Poor governance in the investments asset managers make has been cited as the biggest challenge faced by companies in the sector after tax regulations.

A study conducted by Aberdeen Asset Management found 89% of 293 financial services decision-makers it surveyed considered effective governance to be a critical driver of investment performance.

Corporate governance emerged as the most important matter on which asset managers should enagage the companies in which they invest, with strong support also for engagement on remuneration, corporate actions and environmental and social issues.

The overwhelming majority (85%) said that asset managers should engage with the companies in which they invest client funds both before investments are made and at regular intervals subsequently.

Aberdeen Asset Management head of corporate governance Paul Lee said: “The research makes clear that governance has to be a fundamental part of what investors do day-in, day-out . It’s about asset managers understanding what they own and not being shy of having conversations with the companies they invest in. Those conversations need to happen regularly and be a frank and honest two-way dialogue.

“Getting governance right is not easy. It involves research and thoughtful understanding. A lot of time spent meeting people and listening – not just talking. Doing these things, and therefore getting governance right, is easier if you take a long-term approach.

“A company is much more likely to talk to you if they don’t think you’ll sell their bonds or shares at the sight of one set of poor quarterly figures. We need to do more as an industry to invest for the long term ourselves and encourage the companies we own to do the same.”

Mark Colman, head of fiduciary management office at Santander Asset Management, said: “Asset managers should certainly include governance in their analysis. Increasingly, it is essential that no matter how good a company is in a particular country, there are times when you’ve got to say ‘do I really want to put my money there?’ because there could be issues well beyond the influence of that particular company that should make you shy away from investing.”

Several impediments to long term investment emerged from the research with 70% of respondents citing a short-term environment where performance is regularly measured against peers as a barrier to a long term view. Nearly half (48%) believed regulations also forced short-term thinking and acting, while the vast majority believed that there were sufficient investment models and performance metrics available to support long term investing. Indeed, one factor identified as promoting short-termism was the proliferation of models and metrics.