With long-term investors like pension funds continuing to face challenges in measuring performance, a new paper is setting out to develop a better way to take on this task.

“Traditional financial performance, as monitored and defined in the marketplace, can be rather noisy in the short and medium term,” says Ashby Monk, executive and research director of the Stanford Global Projects Center, who co-authored the paper with Gordon Clark, senior consultant and professorial fellow at the University of Oxford. “And so to be a long-term investor and be measuring yourself according to noisy short- and medium-term investment performance seemed a rather inefficient way of assessing whether or not an investor was actually doing their job well.”

To help solve this problem, the paper aimed to define a common operating model for long-term investors, as well as metrics to monitor performance.

For long-term investors, it found three environmental enablers that influence the quality of performance: governance, technology and culture. In addition to these enablers, long-term investors use four inputs: capital, people, processes and information. A combination of these four inputs generates the risk-adjusted rate of return, stated the paper.

“If you say to yourself, ‘I want to really improve the way that I’m operating as an investor,’ ultimately what you’re saying is, ‘We want to change the quality of our inputs or change the inputs altogether,’” says Monk. “And what we found in our research is there are really only three ways in which organizations can change the quality of their inputs, and that is governance, culture and technology.”

The paper explored how these enablers and inputs are connected to results by looking at outputs. It noted three intermediate outputs: commitment, alignment and knowledge management and one final output: investment return.

“By this account, the long-term performance of an investment organization is the product of its environmental enablers and production inputs, managed in ways that mobilize the commitment of investment professionals by ensuring alignment of interests and the sharing of information and knowledge consistent with its comparative advantages and the organization’s goals,” noted the paper.

The paper suggested some tangible metrics for monitoring performance based on the enablers, inputs and outputs identified. “We’ve identified the building blocks for institutional performance, and within each building block we’ve identified a group of metrics and then within those metrics we’ve given actually options in a number of cases how to measure relevant performance,” says Clark.

The metrics listed include: board engagement, culture, technology, capital leverage, people, healthy and happy, process, information, commitment, alignment, knowledge management and investment performance.

Monk says the paper isn’t claiming the 11 metrics are the only possible metrics, but they’re based on discussions with organizations on what they see as important.

“The ambition of the paper is just to sensitize the world of long-term investors to ways in which they could be using these types of metrics and then provide a set of example metrics that they can either adopt wholesale or they could tweak and develop,” says Monk.