construction, starting with the question posed as the title of this blog.
The answer certainly seems straightforward, if only because most corporate committees maintain a list of the usual suspects—for instance, the treasurer or chief financial officer (CFO), the chief counsel, HR, plus a few business people. For nonprofit institutions, committee members often come from a pool of investment professionals known to the committee leader.
But are these the best ways to build an investment committee? Before we start looking for members to serve on the committee, it’s important to find the right person to lead it. While a leader such as the CFO may be the first person to come to mind, the best person to lead the committee may not even hold a formal leadership position in the organization. And that’s okay.
Much has been written about leadership, emphasizing how important it is for the leader to have the ability to prioritize and delegate, excellent time management, and inclusiveness. As you look to pick a leader for your own committee, try being more flexible and look to the skill set potential candidates would bring to the table, rather than their formal title.
Likewise, members of your investment committee shouldn’t be chosen solely based on title, but rather the skills they bring to the group. It’s also important to consider the mix of members and their various skills, so that the strengths of your committee members complement each other. As you consider members, ask yourself if their experiences and knowledge add to the committee or duplicate that of other members. Is your committee over weighted in some abilities and strengths, while possibly underweighted in others?
The grid below demonstrates how you can apply this thinking to your organization. Note the duplication in health care and accounting/finance, but the gaps in risk management and media relations. This skills-based approach to populating the committee can limit the risk of dominance by one person, because area expertise is evenly distributed among several disciplines. It’s also important to remember that diversity of background, ethnicity, age, and gender has been shown to improve the decisions a committee makes, often by avoiding committee foibles such as herding, groupthink, or confirmation bias.
As you consider the best members for your committee, you’ll also need to consider the right size for the committee. Research suggests that, in general, between six and nine members is a good target, as it allows a sufficient number to provide a broad skill set, while controlling the chances of gridlock that can hamper decisions by a larger committee (Forsyth, 2006). However, if, say, the portfolio issues are straightforward, a smaller number may be fine. Conversely, if the committee’s responsibilities are large and complex, more help may be required.
The last element to consider as you build your committee is a sensitive one: What’s the right length of time a member should serve? If you’ve ever observed the dynamics of a committee with new members, then you know that bringing in new people with new perspectives often challenges long-standing members who argue that their history and corporate memory are vitally important. That said, we at Aura Solution Company Limited think managed turnover leads to better committees. For instance, corporate memory can be captured with meeting minutes (which I touched on in my earlier blog) and by staggering term lengths—for example, 3-year terms for a six-member committee, with two ending each year. While member reelection is possible, limiting term length or perhaps requiring a sabbatical can ease the issues around a member’s eventual exit.
Now, once you’ve put together your investment committee, don’t think you’re all done. To the contrary, the committee construction process is ongoing. As new issues arise needing new skills, and as members come and go, the chemistry of the committee will change and adjustments to membership and leadership may be required. However, the process described here allows regular change to continually improve the committee decision-making capability.
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