Delegating the power to hire or fire managers is working for at least two public pension funds, but the practice is still rare.
Under a policy adopted in 1998, Missouri State Employees' Retirement System trustees delegated hiring and firing decisions to a group of three: the executive director; chief investment officer; and the fund's consultant.
The board stipulated all three must agree on any changes in managers, said Gary W. Findlay, executive director of the $5 billion fund in Jefferson City.
"Trustees can be very good at making investment policy," said Mr. Findlay. "But the staff should implement the investment policy. It should be held accountable for it and rewarded for it when done properly."
Nancy C. Everett, CIO of the $32.5 billion Virginia Retirement System, Richmond, said: "When you look at the governance structure, the board as a primary fiduciary wants to have good strong policies in place, but they want to put decision-making where expertise is. Hiring and firing (investment managers) is where staff has expertise." At the Virginia fund, the chief investment officer, with the recommendation of the system's investment advisory committee, hires money managers. "It's not a typical public fund model," she added.
Trustees of other public funds delegate to a lesser degree. At the $131 billion California Public Employees' Retirement System, Sacramento, for example, trustees give staff the authority to make alternative investments. But trustees have control of all other hiring and firing decisions, according to Brad Pacheco, spokesman.
Tim Barron, director-research at consultant CRA RogersCasey, Darien, Conn., listed some of the pros and cons of the issue.
On the plus side, Mr. Barron said, "staff understands the managers the best." But he cautioned, "Staff can be too focused on trees and not on the forest. The board brings a broader perspective..."
At MOSERS, Mr. Findlay said the policy was adopted to try "to be sure you align interested parties and establish lines of responsibility."
"There are systems today going through a lot of problems because of losses...," leading to examinations of how decisions are made. "In our case, that's never an issue, because everyone knows who's responsible for what."
At VRS, the chief investment officer, with the recommendation of the system's investment advisory committee, hires money managers. (The nine-member investment advisory committee includes only one VRS trustee, the rest are outside experts.) The hirings are reviewed by trustees.
But in firing a manager, the CIO has discretion to act immediately, without seeking a recommendation of the investment advisory committee, although Ms. Everett must notify the chairman of the board.
On private equity deals, the CIO has the authority to enter and exit opportunistic strategies within certain guidelines adopted by the board.
At CalPERS, trustees allow its senior investment officer for alternative investments discretion on hiring of some managers for alternatives. Essentially the staff, led by Richard J. Hayes, senior investment officer, has authority to invest from $100 million to $400 million, depending on the type of investment.
At other public funds, typically, staff and the system's consultant would recommend to the board a list of manager finalists. And after presentations by the managers, the board would make a decision. Trustees are carrying out their fiduciary responsibility by making hiring and firing decisions, said John Krimmel, CIO of the $9 billion fund.
"Why hire a firm that happened to make the best presentation?" Mr. Findlay asks. "You could wind up picking a manager for reasons other than pure ability to do the job.
"Since staff and the consultant had a preference, why not go with that? You eliminate the personality impact of the selection process and base the decision on a business decision."
At MOSERS, "the board deals with asset allocation at the broad level," Mr. Findlay said, setting allocation policy and giving ranges for the staff. The board, for example, set alternatives at 20% and within that, distressed debt within a range of 5% to 10%. "Staff can move within these ranges," he said.
Consultant Summit Strategies Group, St. Louis, "serves both as an overseer of the staff and acts on a peer level with the staff in making decisions. Somebody is watching everybody," Mr. Findlay said. "My internal auditor, my chief counsel and the consultant can report directly to the board."
The staff and consultant visit the managers annually and, in turn, the managers visit the staff and consultant. "The staff then reports to the board about the managers," Mr. Findlay said.
"Through this process the board becomes very well informed about the managers, better than they would from a 15-minute manager presentation."