The fallout from the 2008–’09 financial crisis — and the tepid economic recovery that followed — has put pension boards under full scrutiny as retirees, both present and future, demand to know the inner workings of their funds’ management. As the population grows lopsidedly older, pension solvency has become part of the public discourse with ever greater regularity. If a fund is running in the red, it is human nature to finger point. Pundits and pensioners alike want to know how board members got their seats.
Pension board selection usually centers on getting representation across several groups. Even so, boards often fail to include an array of people who could help foster better management. For example, union representatives who may lack technical and investment savvy may get appointed to pension boards and potentially shut out a fund manager with an innovative portfolio strategy.
“What you get, typically, is a bunch of generally well-meaning people, but a lot of them really don’t have training in effective governance,” says Keith Ambachtsheer, the director emeritus of the Rotman International Centre for Pension Management (ICPM) at the University of Toronto. When you contrast that with an ideal board that is knowledgeable and understands the role of governance, you realize that many of these people are “not well placed,” he adds.
Of greatest value to boards is collective skill experience, explains Ambachtsheer. Getting that firsthand knowledge, whether from peers or experts, is key. Robert Astley, outgoing chair of the Canada Pension Plan Investment Board, says directors who join the CPPIB receive a full-day orientation with senior managers of the investment team to understand the history, dynamics and present strategy of the fund. Comparing the intensity of the CPPIB’s training program to “drinking from a fire hose,” Astley explains that when learning about the fund and getting up to speed on issues, there is an attempt to convey the idea that corrections can happen and markets can change quickly. Peter Gleason, managing director and CFO at the National Association of Corporate Directors (NACD), concurs. “The pace of education has increased dramatically, and I think that coincides with the environment we are operating in,” he says. “People know the environment is changing so fast, you have to have education to keep up with it.”
The NACD offers programs such as governance fellowships and certification for board members. The ICPM’s Board Effectiveness Program, for example, covers a variety of management topics, including investment beliefs and risk management. Rather than relying on the corporate seminar standard stand-and-deliver format, the ICPM programs allow board members to interact and share experiences that can help with future challenges.
Astley stresses that the boards of employer-sponsored funds have different risks and liability issues to contend with than does the board of the CPPIB or other perpetual-type, or government, plans. He also points out dynamics play a vital role in board effectiveness, and he sees it as a duty of the leadership role entrusted to the chair: “It is essential to try to enhance the collegiality and cohesion of the 12 members of the [CPPIB] board.” And that effort never stops as board members retire and new dynamics take shape.
What happens when boards need to hire? Says Gleason: “There’s a lot more targeted search aimed at what we specifically need.” Whereas boards used to look for specific people such as CEOs or retired CEOs, he notes, today there is more of a push to get people with a certain set of skills, as well as a willingness among hiring teams to go across borders to find the right talent. For example, all board members of the CPPIB formerly had to be residents of Canada. Legislation is being altered to allow three of its board members to live outside the country. In terms of internal human resource functions, the CPPIB conducts regular annual evaluations of the chair and all of the directors. Directors’ evaluations are presented to the chair, and the chair’s evaluation is presented to the governance committee for coaching, should it be needed.
Overall, notes Ambachtsheer, a pension board is more effective when its personnel has a diversity of opinion, because such a group fosters debate — and a range of potential asset management strategies. “It is opposing ideas that create a greater understanding of how to deal with these problems that have ambiguity attached to them. So diversity is a good thing.”
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