Effective Board Governance Presented by Tom Iannucci Cortex

Effective Board Governance Presented by Tom Iannucci Cortex Applied Research April 2006 CORTEX

About Cortex? Ø Pioneer in pension governance; Ø Origins in management consulting; Ø Independent boutique firm; Ø Only consulting firm dedicated to pension governance; Ø Process-driven to achieve strong client buy-in; Ø Track record of facilitating change. 2 CORTEX

Our Services Ø Role clarification Ø Governance policies and support Ø Strategic planning Ø Board training Ø Board self-evaluation Ø Governance reviews/audits Ø Investment consultant search Ø Specialty projects (organizational) 3 CORTEX

The Firm Ø Founded by Dr. John Por in 1991 Ø A core team of professionals Ø Mix of backgrounds: ü Law, finance, economics, engineering, fund administration Ø Over 75 governance clients ü U. S. , Canada, Europe ü Public, corporate, DB, DC 4 CORTEX

Sample Clients Ø Colorado PERA Ø Alameda County Ø Cal. STRS Ø Kern County Ø Louisiana SERS Ø Sonoma County Ø Maryland State Ø Ventura County ERS Ø San Francisco ERS Ø Virginia Employees Ø LA Fire & Police Ø Mississippi PERS 5 CORTEX

The Governance Function Investment Managers Investment Consultant BOARD Sponsor Management/ Staff Members/ Beneficiaries Legal Counsel Actuary 6 CORTEX

Our Beliefs on Governance Good Governance: ü is crucial to organizational success ü doesn’t occur naturally ü has to be consciously designed ü requires ongoing efforts and attention 7 CORTEX

Our Mission To assist retirement systems in identifying and implementing organizational best practices for achieving optimal performance. 8 CORTEX

A Best Practices Organization Ø Meaningful, agreed-upon goals Ø Clear roles (Board, staff, vendors) Ø Knowledgeable Board & staff Ø Measuring/monitoring the right things Ø Policies/processes in place Ø Sound investment philosophy 9 CORTEX

Fiduciary Duty vs. Board Effectiveness Ø Fiduciary Duty: ü Loyalty to the beneficiaries ü Prudence Ø Board effectiveness: ü Processes and practices designed to ensure: § Fiduciary duties are met; AND § Superior performance is achieved 10 CORTEX

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) 11 CORTEX

Prudence is process: Ø Clear delegation Ø Knowledgeable players Ø Sound policies Ø Due diligence Ø Appropriate reporting 12 CORTEX

Effective Boards Ø Demonstrate prudence Ø Abide by duty of loyalty Ø Focus on the important but not urgent Ø Support optimal performance This rarely happens naturally! 13 CORTEX

Why Not? Ø Fiduciary knowledge not easily gained Ø Turnover among Board and staff Ø Lack of common terminology Ø Human tendency to focus on interesting/urgent 14 CORTEX

Designing A Governance Framework Mission / Purpose Decision-making Structure Fiduciary Knowledge Policy Framework Monitoring Systems Meeting Operations Reality Check 15 CORTEX

Achieving Governance Best Practices 2 Stages: 1. Build a governance framework ü Role clarity ü Governance policies 2. Build knowledge and strategy ü Board training program ü Strategic planning 16 CORTEX

Phase I How To Begin Role Clarity: Ø Board Officers Ø Committees and Committee Chairs Ø Executive Director 17 CORTEX

Typical Role-related Issues Ø What is the right committee structure for us? ü What is the role of each committee? Ø What is the role of the Board: ü Staff hiring and termination ü Directing staff ü Hiring and terminating managers ü Due diligence ü Stakeholder communications 18 CORTEX

Role-related Issues (cont’d) Ø How much authority should the Chair have? ü Determining committee chairs/members ü Board travel Ø What authority does the ED have? ü Staff hiring and direction ü Expenditures ü Hiring service providers ü Portfolio re-balancing ü Selecting vendors ü Due diligence ü Making policy recommendations 19 CORTEX

Governance Policies Samples: Ø Board Education Ø Board Operations Ø Board Communication Ø Board Evaluation Ø Executive Director Evaluation Ø Vendor Selection Ø Policy Process Ø Code of Conduct Ø Board Travel 20 CORTEX

Typical Policy Issues Ø What would a good board orientation program look like? Continuing board education program? Ø Should there be term-limits for officers and committees? Ø What routine reports should the Board expect? How frequently? Ø How should meetings operate? 21 CORTEX

Policy Issues (cont’d) Ø How should the Board communicate: ü Members ü County ü Employee groups ü Vendors ü Media Ø How should we evaluate the ED? Ø How should we evaluate ourselves? Ø What do we do if board members don’t behave or abide by our policies? 22 CORTEX

Benefits Ø Ability to demonstrate prudence to the outside world: ü A formal governance program is becoming industry standard (fid. audits) Ø Maximize likelihood of strong performance (investment & admin. ) ü More efficient/focused decision-making ü Clear, effective working relationships 23 CORTEX

Phase II Ø Updating/refining the framework Ø Continuing board training Ø Strategic planning 24 CORTEX

Who Hires Us? Generally, two types of clients: Ø Those that have experienced an organizational conflict of some sort; Ø Those that are functioning well and wish to refine/continue current practices. 25 CORTEX

Option A Ø Deliverables: ü Develop charters for each key player ü Develop 5 governance policies Ø Process: ü Board/staff survey ü Board and staff interviews ü Working sessions with staff to draft policies and charters ü Presentation for Board to discuss and adopt policies and charters Ø Completion: 4 -5 months 26 CORTEX

Option A - Variations Ø Spread project over two years: ü Year 1 – charters ü Year 2 – policies Ø Less efficient and ultimately more costly 27 CORTEX

Option B Governance Workshop Ø Board survey and interviews Ø Telephone interviews Ø ½ day workshop: ü Educational ü Interactive Ø Governance action plan 28 CORTEX

Option C Strategic Planning Ø Process: ü Strategic planning survey ü Interviews and working sessions ü Statement of Strategy/Business Plan ü Workshop Ø More effective as a follow-up to governance policy framework 29 CORTEX

Questions and Discussion 30 CORTEX