The Canadian federal government's new proposed budget has a constructive idea pension funds and other fiduciary institutions should consider for strengthening their governance structure.
The budget proposal suggests adding qualified non-Canadians to the Canada Pension Plan Investment Board, which oversees C$172.6 billion (US$170.2 billion).
“At this stage of its evolution, the CPPIB's board of directors might benefit from having access to the international talent pool,” according to the proposed budget, called “Jobs, Growth and Long-Term Prosperity: Economic Action 2013” and released March 21.
The “CPPIB invests a significant proportion of its assets outside of Canada,” the budget proposal states. “Currently, only Canadian residents can serve on the CPPIB's 12-person board of directors.”
It's a great idea for the CPPIB. Sponsors of other fiduciary funds should consider adopting a similar idea for their oversight boards as well. The added exposure of the “outsiders” to governing boards or committees could add new thinking and knowledge, fresh perspective and experience. That is, the “outsiders” offer additional resources for investment boards and committees.
A few plan sponsors already have embraced a similar concept.
Boeing Co. and Exelon Corp., both based in Chicago, each has appointed outside advisers to their corporate investment committees. Both companies added individuals who currently serve as chief investment officers for other organizations. In addition, the Florida State Board of Administration, Tallahassee, has a non-Florida resident as a member of its Investment Advisory Council.
Traditionally, the composition of boards of trustees overseeing pension and other investment assets and corporate investment committees is from a relatively narrow field, as sponsors are mostly captive to their local constituencies, internally within a company or within a political realm and among participants. Drawing from a relatively small pool of candidates limits the universe of talent and investment expertise, and makes the board more insular.
Adding outsiders offers broader insights and other perspectives on markets and asset classes and fresh perspectives on the business of money management indispensible to achieving funding and investment goals.
In 2008, Boeing added William H. McLean, vice president and CIO of Northwestern University, overseeing its $7.1 billion endowment, and Myra Drucker, former CIO of General Motors Trust Bank and managing director of General Motors Asset Management and former CIO of Xerox Corp., who is a director of GMO LLC. “We wanted to make it a more robust investment discussion,” Mark A. Schmid said at the time he added the advisers when he was Boeing's chief investment officer.
Charles Bickers, spokesman for Boeing, said this month of the advisers to the investment committee: “We feel they bring a valuable external perspective to our thought process and decisions” in overseeing the company's $56.2 billion in defined benefit and $36.6 billion in 401(k) assets.
In 2010, Exelon took the concept to a higher level, creating a board-level oversight committee in addition to its corporate pension committee, while also naming outside advisers. Traditional corporate investment committees don't have a lot of investment expertise, noted Douglas Brown, Exelon CIO.
“The overriding thought was, how can we structure (investment governance oversight) to leverage the expertise we already have on the board and then bring in some outside expertise,” Mr. Brown said.
The Exelon board decided to leverage its own investment expertise, creating the board-level investment oversight committee of four external directors. John W. Rogers Jr., chairman and CEO of Ariel Investments LLC and a member of the investment committee of the University of Chicago,, serves as the chair of Exelon board's investment oversight committee.
In addition, Exelon added to its corporate pension committee Mr. Schmid, who is now CIO of the University of Chicago, overseeing its $7.2 billion endowment, and Kathleen M. Lutito, CIO of the $17.7 billion CenturyLink Investment Management Co., the asset management unit of CenturyLink Inc., Denver. Mr. Schmid and Ms. Lutito serve as advisers to the Exelon corporate investment committee.
The committee oversees Exelon's $13.4 billion in defined benefit assets, $5.2 billion in 401(k) assets, $2.1 billion in voluntary employees beneficiary association assets and $7.2 billion in nuclear decommissioning trust assets. The board's investment oversight committee can draw as well on the expertise of the corporate investment committee's two advisers, Mr. Schmid and Ms. Lutito.
Exelon pays the two outside advisers for their work, a testament to the value it places on the role.
For the Florida SBA, state statute sets general qualifications for the nine members of the Investment Advisory Council, requiring the members have “special knowledge, experience and familiarity with portfolio management, institutional investments and fiduciary responsibilities.” But the statute doesn't address residency.
In 2011, Gov. Rick Scott appointed to the council Michael Price, former chairman of Franklin Mutual Advisers and Franklin Mutual Series Fund who now serves as president of Price Family Foundation Inc. and is a managing member of MFP Investors LLC. Unlike the Boeing or Exelon committees, Mr. Price is a full member of the IAC, which provides an additional resource to the three-member FSBA board of trustees and the FSBA staff.
The Canadian government plans to consult with the provincial officials on permitting “a limited number of qualified persons who are not resident in Canada to serve on the board of directors of the CPPIB and, if there is sufficient support, introduce the necessary changes to the Canada Pension Plan Investment Board Act,” the budget proposal states. It gives no number.
Roger Urwin, global head of investment content at Towers Watson Ltd., Reigate, England, was quoted by Pensions & Investments as noting, “I can't really think of any national pension fund with that configuration.” Such a move “adds diversity and experience,” he added.
Kevin Moriarty, principal at Mercer (Canada) Ltd., Toronto, said in an e-mail: “Since the CPPIB has extensive foreign holdings, the addition of a qualified non-Canadian board member would seem reasonable and prudent — particularly since the purpose of the CPPIB is to invest the plan assets, not manage the design and funding of the plan.”
Such a move extends a trend of asset owners diversifying allocations to add international and alternative assets to domestic portfolios, as well corporate boards adding more independent and diverse directors. The time has come for fiduciary fund sponsors to add the flexibility of external expertise.