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

May 16, 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 third 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. In the second article, we discussed the best practices related to board composition and education.  In this article, we present the overall best practices for board committee structure and board evaluations.

Board Committee Structure
Self-governance 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.  When used effectively, the committee structure allows for issues to be identified and deliberated among a subset of the board in more depth and detail than may be appropriate in a large group setting.  Experts and advisors often contribute to the committee process by offering their expertise.  Once the committee feels that they are sufficiently knowledgeable about the issue at hand, they report their findings and recommendations to the full board for further discussion and, if appropriate, a board vote.  With each committee exercising this level of diligence for the issues under its purview, the full board is better able to address all of the issues on which it must opine with the appropriate level of rigor. 

However, this process only works well if the committee structure is designed carefully and each committee has a clear understanding of its areas of responsibility.  Therefore, it is important to have committee charters that spell out the issues each committee oversees and delineates which decisions can be made at the committee level and which must be brought to the full board for discussion and vote.  Specifically, the Clapman Report 2.0 suggests that “a fund’s governing documents should include the following information relating to committees through either a committee charter or otherwise:

In addition to having an effective committee structure, it is important to disclose this information to the public.  The Clapman Report 2.0 suggests that the board’s “committee structure, role and authority” be included on the fund’s website.2  Not only does this allow for the fund beneficiaries and others to see how decisions are made, it also serves to enhance the overall accountability of the board.

Board Evaluations
As mentioned in the first article in this series, it is suggested that self-evaluations are conducted regularly to ensure that the board is working effectively as a team to fulfill its fiduciary duties.3  These evaluations can take many forms, including a functioning assessment of the full board only, or drilling down to evaluate the performance of the committees and of the individual directors or trustees.  While the most comprehensive of these approaches to board evaluations is recommended by most experts, there can be resistance from board members when it comes to the individual assessments.  One recommendation is to implement the process over time: starting with a full board evaluation, then moving to the committee level, and then, once the board members become comfortable with the evaluation process, moving on to the individual level. 

One question that must be decided is who will conduct the evaluation.  In the corporate board setting, many more companies are using outside advisors to conduct their board evaluations in order to strengthen the perception of the independence of the process.  Some boards prefer not to bring in an outside advisor and may choose to have an independent board chair or committee chair conduct the evaluation. 

Whether it is an outside advisor or one of the board members, the information sought can be gathered by interview or by the completion of evaluation questionnaires.  The interview or questionnaires should gather information regarding topics such as:

In order to be sure that the evaluations are conducted regularly and in a meaningful way, it is important to designate the person or committee responsible for overseeing the process. Corporate boards typically assign the oversight of the board evaluation process to the Nominating or Governance Committee. For pension fund boards, Professor Gordon L. Clark of Oxford University suggests that a governance sub-committee or the standing audit committee oversee the board evaluation process.4


1  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  Ibid.
3  Rick Funston, Keith Johnson, Randy Miller & Mark Barrott, Public pension fund governance: alignment of responsibility with authority, Pensions & Investments, Aug. 1, 2012.
4  Professor Gordon L. Clark, Harvard University and Oxford University, Pension Fund Governance (a presentation based upon a series of interviews with leading pension funds and benevolent institutions in cooperation with Watson Wyatt Worldwide), available at http://www.law.harvard.edu/programs/lwp/SessionI_ClarkGovernance.pdf

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