Navigating Governance Risk

Transcription

1 Navigating Governance Risk How to Proactively Avoid Fiduciary Potholes & Limit Legal Liabilities May 23 rd, 2017 Hollywood, Florida

2 Today s Presenters Brad Kelly Partner brad.kelly@ggainc.com Peter Landers Partner peter.landers@ggainc.com 1

3 What if This Happened? SOURCE: 2

4 Fellow Funds are Busy in the Courts Illinois Supreme Court State funds need $105 Billion between now and 2045 Gov t must pay the accrued pension liability Chicago raising property taxes to fill $500 Million gap California Appellate Court Benefits can be cut if pension remains reasonable Credit Rating Cuts Illinois New Jersey Chicago 3

5 Extremely Tough Times for Some Funds KRS Governance Issues: Governor Bevin removed the Board Chair Court ruled that Bevin had overstepped Chair found to be in breach of duties New Board was instated Fund Management Issues: Negotiated agreement with KKR Lower fees: no fees for manager Worked 2 weeks/month in KRS Office Resulted in higher fee costs and loss in the portfolio Hedge fund fees rose 11% Lynn Stout, Cornell Law Failure in Governance 4

6 Why Worry? 2016 Moody s estimates there is currently a: $3.5 Trillion in unfunded liabilities in federal employee pensions; and $3.5 Trillion in unfunded liabilities in state & local employee pensions. Cumulative Total is 40% of the U.S. GDP 5

7 International Opinion: It Has to Be the Trustees! SOURCE: 6

8 What Happens? 7

9 Possible Outcomes Outside Appointees PROS Bring additional skills and knowledge Can provide unbiased views CONS Do not have skin in the game Can provide biased views Member Trustees Have skin in the game Understand member issues &concerns May not be professional / have strong oversight skills 8

10 Primary Fiduciary Duties of Public Pension Trustees Basic Fiduciary Duties Loyalty Prudence Impartiality Ancillary Fiduciary Duties Delegation Co Trustees Furnish Information to Beneficiaries Keep Records and Provide Reports Segregate and Identify Trust Property 9

11 The Foundation: Are Board Charters Thorough? Succession Planning Performance Evaluation Compensation Investments Strategic Planning Financial Monitoring Plan Valuation & Administration Business Risk Management Growth & Transformation Compliance Communication & Information Codes of Conduct Board Effectiveness 10

12 Oversight Board (Direction/Strategy) Does your Board? Provide direction and strategy to management Make policy that management carries out Select, evaluate and support the CEO Approve high level organizational goals, policies and practices Set and approve Board governance Set and approve Board delegations Oversee management, organizational and investment performance and risk and policy compliance Act as an external advocate in public policy and stakeholder/community relations 11

13 Are You Considered a Good Trustee? Watchdog Focus is on corporate oversight. Approval of management s decisions and actions. Challenges management s assumptions. Raises challenging and sometimes difficult issues. Sounding Board Focus is on partnering with management to benefit the corporation. Provides advice, counsel, guidance, and mentoring to the CEO and senior management. Facilitates business introductions. Source: Building Better Boards, Jossey Boss

14 Barriers to High Performing Boards No strategic plan Micro management Ineffective Nominating/Governance Committee Too small Lack of orientation Lack of functioning committee structure Poor board renewal Composed of mostly senior execs Lack clarity on retained/required skills Do not assess overall effectiveness 13

15 Are You Aware of Liabilities That Exist? Is Your Board a Target for Lawsuits? Non Compliance With Governance Documents Unreasonably High Administrative Fees Negligent Selection and Monitoring of Service Providers Excessive Investment Management Fees Imprudent Investments Too Many Investment Options Self Dealing Insufficient Funding 14

16 What Do You Assume? False Sense of Security Reality ERISA Fiduciary Standards Do Not Apply Protected by Sovereign Immunity Outsourcing Management Reduces Liability Government Trustees Are Held to High Fiduciary Standards Similar to the ERISA Duties State Law Significantly Limits Indemnification For Governmental Fiduciaries Officers Selecting the Outsource Firm Will Be Held Liable for Their Decision Making Process and Reasonableness of Fees 15

17 Are You Overseeing & Mitigating Risk? Operational Risk Administrative errors IT errors and failures Fraud Natural disasters Legal Outsourcing related Governance Managerial Investment Risk Governance Market Liquidity Interest rate Credit Funding Outside Risk Reputation Cyber security Social media 16

18 Do You Have an Investment Philosophy & Policy? Is There an Established Foundation? Policy Objectives Determination Role of Strategic Investment Classes Policy Development Implementation Modeling of Strategic Classes Asset Liability Analysis Strategic Planning Portfolio Structuring Manager Selection Monitoring Do you Follow Them? 17

19 Are You Questioning Your Traditional Practices? How can you reduce your pension deficits? Increase Contributions Decrease Benefits Increase Investment Returns Decrease Operating Costs We advocate increasing investment returns through decreased operating costs. 18

20 Do You Have a Succession Plan Process? Articulate Business Strategy Define Experience and Leadership Competencies Required to Implement Business Strategy Assess Potential Candidates Development Planning Monitor, Measure and Evolve Emergency plans are a minimum requirement: Nature of emergency may affect candidates chosen Criteria for interim CEO/CIO may be different 19

21 Are You Compensating For Performance? Effective Performance Incentive Plans Aid recruitment and retention of talent Are clear on expectations and process Promote buy In Based on influence Assess attainability Are simple Rely on strong communication Are renewable Are affordable 20

22 Are Pay & Performance Reasonable? Absolute and Relative Performance Annual performance Long Term performance Peer group Comparables in State Size of fund 21

23 Do You Fully Understand What Is Expected? Increased Board responsibilities add pressure: Governance Structure Accounting & Reporting Risk Tolerance & Management Executive Compensation & Performance Measurement Board Responsibilities Investment Management, Philosophy & Policy Portfolio Construction & Manager Selection Asset Allocation 22

24 Outcomes of Good Governance Why should you want good governance? Strong operating / management environment to achieve fund objectives Focus on policy issues Clearly defined roles and responsibilities Clear investment policies and documentation Proper role for the Trustees Prudence is process How Can You Achieve This? 23

25 You Should (Always) Be Strengthening Your Skills NCPERS Accredited Fiduciary Program Equips participants with information, best practices and strategies for governing public funds in an ever changing environment. NCPERS Accredited Fiduciary Program Who can benefit? TRUSTEES EXECUTIVES SENIOR MANAGERS 24

26 Protect Yourself, Your Board & Your Fund If You Understand and Follow Your Basic Fiduciary Duties Loyalty (No Self Dealing) Prudence (Detailed Process) Impartiality (Members Benefit) Proactively Avoid Fiduciary Potholes & Limit Legal Liabilities 25

27