Mauboussin on Strategy - Investment Committees: How to Build a Team to Make Good Decisions

Thanks to Dah Hui Lau for passing this along.

“You’re hired,” are three of the sweetest words an executive of an investment management firm can hear. “You’re fired,” in contrast, are the three most dreaded. Those hire and fire decisions are often the product of an investment committee, a group with fiduciary responsibility to make financial decisions on behalf of beneficiaries. And those decisions are often poor. Committees, like individuals, are prone to all sorts of mistakes, including buying high and selling low.

Estimates suggest that investment committees oversee over $5 trillion in financial assets worldwide. Yet there is no fully developed set of ideas on how to best create, manage, and evaluate an investment committee. Sure, there have been publications about how committees should define and stick to investment objectives, and how to avoid behavioral biases. But a thorough discussion of the structure of an effective committee requires more depth and rigor than what we have today. Two heads may be better than one, as they say, but only if they operate effectively.

This essay is about how to create a productive investment committee. Topics include how to structure a committee, the importance of classifying problems, how to best gather options, the importance of leadership, methods to decide, and pitfalls to avoid. I have included a checklist at the end. Since most investment committees are already up and running, many of these topics will be helpful in improving results.