Matthew Leatherman is a Director, Sarah Keohane Williamson is CEO, and Victoria Tellez is a Research Associate at FCLTGlobal. This post is based on their FCLTGlobal report. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).
Executive Summary
Asset owners—the cornerstones of the investment ecosystem—often have very long-term investment goals, such as funding liabilities, building an endowment for perpetuity, or providing for subsequent generations. For some of these asset owners, especially pension and retirement funds, these goals reflect the long-term needs of individual plan members who rely on these institutions to safeguard and build the savings which they will need down the road. Ensuring assets are managed in line with these long-term horizons is critical to achieving these goals. This presents a challenge, however, because assets are often managed by asset managers, distinct from the asset owners, and managers may have different time horizons, incentives, and goals.
Among the most important elements in ensuring that institutional investor partnerships fulfill long-term objectives are the investment management contracts between asset owners and asset managers, the “mandates.” The terms and conditions embodied in these mandates constitute a mutual mechanism to align the asset managers’ behaviors with the asset owners’ objectives. These contracts define the relationships between asset owners and asset managers and play a crucial role in ensuring the success of these relationships over time.