 | 13 Mar 2007 This paper identifies ideas and concepts that relate to the definition and implementation of a governance mechanism as part of an organization's adoption of portfolio management.
What is portfolio management?
Morgan Stanley's Dictionary of Financial Terms offers the following explanation of the term portfolio:
If you own more than one security, you have an investment portfolio. You build the portfolio by buying additional stocks, bonds, mutual funds, or other investments. Your goal is to increase the portfolio's value by selecting investments that you believe will go up in price.
According to modern portfolio theory, you can reduce your investment risk by creating a diversified portfolio that includes enough different types, or classes, of securities so that at least some of them may produce strong returns in any economic climate.
In a nonfinancial business context, projects and initiatives are the instruments of investment. An initiative, in the simplest sense, is a body of work with:
- A specific (and limited) collection of needed results or work products
- A group of people who are responsible for executing the initiative and use resources, such as funding
- A defined beginning and end
Managers can group a number of initiatives into a portfolio that supports a business segment, product or product line (or some other segmentation scheme). These efforts are goal driven; that is, they support major goals and/or components of the enterprise's business strategy. Managers must continually choose among competing initiatives (i.e., manage the organization's investments) to select those that best support and enable diverse business goals (i.e., they diversify investment risk). Managers must also manage their investments by constantly monitoring and making decisions about which initiatives to undertake, which to continue and which to reject or discontinue.
What is governance?
Governance is one of those terms everyone knows until they're asked to reduce it to a few simple sentences. So a definition seems a good place to begin. We will start with understanding the idea of governance in general; then we'll move on to the subject of governance specifically applied within the context of portfolio management.
Let's start with a dictionary definition. One definition provided is: gov.er.nance n.
- government; exercise of authority; control
- a method or system of government or management
A competing dictionary tells us that governance is: The act, process or power of governing.
Making use of both dictionary definitions, we must deal with ideas and concepts around the exercise of authority or control. Further, we must look for insight into the act of exercising this authority, the underlying process for that exercise and the power or powers that enable its exercise.
For the purpose of this paper, the identified concepts and insights and their explanations are bounded within the context of governance for the exercise of portfolio management as an organizational process. More specifically, this discussion is about portfolio management as it applies to initiatives or projects. However, this discussion is largely applicable to the use of portfolio management practices in other areas, such as products or software applications.
This paper identifies ideas and concepts that relate to the definition and implementation of a governance mechanism as part of an organization's adoption of portfolio management. This paper does not discuss the specific steps, roles and work products that are needed to implement portfolio management governance, but it is hoped that the identified ideas and concepts provide a springboard for needed executive discussion and review in this important area of organizational governance.
Download | Description | Name | Size | Download method |
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| whitepaper (PDF) | Establishing_PM_governance.pdf | 271 KB | HTTP |
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Resources Learn
- For reference see the Morgan Stanley Dictionary of Financial Terms, the Random House Unabridged Dictionary; Random House; 2006, and The American Heritage Dictionary of the English Language; Fourth Edition; Houghton-Mifflin; 2000.
- Read Michael F. Hanford's introductory articles on portfolio management on developerWorks Rational: Getting started with portfolio management, and Portfolio management essentials.
- To learn more about IBM Rational Portfolio Manager, visit the Portfolio Manager area on developerWorks Rational.
- To learn more about IBM Rational Method Composer, visit the Rational Method Composer and RUP resource area on developerWorks Rational. You'll find technical documentation, how-to articles, education, downloads, product information, and more.
- For a complete list of available plug-ins for Rational Method Composer, visit the RMC plug-ins page on developerWorks Rational.
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