Serving as a Fund Trustee: Effective Governance for Public Pension Funds

March 9, 2016

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. This article is the second 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.

In the first article in this series, we examined the general responsibilities you have as a fund trustee, including management oversight, strategy and risk management, culture and governance. Subsequent articles will focus specifically on the governance issues that are so important for the effectiveness of both pension fund and corporate boards. In this article, we discuss best practices related to board composition and education.1

Board Composition. Since both corporate and pension fund boards are effectively teams of people making important decisions, significant care must be given to the selection of those who will serve on the board. Many corporate board advisors suggest that a board first determine which skill sets should be represented among the board members. Once the list is created, a matrix is developed to assess what the current board members bring to the table, and which skill sets are not represented among the current board members. Then these are taken into consideration when future candidates are assessed for potential board membership. This approach may be challenging for pension fund boards because their membership is often dictated by law, with representatives who may be elected or appointed to the role. However, determining which skill sets are missing from the board can still be a valuable exercise for pension fund boards in order to determine where there are strengths and where additional expertise should be sought.

Board Member Education. Targeted and customized education programs can be used to address any areas that may be wanting on a pension fund or corporate board. Training can be sought by the entire board, or by specific board members, to address those areas where the board is lacking specific expertise. The Clapman Report 2.0 suggests that pension board members regularly “obtain education that provides and improves core competencies, and that assists them in remaining current with regard to their evolving obligations as fiduciaries.”2 It is suggested that pension board members conduct a self-assessment of their “knowledge and understanding of the issues involved in the management of the system across the broad spectrum of pension-related areas.”3 It is also recommended that pension boards develop an Education Policy that documents the boards’ “approach to educating pension fund trustees so that they can discharge their duties with the requisite knowledge, skills and abilities,” and that this policy is made available to the public.4 Similarly, corporate boards in the United States are encouraged to obtain training and education for their members on a regular basis. While the Securities and Exchange Commission has not made such training mandatory, the requirements for listing the stock of a publicly traded company on the NYSE calls for companies to provide a description of the educational opportunities for their board members in their corporate governance guidelines, which are posted on their websites.5

The next article in this series will address best practices in board committee structure and board self-evaluations.

1 An excellent source for more information regarding best practices for pension fund governance is the Clapman Report 2.0, published by the Stanford Institutional Investors’ Forum Committee on Fund Governance, available at http://law.stanford.edu/wp-content/uploads/sites/default/files/event/392911/media/slspublic/ClapmanReport_6-6-13.pdf.
2 The Stanford Institutional Investors’ Forum Committee on Fund Governance, Clapman Report 2.0, at 13.
3 Id. at 68.
4 Id. at 15.
5 NYSE Listed Company Manual, Section 303A.09, retrieved on 12/10/15 from http://nysemanual.nyse.com/LCMTools/PlatformViewer.asp?selectednode=chp%5F1%5F4&manual=%2Flcm%2Fsections%2Flcm%2Dsections%2F.

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