18. Good Governance: Principles, Pitfalls, and Best Practice

Good governance is a holistic concept that extends beyond legislators and supervisors to encompass all central bank functions—from the setting of investment policy to database management. The three main channels of governance comprise the legal authorizing environment, the top-down delegation of authority, and bottom-up transparency and accountability for outcomes. In this chapter, the authors review the principles underlying good governance, recognizing that the actual structure and organization may differ amongst institutions. The authors then describe the major challenges typically facing public sector asset managers, drawing on their experience working globally with public sector asset managers over decades. Some of these issues include the role of the Investment Committee within the decision-making hierarchy, accountability through meaningful reporting, and enhancing returns while mitigating reputational risk. The chapter ends with four initiatives that in many cases have led to more effective asset management operations: (1) implementing holistic change management practices; (2) regular strategic review of investment policy and guidelines; (3) clearly distinguishing between economic (investment) and accounting results when assessing investment outcomes; and, (4) developing a communication strategy for external stakeholders on the investment framework and performance indicators