Governance and Alignment at Investment Managers

Many investment managers here in Japan have signed up to the Stewardship Code and engage with investee firms on their governance in line with the Corporate Governance Code. However, some might point to governance at the investment managers themselves. What would you say ?

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Many investment managers in Japan are subsidiaries of large financial groups, and relatively few independent investment managers exist. Governance could be defined as the alignment in goals of management, employees, investors/clients and shareholders of the investment firm, to allow sound risk-taking in both investment management and management of the firm. However, this can be difficult to achieve when an investment firm is not independent but has a parent to which it reports, including regarding optimal allocation of resources.

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I can understand that the right incentive structure and the right governance structure including decision rights, will come together to produce a better outcome. Will the right incentive structure allow the assertion of those decision rights ?

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We’ve touched on the fact that base salary represents a larger proportion of remuneration at many Japanese investment managers compared to global managers. Performance fee arrangements (between investment managers and asset owners/retail funds) are also relatively rare compared to globally. Do you think it would help better align incentives if asset owners/retail funds extended performance fee arrangements ?

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My questions have mostly been about good governance and good incentive structures. What do you think the impact is of bad governance and bad incentive structures on the health and competitiveness of the asset management industry as a whole ?

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Daniel Celeghin, Managing Director

Daniel is based in Hong Kong, and is responsible for Asia-Pacific client relationships and thought leadership. He advises some of the world’s largest asset managers regarding their Asia-Pacific operations and strategy, as well as several of the largest asset managers headquartered in the region. Daniel’s experience includes investment innovation, global distribution organization design, operating model configuration, M&A advisory, due diligence, and product development. He was named one of Institutional Investor’s Hedge Fund Rising Stars in 2010.