How to ACT Guidance Challenge

A good governance process includes setting objectives (where it wants to get to) and targets (how it will measure its progress) that apply to all levels of the business and are drawn from the company’s purpose, vision and values.

As with any strategic goal, KPIs for board and senior management should be related to support of the business goal. For example, if the company-level goal is related to the delivery of investment processes that support sustainable outcomes, the KPIs can support in various ways; ensuring resources are allocated to the development and support of teams with the right expertise and diversity to deliver on that goal; by supporting changing internal and established processes that do not guarantee this outcome; by establishing processes that help with monitoring and review.

Opinion remains divided on whether to link KPIs to remuneration, in part because it seems hard. Similar discussions have been undertaken in relation to ESG, and one element is making the KPI relevant, for example related to exposure risks and aligned to company strategy.

Simply put, it is a more effective lever because it communicates that the KPI is considered on the same level and merit as other strategic business considerations. The business case for diverse teams - across many different metrics and lenses, including cognitive approaches - has been made across several pieces of research. Incorporating targets or factors in remuneration that drive improved performance, therefore, helps to deliver shareholder value. Management programmes that incorporate culture, diversity and inclusion are also therefore appropriate for the business.

For compensation to be effectively linked, KPIs must be appropriate and sufficiently stretching. Senior management needs to maintain understanding why diverse teams produce better outcomes and to implement practices that are most relevant to the business.

As with all KPIs, fewer, more targeted ones are more impactful. The KPIs could:

• Relate to achieving internal and operational diversity objectives, including those related to employee welfare.

• Encompass the implementation of measures that support the creation and maintenance of more diverse investment processes and/or teams.

• Focus on impacts and outcomes related to company commitments to third-party initiatives that target real-world outcomes, such as SDGs.

• Focus on the ability to communicate with stakeholders, including clients that are signalling relevant interests and expectations.

The KPIs should include alignment with any relevant initiatives and should include an appropriate timeframe, which may differ across KPIs.

Accountability and oversight over the organisational KPIs should be assigned to the highest appropriate level of governance structure for the size of the firm. The Accountable Executive can help to ensure the requirements for reporting and data collection are communicated to all staff, which could be via intranet or within employee policies. It can also cascade down to managers as part of their responsibilities.

Firms should be clear on who is responsible for delivery of each area, and place the responsibility within formal objectives for the individual. The discussion and agreement on individual objectives is a key part of the managerial relationship that helps the employee to become focused and invested in their success, and will vary according to the role.

However, prior to creating the specific individual objectives, each manager should be setting expectations that all staff adhere to the behavioural and investment aspects of relevant policies. Adherence to policies and processes should be a basic part of any job description and be supported by ongoing training and development. All staff should maintain a reasonable standard of knowledge on the firm’s culture and values, as well as on its approach to diversity. They should also be required to confirm this on an annual basis as they would with other policies.

With the expectation on staff clear, firms should then consider how they will incorporate what they know and are learning from employees to feed back into the business.

Diverse and inclusive investment teams will be driven by a structure that enables representative, cognitive and experiential variety of participants and can be supported by ensuring every team member understands expectations and has received training that is appropriate to their role and experience.