One of the great things about our country is the latitude reasonable people are given to agree to disagree. At the end of the day, I suspect that's exactly where Mr. Potter from the Wyoming Retirement System (Letters to the editor, June 9) and I will end up. I should also allow for the possibility that facts and circumstances may differ substantially between Wyoming and Missouri, but I'd assign a very low probability to that being the case. In my view, the answer to the question of whether the staff or the board will be better positioned to hire and fire money managers, and thus produce a better end result, becomes self-evident when evaluated in the context of best practices in the areas of trust independence and board governance.
In terms of trust independence, I believe best practices will remove the trust as far from the political process as possible and provide trustees with the resources and flexibility needed to control their own destiny and properly fulfill their fiduciary responsibility. (For plans in the public fund arena, I am in complete agreement with Mr. Potter that best practices will result in a very high degree of transparency, but I would add that publicly available thorough documentation should be maintained regarding each hiring or firing decision.) The retirement statute he cited for Wyoming is language commonly found in public retirement laws throughout the land. Since these systems operate as trust funds, it is also important to take the next step and consider "Restatement of Trusts 3rd" (the bible of trust law) which states that "a trustee's discretionary authority in the manner of delegation may be abused by imprudent failure to delegate." In other words, if a trustee is not positioned by education, experience and time needed for thorough understanding and evaluation of hiring and firing decision considerations, that trustee is well advised to delegate those decisions to parties who are.
In terms of board governance, I believe best practices will result in (i) clear assignments of roles and responsibilities that capitalize on the strengths of the various players; (ii) prudent delegation; (iii) thorough oversight and monitoring by trustees; and (iv) alignment of interests.
Regarding alignment of interests, I believe a significant portion of the compensation of the decision-makers should be predicated on the outcome of their decisions. I also believe that if fancy dinners and ballgame tickets are factors in the decision-making process, a new set of decision-makers should be found. For insurance, I'm counting on people not being willing to forgo serious compensation in exchange for a temporal perk. (Mr. Potter's implication is that trustees are immune from influence-peddling marketers — I'll leave that discussion for another day.)
In our case, board turnover rates have been much higher than staff turnover rates. In addition, delegation of hiring and firing authority is not to a single individual but rather to a committee of three consisting of the CEO, CIO and the investment consultant retained by the board. In my opinion (and in my experience), this is not a structure that leads to knee-jerk changes in managers.
Finally, Mr. Potter maintains that the citizens of Wyoming are of the opinion that board members should select the retirement system 's money managers. My best guess is that the citizens of Wyoming are far more interested in the outcome than they are in the process. In my opinion, our process is much more defensible and much more likely to produce a favorable end result than the alternative he suggests.
As I said at the outset, reasonable people can always agree to disagree, and I suspect neither of us has said anything that will change the opinion of the other.
Missouri State Employees'