CORTEX

Effective Board Governance

Presented by Tom Iannucci

Cortex Applied Research

April 2006

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About Cortex?

Pioneer in pension governance; Origins in management consulting; Independent boutique firm; Only consulting firm dedicated to

pension governance; Process-driven to achieve strong client

buy-in; Track record of facilitating change.

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Our Services

Role clarification Governance policies and support Strategic planning Board training Board self-evaluation Governance reviews/audits Investment consultant search Specialty projects (organizational)

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The Firm

Founded by Dr. John Por in 1991 A core team of professionals Mix of backgrounds:

Law, finance, economics, engineering, fund administration

Over 75 governance clients U.S., Canada, Europe Public, corporate, DB, DC

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Sample Clients

Colorado PERA CalSTRS Louisiana SERS Maryland State

ERS San Francisco ERS Virginia Employees

Alameda County Kern County Sonoma County Ventura County LA Fire & Police Mississippi PERS

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Investment Consultant

Management/ Staff

BOARD

The Governance Function

Actuary

Investment Managers

Legal Counsel

SponsorMembers/

Beneficiaries

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Our Beliefs on Governance

Good Governance: is crucial to organizational success doesn’t occur naturally has to be consciously designed requires ongoing efforts and attention

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Our Mission

To assist retirement systems in identifying and implementing

organizational best practices for achieving optimal performance.

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A Best Practices Organization

Meaningful, agreed-upon goals Clear roles (Board, staff, vendors) Knowledgeable Board & staff Measuring/monitoring the right things Policies/processes in place Sound investment philosophy

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Fiduciary Duty vs.Board Effectiveness

Fiduciary Duty: Loyalty to the beneficiaries Prudence

Board effectiveness: Processes and practices designed to

ensure: Fiduciary duties are met; AND Superior performance is achieved

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Loyalty

Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctillio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct of fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.

Chief Judge Cardozo (Meihnard v. Salmon)

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Prudence

Prudence is process: Clear delegation Knowledgeable players Sound policies Due diligence Appropriate reporting

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Effective Boards

Demonstrate prudence Abide by duty of loyalty Focus on the important but not urgent Support optimal performance

This rarely happens naturally!

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Why Not?

Fiduciary knowledge not easily gained Turnover among Board and staff Lack of common terminology Human tendency to focus on

interesting/urgent

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Designing A Governance Framework

Mission / Purpose

RealityCheck

Policy Framework

Monitoring Systems

FiduciaryKnowledge

Decision-making Structure

MeetingOperations

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Achieving Governance Best Practices

2 Stages:

1. Build a governance framework Role clarity Governance policies

2. Build knowledge and strategy Board training program Strategic planning

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Phase IHow To Begin

Role Clarity: Board Board Officers Committees and Committee Chairs Executive Director

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Typical Role-related Issues

What is the right committee structure for us? What is the role of each committee?

What is the role of the Board: Staff hiring and termination Directing staff Hiring and terminating managers Due diligence Stakeholder communications

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Role-related Issues (cont’d)

How much authority should the Chair have? Determining committee chairs/members Board travel

What authority does the ED have? Staff hiring and direction Expenditures Hiring service providers Portfolio re-balancing Selecting vendors Due diligence Making policy recommendations

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Governance Policies

Samples: Board Education Board Operations Board Communication Board Evaluation Executive Director Evaluation Vendor Selection Policy Process Code of Conduct Board Travel

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Typical Policy Issues

What would a good board orientation program look like? Continuing board education program?

Should there be term-limits for officers and committees?

What routine reports should the Board expect? How frequently?

How should meetings operate?

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Policy Issues (cont’d)

How should the Board communicate: Members County Employee groups Vendors Media

How should we evaluate the ED? How should we evaluate ourselves? What do we do if board members don’t

behave or abide by our policies?

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Benefits

Ability to demonstrate prudence to the outside world: A formal governance program is

becoming industry standard (fid. audits)

Maximize likelihood of strong performance (investment & admin.) More efficient/focused decision-making Clear, effective working relationships

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Phase II

Updating/refining the framework Continuing board training Strategic planning

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Who Hires Us?

Generally, two types of clients: Those that have experienced an

organizational conflict of some sort; Those that are functioning well and

wish to refine/continue current practices.

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Option A

Deliverables: Develop charters for each key player Develop 5 governance policies

Process: Board/staff survey Board and staff interviews Working sessions with staff to draft policies and

charters Presentation for Board to discuss and adopt

policies and charters Completion: 4-5 months

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Option A - Variations

Spread project over two years: Year 1 – charters Year 2 – policies

Less efficient and ultimately more costly

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Option BGovernance Workshop

Board survey and interviews Telephone interviews ½ day workshop:

Educational Interactive

Governance action plan

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Option CStrategic Planning

Process: Strategic planning survey Interviews and working sessions Statement of Strategy/Business Plan Workshop

More effective as a follow-up to governance policy framework

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Questions and Discussion