PLSA Investment Conference 2017: More than half of professional trustees and consultants rate their clients’ decision-making capabilities as acceptable or below, as industry figures have urged a rethinking of boardroom psychology.
Research undertaken by consultancy Redington and chief executive of Royal Mail Pension Trustees Chris Hogg in conjunction with the Pensions and Lifetime Savings Association also revealed a startling lack of honest feedback being given to trustees by their advisers.
Groupthink and a lack of cognitive diversity are increasingly being identified as underpinning collective governance limitations.
There’s a cardinal rule, and that’s, ‘You don’t alienate your customers’
Paul Richards, Redington
And it is now broadly accepted that improving governance standards can add between 1 per cent and 2 per cent to scheme returns, with some arguing that even those estimates are conservative.
Behavioural scientists echoed the calls to shake up processes, asking trustees to challenge biases within the boardroom and introduce more diverse opinions to their decision-making process.
Worrying results
The survey asked consultants and professional trustees to rate their clients’ governance capabilities from “unfit for purpose” to “very well equipped”.
While professional trustees had a slightly higher opinion of trustee skills, more than 50 per cent of both groups said boards were “acceptably equipped” or worse.
The research also found that trustees and their advisers almost unanimously thought feedback between the two groups was important, but nearly one in five had seen no instances of advisers delivering developmental feedback.
Paul Richards, director of strategy at consultancy Redington, said research showed this was because consultants are wary of endangering client relationships, both for the sake of the scheme’s success and for purely economic reasons.
“There’s a cardinal rule, and that’s, ‘You don’t alienate your customers’,” Richards told an audience at the PLSA’s investment conference, adding that poorly-received feedback could lead to a deterioration of the working relationship between trustees and advisers.
Be brave
In response, Richards advised that schemes and their consultants agree on a policy of “radical candour”, based on management guru Kim Scott’s theory of the same name.
That would involve advisers demonstrating they care about the issues raised in trustee meetings and being prepared to challenge the behaviour they observe there, in the process becoming a critical friend of the board.
Openness to criticism would also be a key trait for any trustees, and particularly chairs, if this approach is to work, said Hogg.
“I actually think there might be a call for some kind of chair’s statement,” he said, arguing that good chairs should be able to demonstrate they seek out feedback.
Trustees must reflect
Ultimately, there is only so much consultants can do to challenge behavioural biases among their clients.
Is groupthink at play on your trustee board?
A desire for conformity could stifle debate in trustee meetings, new research has suggested, but industry experts say lay trustees are encouraged to challenge the status quo.
Consultancies Aon Hewitt and Behave London have developed a checklist of six behavioural biases commonly found in trustee meetings, including authority bias and loss aversion.
These can threaten the usefulness of the modelling so often used by the consulting industry. “Such approaches usually assume that investors will take cold, rational decisions framed by the evidence that’s in front of us,” said John Belgrove, senior partner at Aon Hewitt.
Behavioural biases abound in environments with low cognitive diversity. Hannah Lewis, founder of Behave London, urged the industry to reflect on its lack of age and gender diversity.
“Do we need a way of bringing people in as trustees by having structured mentoring or training?” she asked.
