Ebook: Institutional Asset Management: How are professional investors affected by legislature and corporate governance? : How are professional investors affected by legislature and corporate governance?

This study examines the current legislature and best practice corporate governance for institutional investors in Germany and the United States. Differences in investment regulation, compliance and disclosure requirements, as well as expense and tax schemes are identified for insurance companies and the pension fund industry. Based on current academic literature, hypotheses about the impact of different regulatory regimes are derived and tested empirically in a comparison between Germany and the United States over the last five years. Differences in asset allocation between the two countries are determined for both industries. It is shown that the strict quantitative regulation of asset allocation in Germany has no negative impact on institutional investors’ performance, yet it reduces the realized risk measured through depreciation. A principal component regression reveals that asset allocation constitutes a relevant indicator for depreciation and performance in Germany. It can be inferred that the investment regulation in Germany poses little disadvantages for investors while it provides a significant risk reduction. This conclusion is confirmed by practitioners from the pension fund industry in Germany. Auszug aus dem Text Text Sample: Chapter 3.2, CORPORATE GOVERNANCE IN THE INSURANCE AND PENSION FUND INDUSTRY: Having highlighted the most important external surrounding conditions for insurances and pension funds in Germany and the United States as well as the major differences between the regulations of these two countries, the following chapter aims at providing similar information concerning the internal decision-making processes for institutional investors. Governance plays an important role in this field of asset management due to the principal-agent constellation between sponsors and investors. In this setting, the information asymmetry is paired with incongruent goals of both parties and different levels of risk aversion. This can lead to behaviour that is not in the best interest of all parties involved, such as window dressing as mentioned in chapter 2.2.1, and thus many companies specifically state their stance on and policy for corporate governance. Corporate governance generally provides a system with which a company is able to govern itself. The system defines roles, responsibilities as well as account-abilities and is defined by five constituents: Corporate culture and environment including values, ethics, ease with which employees raise concerns or report irregularities, etc. Corporate structures including board of directors, senior management, business area functions, etc. Essential governing documents and policies including by-laws, organizational rules, committee mandates etc. Strategies, policies, procedures and controls covering risks to which the insurer is exposed and risk management, compliance, audit, financial reporting, etc. Decision-making and actions linked to this culture, environment and framework of structures, policies and controls. 3.2.1, BEST PRACTICES FOR THE INSURANCE INDUSTRY: Despite the fact that there is no legal requirement to do so, there has been a recent drive within the non-public company sector of the insurance industry to adopt certain corporate governance best practices as set forth in the Sarbanes-Oxley Act of 2002 and the various securities exchanges. The increased attention led the International Association of Insurance Supervisors (IAIS) to adopt revised Insurance Core Principals (ICPs) and an associated Assessment Methodology, offering new guidance for the effective operation of supervisory systems around the world in 2003. The assistance provided by the IAIS captures corporate governance for both insurance companies and insurance supervision. Extending the frameworks set up over the years, the IAIS released a joint issues paper with the OECD in pursuit of enhancing the protection of policyholders and shareholders beyond the system already provided by existing regulation and supervision as well as developing guidance specifically directed to the insurance sector that would supplement corporate governance rules generally applicable to non-insurance companies. According to the IAIS and OECD, corporate governance for the insurance industry covers seven different topics: Governance structures define the role of the board in setting strategies and policies as well as overseeing senior management. The different functions of the board are delegated to board committees, such as an audit, compensation and a corporate governance committee. The composition of the board itself is governed with the help of proper criteria for executive and non-executive members. Furthermore, the board needs to show independence of decision-making. The functions of the board include the setting of strategies and policies as well as delegating and reporting. The board is supposed to take on responsibilities in the areas of corporate governance, ethics and business conduct as well as conflicts of interest. A major governance function of the board includes the remuneration and possible perverse incentives leading to unacceptable risk taking of decision-makers. It is the board’s responsibility to ensure adequate qualifications and training of board members. Defining the extent to which accountability is shared between the board and executive managers is also a function of the board. The control functions of corporate governance include risk management, compliance, internal audit and other control functions as an integral element of a sound governance system. This includes dealing with solvency issues of the company related to corporate governance, such as internal modelling, stress testing etc. The use of external rating agencies is to be determined as well as the staffing and independence of internal control functions. The qualifications and independence of actuarial functions and auditors has to be determined. The disclosure of corporate governance has to be developed in terms of transparency. The relationship with stakeholders must be managed adequately, where the participating policyholders form a special class of stakeholder. The responsibility of an insurance company towards society is governed through corporate social responsibility. Effective corporate governance can assist the supervisor by making it possible for the supervisor to have greater confidence in the work and judgment of an insurer’s board, senior management and control functions. This contributes to the supervisor’s ability to protect policyholders’ interests. Biographische Informationen Andreas Sossong was born in Saarbrücken (Germany) in 1986. He holds a master’s degree in finance from the WHU – Otto Beisheim School of Management in Vallendar. Due to his study visits to the University of Michigan (Ann Arbor) and the University of Texas (Austin), he has gained international experience. Further, the author has gained varied experience in the area of international banking at Goldman Sachs, Deutsche Bank and Oliver Wyman Financial Services Consulting. Besides, he could extend his knowledge in the area of the asset management at the Berenberg Bank and Dr. Kalliwoda Research. After his studies, Andreas Sossong joined Oliver Wyman where he is currently pursuing a career in management consulting.