Correspondence: Gordon L. Clark, Oxford University Centre for the Environment, South Parks Rd., Oxford OX1 3QY, UK. Tel: +44 (0) 1865 285072; Fax: +44 (0) 1865 285073; E-mail: gordon.clark@ouce.ox.ac.uk

¹is the Halford Mackinder Professor of Geography, holds a Professorial Fellowship at St Peter's College, is cross-affiliated with the Institute of Ageing at Oxford University and is currently a Senior Research Associate of the Labor and Worklife Program at Harvard Law School (Cambridge MA). His current research is on pension fund governance, focusing upon trustee decision-making competence and consistency and the design of rules and regulations to enhance the investment performance of these crucial institutions. With Professor John Marshall and Ms Emiko Caerlewy-Smith, he has concluded a two-year project on trustee competence drawing upon the attitudes and decision-making skills of a select group of UK trustees. This work has been published by the National Association of Pension Funds and through the Journal of Pension Economics and Finance (published by Cambridge University Press). Recent books include The Geography of Finance (Oxford University Press, 2007), Pension Fund Capitalism (Oxford University Press, 2000), European Pensions & Global Finance (Oxford University Press, 2003) and Pension Security in the 21st Century (Oxford University Press, 2003). He is also a co-editor of the Oxford Handbook of Pensions and Retirement Income(Oxford University Press, 2006).

²graduated from Oxford University (Merton College) with an MA in Mathematics and an MSc in Applied Statistics. He qualified as a Fellow of the Institute of Actuaries in 1983. He worked as an investment consultant for Bacon and Woodrow and headed William Mercer's investment practice before joining Gartmore Investment Management in 1987, where he was the Director responsible for two fields: business development and quantitative investment. He joined Watson Wyatt as a partner in 1989 to head up the firm's UK investment consulting practice, taking on the role of the first global head of practice when this was formed in 1995 and he remains in this role with a worldwide team of over 300 in his charge. He has responsibility for a number of the firm's major investment clients, both in the UK and internationally, advising them on all investment issues. He has increasingly concentrated on policy issues, particularly those relating to asset allocation. His clients include a number of big UK pension funds, but he has also done project work for several institutional funds outside the UK that are working to globalise best practice principles. In particular, he has had client consulting involvement in the US, Canada, Netherlands, Switzerland, France, Ireland, Hong Kong, Malaysia, Singapore, Korea and Japan. More recently, he has had greater involvement advising the headquarters of multinational companies.

Received 12 December 2007; Revised 12 December 2007.

Abstract

Good governance by institutional asset owners makes a significant incremental difference to value creation as measured by their long-term risk-adjusted rate of return. Drawing upon best-practice case studies, it is argued that the principles of good governance can be summarised by organisational coherence, including an institution's clarity of mission and its capacities; people, including who is involved in the investment process, their skills and responsibilities; and process, including how investment decision-making is managed and implemented. Using the case studies to develop the principles and practice of good governance, there are a number of lessons to be learnt from our exemplars whatever the nature, scope and location of the institution — summarised through a set of 12 findings about global best-practice with implications for large and small institutions. Implications are also drawn for the design and management of sovereign funds, which are increasingly important for national welfare in global financial markets. In conclusion, we see the challenge of governance as having two facets: to facilitate adaptation to the functional imperatives of operating in global markets given the heritage of an institution and, over the long-term, to undertake reforms such that institutional form and structure are consistent with the principles developed herein.