Serving as a Fund Trustee: Effective Governance for Public Pension Funds
As a trustee for a public pension fund, you serve as a fiduciary over fund assets often including shareholdings in thousands of publicly traded companies. The members of the boards of directors of each of those companies, in turn, act as fiduciaries for their shareholders. Although there are copious resources regarding the governance of these companies, there is less guidance for you regarding governance practices for public pension funds. This article is the first in a series of articles dedicated to providing you, as a fund trustee, insights into those best practices in corporate governance that may also apply to fund governance.
Similar to the role of a corporate board member, your role calls for you to oversee valuable assets for the benefit of others. In the case of corporate directors, the assets are physical and intangible assets owned by the company for the benefit of a group: the corporation’s shareholders. While you oversee a different type of asset – an investment fund rather than physical and intangible assets – you also do so for the benefit of a group: the fund beneficiaries. Therefore, you both must fulfill fiduciary duties to the group for which you are serving.
In order to fulfill your fiduciary duties, just as a corporate director, you must work within the board structure to make difficult decisions, often involving large sums of money that will impact thousands of people. While serving in the role of trustee, you must work effectively within a team environment while drawing on your experience and background. You must also be courageous enough to voice your opinions among a group and have the integrity to act independently in all circumstances.
Board Responsibilities. In this article, we will examine the general responsibilities you have as a fund trustee and compare them to those of a corporate director. In future articles, we will consider the structure, leadership, and overall best practices for both corporate boards and pension fund boards in order to provide you insights into the corporate governance practices that should be considered by your board as well.
While the specifics differ, the roles and responsibilities of a corporate board and a pension fund board overlap quite a bit. Both boards have responsibility to oversee the management, strategy, risk management, governance and culture of the organization.
Management Oversight. Corporate and pension fund boards have the responsibility to identify and hire the chief executive officer of the entity. They must also evaluate his or her performance on both a short-term and long-term basis. In turn, the boards are responsible for establishing the compensation programs for the senior executives and overseeing the design of incentive plans that reward executives for implementing the agreed-upon strategy. These boards must also stand ready to fire the chief executive if the circumstances warrant. Best practices call for both types of boards to maintain a leadership succession plan for the entity. This often requires involvement in management development in order to identify potential leaders within the organization who could serve as the next chief executive.
Strategy and Risk Management. Another key responsibility of both types of boards is the oversight of the strategy or the mission of the organization. While executives are responsible for the day-to-day execution of the strategy or mission, the board members must ensure that this is done effectively. Along these lines, the boards also make sure that management has effective risk management policies in place, and that such policies are sufficient to address the various and ever-changing risks that face both types of entities. While the missions, strategies, and risk management processes differ significantly between corporations and pension funds, the responsibilities to oversee them are similar for both directors and trustees.
Governance. Of course, corporate directors and pension fund trustees must also govern themselves. Determining the leadership structure that will guide the board is one important factor here. Self-governance also often includes the development of a committee structure that allows directors and trustees the time needed to examine issues in depth, while still allowing for sufficient discussion at the board level before final board decisions are made. It is also suggested that self-evaluations are conducted regularly to ensure that the board is working effectively as a team to fulfill its fiduciary duties.1
Culture. Most importantly, both types of boards are responsible for establishing the appropriate culture and “tone at the top” for the organizations they oversee. Both corporations and pension funds are large, complex entities with many people involved in making decisions every day that impact not only the shareholders or beneficiaries, but often employees and members of the broader community as well. As members of the governing bodies of each of these types of entities, corporate directors and fund trustees must always consider this responsibility when making any board-level decision.
1 Rick Funston, Keith Johnson, Randy Miller & Mark Barrott, Public pension fund governance: alignment of responsibility with authority, Pensions & Investments, August 1, 2012.