Richard Ennis Has a Fix for Governance. No One Will Like It.

“Only the trustees are in a position to fix things,” argues the former consultant.

Illustration by II

Illustration by II

Critics often blame vaguely defined bad governance for the poor outcomes at many endowments, pensions, and other institutions.

But in a new paper to be published in an upcoming issue of the Journal of Investing, Richard Ennis, co-founder of consultant Ennis Knupp and a frequent critic of the industry, calls out the specific behavior at the root of poor governance structures and details some fixes, few of which Ennis admits will be popular with trustees, asset managers, or consultants that have operated for decades in an industry defined by such relationships.

The problem is that boards of trustees, chief investment officers, and outside consultants that provide advice often fail to understand the profound differences between investment policy and investment strategy. The confusion between policy — broad guidelines on issues such as risk tolerance — and strategy — choosing asset managers or investments — is a dangerous slippery slope that is responsible for decades of underperformance at institutions.

“Trustees should concern themselves with institutional investment policy, the principal focus of which is controlling risk and ensuring liquidity. In practice, however, trustees have allowed their deliberations to encompass elements of active investment strategy,” wrote Ennis, who believes the behavior has muddied accountability.

In a previous series of papers called “Disentangling Investment Policy and Investment Strategy for Better Governance,” Ennis laid out the real-world results of poor governance. Large endowments and public pension funds use an average of 100 asset managers, but in the end they remain inadequately diversified and often underperform the major indices by an amount equal to what they paid these outside firms. Since 2008, large public pension funds have underperformed passive strategies by 1.2 percent annually. Endowments have fared worse, lagging passive by 2.2 percent annually. (Because institutions often devise their own custom benchmarks, it may appear to the world that they’re beating passive strategies.)

Although Ennis ticks off a long list of governance woes, he focuses on the problems that emerge when trustees don’t fully embrace the distinctions between investment policy and strategy, an issue that hasn’t been studied by academics and isn’t managed by practitioners.


Trustees, who are often unpaid laypeople, are in charge of investment policy, a road map created for an allocator’s particular circumstances that can include risk tolerance, liquidity management, and the role of active management, among other things.

Once an investment policy statement is crafted by the trustees, it’s the job of the CIO to implement the road map. Ennis argues that this is where policy ends and strategy begins. The CIO, or OCIO, now begins the work of picking securities, assets, or funds.

The critical thing for Ennis is that there is a separation of duties. Intuitively, that makes sense: In all areas of finance, independent oversight has proved valuable.

“Implicit in the delegation is the responsibility of the client to hold the investment manager accountable for results. This is not an adversarial situation. Nor is it a collaborative effort. Rather, it is simply that the client must remain objective in monitoring and evaluating the manager’s work,” Ennis wrote.

Among the examples included in the paper are trustees who get involved in approving tactical investment strategies or who actively collaborate with the staff of a pension to work on benchmarks. He has particularly harsh words for consultants, who “work closely with institutional investment staffs as well as trustees: some [lose] sight of who brung them to the dance.”

The holes in governance structures have allowed asset managers to breach the walls of trustee independence, because they’ve sought to make themselves integral to the entire investment process. “Some sponsored ‘educational’ sessions with clients outside of official meetings (casting the manager in the role of host and the client as guest). Not infrequently, managers would discuss individual holdings with clients in the course of portfolio reviews ([in other words], a sharing of war stories),” wrote Ennis.

To fix the system, Ennis argues that trustees should delegate full investment discretion to the CIO or OCIO. “I do not believe any funds should operate with the traditional trustee-consultant model, in which the consultant advises trustees in connection with strategic decisions (as well as policy) and performs a performance evaluation. Under this arrangement, the consultant faces insurmountable conflicts.”

Instead, he said, consultants should stick to creating robust investment policies; advise trustees on how they can ensure their own independence; help smaller funds pick OCIOs; and create passive benchmarks, among other activities.

But Ennis says it won’t be easy to change things. Many trustees enjoy being in the thick of the investment decision-making process, while consultants have long profited from being involved in strategy.

But as Ennis wrote, “Trustees have an obligation to stakeholders to make a frank assessment of their role and performance in investment oversight. They must continually strive to educate themselves and be prepared to move beyond their comfort zone. Far too much is at stake for them to do otherwise. And only the trustees are in a position to fix things.”