Poor governance costing $500k in lost returns: KPMG

Insufficient investment governance may cost Australian institutional asset owners, and in turn their customers who must bear the losses, as much as $500,000 across their working lives, according to a new report by KPMG Australia and Frontier Advisors.

Two-thirds of survey respondents, sourced from Australia’s investment management sector, believe that the return penalty for poor investment governance could reach 1% or more per annum. This swells to more than four out of five (82%) respondents who believe they would be hit with an investment return penalty of at least 0.75% per annum.

Only three per cent of respondents believed there to be no cost import for poor governance practices.

KPMG calculated that, for a 25-year-old super fund member, the impact of a 1% reduction in investment returns over the course of a working life could be up to 40% or $500,000, less in a retirement payout than if they were invested in a fund with better investment governance.

For those that engage in good investment governance practices, investors could reap an additional 0.5% per annum or more in additional investment return, survey respondents believe.

“Good investment governance ensures stakeholders’ interests are prioritised and protected. It established clear guidelines for institutional asset owners, including risk management protocols, investment strategies and disclosure requirements,” KPMG wrote in its report.

“By adhering to good investment governance practices, asset owners are compelled to act in the best interests of their stakeholders, minimising the potential for conflicts of interest or unethical behaviour as we have witnessed in the past.”

Sarah Cornelius, Frontier Advisors’ head of investment governance, added: “By adhering to principles of transparency, accountability, and integrity, asset owners can build trust, attract capital (or new members in the case of super funds) and also attract top talent and foster innovation.”

Most respondents (68%) report that investment governance today is substantially better than it was a decade ago, while a further 29% believe it is at least marginally better. However, 92% believe the investment governance landscape has become increasingly complex over this time.

KPMG consulting partner Platon Chris further acknowledged that governance practices which have served well in the past may not be suitable for the future environment.

“[The] evolving landscape of technology, ESG, climate factors, a dynamic regulatory environment, coupled with the increasing globalisation of markets, is putting pressure on investment governance models and capabilities to adapt and innovate.

“Cyber security breaches and the ever-increasing threat of cyber-attacks also pose real challenges.”

Among some of the key governance threats noted by institutional asset owners, include the increasing complexity of compliance, with fund managers required to examine their portfolios through a multiplicity of lenses (return, risk, peers, regulatory benchmarks, and ESG considerations.

As well, nearly a third of respondents felt that there is too much of a focus on short-termism over long-term sustainability.