Appendix II

THE STATE OF GLOBAL PENSION FUND GOVERNANCE TODAY:
BOARD COMPETENCY STILL A PROBLEM

Keith Ambachtsheer, Ronald Capelle, and Hubert Lum
Working Paper, June 2007

Please do not cite without the authors’ permission.

Corresponding Author: Keith Ambachtsheer, Rotman ICPM, 151 Bloor Street West,
Suite 702, Toronto ON M5S 1S4 CANADA (email: icpm@rotman.utoronto.ca). This
study was commissioned by the Rotman International Centre for Pension Management(ICPM) at the University of Toronto, and was presented at its 2006 Fall Colloquium. The
authors wish to thank Ann Henhoeffer for managing the survey dimension of this study,
and Prof. Menzefricke for statistical assistance. Any remaining shortcomings and errors
in the paper are the authors’ alone. Keith Ambachtsheer is Director of Rotman ICPM andAdjunct Professor of Finance at the Rotman School of Management. Dr. Ronald Capelleis President of Capelle Associates Inc. Hubert Lum is Director of Research at CEM
Benchmarking Inc.

page iPAPER ABSTRACT
A 1997 investigation into the quality of pension fund governance uncovered a widespread board competency problem. This follow-on study analyzes the findings of a
new survey on pension fund governance, to which an international group of 88 seniorpension fund executives responded. Survey responses indicate that the board
competency problem has not disappeared. As was the case in 1997, we found apositive correlation between governance quality and fund performance. The new
results also suggest that selection processes for members of the board of governors
continue to often be haphazard. Self-evaluation of board effectiveness continues to be
the exception rather than the rule. Weak oversight functions continue to lead todifficulties in sorting out the competing financial interests of differing stakeholder
groups, and result in organization dysfunction. Examples are lack of delegation
clarity between board and management responsibilities, board micro-management,
and non-competitive compensation policies in pension funds. We recommend anumber of specific actions to address the governance challenges that continue to facepension funds. We also recommend that regulators require pension funds to regularly
report on the actions they are taking to strengthen their governance processes.

Why this Paper?
The well-publicized misadventures of such major corporations as Adelphia, Ahold,Enron, HealthSouth, Parmalat, Qwest, Tyco, WorldCom, have triggered important new
empirical and more conceptual research efforts in the field of corporate governance [1].
Pension fund governance has not yet garnered the research attention that corporate
governance has [2]. We are aware of only a few published efforts with an empiricaldimension. For example:
1. Anthropologists O’Barr and Conley caused a stir with their 1992 book Fortune
and Folly: The Wealth & Power of Institutional Investing. Based on observing
behavior at nine major US pension funds over a two year period, they concluded
that the aim of pension fund governance appeared to be focused more on
responsibility deflection and blame management than on good governance andcreating value for fund stakeholders.
2. Ambachtsheer, Boice, Ezra, and McLaughlin designed a survey that was
answered by 50 senior pension fund executives in December 1994 during a
symposium titled “Excellence in Pension Fund Management: What Is It?” Asked
to estimate the ‘excellence shortfall’ in their organizations, the median response
was a material 66 basis points. Asked to identify the sources of excellence
shortfall, the three causes mentioned most frequently were poor decision
processes, inadequate resources, and lack of focus or mission clarity.
3. Ambachtsheer, Capelle, and Scheibelhut conducted a predecessor study in 1997 to
the one described in this paper. They found a positive correlation between pension
The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page ii

fund governance quality and organizational performance, and identified a numberof specific fund oversight and management factors important performance drivers.
Governance difficulties similar to those documented in this paper were
uncovered. The results were published as “Improving Pension Fund Performance”
in the November/December 1998 issue of the Financial Analysts Journal.
4. Clark, Caerlewy-Smith, and Marshall studied the problem-solving capabilities ofpension fund trustees in the U.K. in 2006 and found these capabilities“surprisingly heterogeneous”, with potentially significant implications for pension
fund governance.
5. Clapman et al. listed a litany of governance-related problems in U.S. pension
funds and recommended a list of ‘best practices’ governance principles to deal
with them in 2007.
The paucity of empirical research to date leaves considerable knowledge gaps in pension
fund governance and its effectiveness. The goal of this paper is to fill in some of thesegaps. What is that state of pension fund governance today? What are the opportunities for
improvement, possibly supported by regulatory measures? Does better pension fundgovernance lead to better financial outcomes such as investment performance? These are
the key questions the paper will address.
One final definitional note before we get into the details of the study. Throughout the
paper, we will use the term ‘pension fund governance’ as a broad descriptor covering all
aspects of decision-making processes inside pension funds. We will use the more specificterms of ‘oversight’, ‘management’, and ‘operations’ to distinguish between
responsibilities and activities typically reserved for boards of governors (or trustees, ordirectors), responsibilities and activities generally delegated by a board to senior
management, and responsibilities and activities generally delegated by senior
management to other professionals either inside, or outside the pension fundorganization.
Research Design
To gather information on pension fund governance, we designed a survey to be answeredby a pre-selected group of senior pension fund executives with titles such as Chief
Executive, Chief Investment Officer, Executive Director, VP-Pensions, etc. The common
factor among these pension executives was that their funds had supplied return, cost, andrisk-related data to CEM Benchmarking Inc., an organization that measures the costeffectiveness of pension fund organizations around the globe. We received completed
surveys from 88 pension executives. For 81 of these 88 respondents, we also hadcomplete sets of fund data ending in 2004. The aggregate assets of these 81 funds
amounted to $1.4 trillion dollars at the end of 2004. Table 1 provides additional
information on the characteristics of these 81 funds. Note the sample represents a goodmix of funds by both geographical and sponsor-type criteria.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page iii

The survey itself consisted of two parts. One part asked the pension fund executives toassign a rank from 6 to 1 to each of 45 statements related to various aspects of theoversight, management, and operations areas of their own pension fund. Each statement
was phrased so that the higher the assigned ranking, the more favorable the senior
executive’s view was of that particular element or activity of fund oversight,
management, or operations. For the 81 completed surveys received for which there wasalso 5-year fund performance data available from CEM Benchmarking Inc., the 45
rankings were averaged to create a single ‘CEO Score’. The other part of the survey
asked two open-ended questions, one about the key oversight challenges the executives
see facing their boards of governors today, and the other about the key management
challenges they see themselves facing today.

Table 1 – Characteristics of the Responding Pension Funds at December 31, 2004
RegionAustralia / New Zealand
CanadaEuropeUnited States% (EW) *
4%
41%
11%
44%

% (DW) **
1%
13%
32%
54%

Sponsor Type
Corporate
Public Sector
Other% (EW) *
38%
41%
21%

% (DW) **
14%
66%
20%

Size
Billions of $USD
* Equal-weighted** Dollar-weighted

Median$3.7B

Mean$17.9 BThe study will unfold in three parts. We commence by analyzing the responses to the two
open-ended questions. From there, we move on to analyze the rankings to the 45
statements about fund oversight, management, and operations. An important part of thisanalysis will be to compare the 2005 rankings provided as part of this study, with therankings provided in 1997 by 80 fund executives to the same 45 statements in a priorsurvey [3]. The final part of this study will report on tests for any statistical relationshipbetween the ‘CEO Scores’ representing pension fund organization effectiveness asperceived by its own chief executive, and fund investment performance as measured by
CEM.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page iv

Pension Fund Oversight and Management: Current Issues
The survey posed the following two open-ended questions:
1.

What do you see as the more important oversight issues facing your board ofgovernors (or trustees, or directors) at this time?

2. What do you see as the more important organizational issues facing you at this time?
The survey participant responses to these two open-ended questions are summarized inTables 2 and 3 below. The original 63 responses to Question #1, and the 60 responses to
Question #2 can be provided by the authors on request on an anonymous basis.
Given that the two questions were open-ended, it required some effort to create broad
response categories, and to fit the individual responses into these broad categories. In theend, four broad response categories were created. Table 2 shows that two of the four wererelevant to both the oversight and management functions (i.e., agency/context andinvestment beliefs/risk management issues). Of the other two, one was relevant only tothe oversight function (i.e., oversight effectiveness issues), the other only to the
management function (i.e., strategic planning/management effectiveness issues).
Table 2 – Pension Fund Oversight and Management: What Really Matters?

1. What are the more important oversight issues?
a. Agency / context issues
b. Governance effectiveness issuesc. Investment beliefs / risk management issues

Proportionof Responses
44%
36%
20%

2. What are the more important management issues?
a. Strategic planning / management effectivenessb. Agency / context issuesc. Investment beliefs / risk management issues

Proportionof Responses
73%
15%
12%

The proportions of responses falling into the four categories tell an interesting story:
1. Responding pension fund executives think their boards of governors face
important issues in three areas: agency/context issues (44% of responses),
oversight effectiveness issues (36%), and investment beliefs/risk management
issues (20%). We think this represents an astute collective assessment by these
executives. Without oversight context, there is no legitimacy. Without oversighteffectiveness, there can be no common vision. Without a basic understanding of
how capital markets function and how risk should be defined and managed, theoversight function cannot be effective.
The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page v

2. While a number of the responding pension fund executives believe they
themselves have a role to play in resolving agency/context (15%) and investment
beliefs/risk management (12%) issues, they see their major challenges lying in thestrategic planning/management effectiveness area (73%). Again, we think this tobe an astute collective assessment which bodes well for the future of pension fundgovernance. If the fund’s chief executive is not prepared to be accountable forresults in the strategic planning/management effectiveness area, no clear
organization vision will ever be articulated or actualized.
So what were some of the specific oversight and management challenges mentioned in
the survey? That is the question we address next.
Specific Governance and Management Challenges
To repeat, the open-ended nature of the oversight and management questions led to 63
and 60 responses respectively, requiring categorization. Table 2 listed the four broad
response categories. Table 3 continues that process on a more disaggregated level for theoversight-related and management-related responses. In Table 3, under ‘agency/context
issues’, pension fund executives exhibit a clear awareness of the (sometimes impossible)balancing act DB pension plans typically force upon boards of governors. The reality isthat the financial interests of various stakeholder groups in DB plans do not always line
up in a nice ‘win-win’ manner. So instead of providing oversight to the pension
organization, boards (and to a lesser degree, management) can get involved in sorting out
the respective financial interests of retirees, active workers, future workers, andsometimes even those of bond holders, shareholders, or current and future taxpayers.
There is also the related question of trying to understand what light (if any) past, current,
and future laws and regulations may throw on these matters.
Table 3 – Pension Fund Governance and Management: Specific Challenges
1. Agency / context issues
a. Balancing stakeholder interests
b. Understanding the legal / regulatory environment
2. Oversight effectiveness issues
a. Appropriate skill / knowledge set for the Board
b. Clear delegation to management
3. Investment beliefs / risk management issues
a. Understanding context-based risk and its managementb. Informed ‘investment beliefs’ and their relevancec. Shift to risk budget-based investment process
4. Strategic planning / management effectiveness issues
a. Resource planning, organization design, and compensationb. Clear delegation from the Board
c. Effective IT-based implementation systems

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page viUnder ‘oversight effectiveness issues’, the responding pension fund executives point to
two fundamental, related challenges that remain unresolved in large swaths of thepensions world. The first is board competency. The second is the critical requirement forboards to understand the difference between overseeing and managing. The board
competency issue results directly from the often-deficient methods through whichtrustees are elected/selected for pension boards. Because there often is a board
competency issue, there is often also a board delegation issue. Boards that do not clearlydelegate fund managing to fund management, place the organization and its stakeholders
at a serious effectiveness disadvantage [4].
The board competency issue is often also the source of problems in the ‘investment
beliefs/risk management’ area. It is not a question of board members becoming experts inthis area. That is not a realistic expectation. However, board members must be capable ofstrategic thinking. That means they should insist on clear linkages between the pension
contract, how the organization defines, measures, and manages risk, and how outcomesare measured and rewarded. It is up to management to show the board how this is best
accomplished through a liability-anchored, risk budget-based investment process [5].
We have already expressed the opinion that assignment by the pension fund executives ofa high priority to ‘strategic planning/management effectiveness issues’ bodes well for the
future. This view is re-enforced by the specific executive focus on resource planning,organization design, compensation, and IT-based implementation systems. In our view,
these are indeed critical elements required to build a high-performance culture.
Effectiveness Rankings and ‘CEO Scores’
The survey also asked the pension fund executives to assign a rank from 6 to 1 to each of
45 statements related to various aspects of the oversight, management, and operations
areas of their own pension fund. Each statement was phrased so that the higher theassigned ranking, the more favorable the respondent’s view was of that particular element
or activity of fund oversight, management, or operations. All 45 statements, ranked byhighest to lowest 2005 rankings, are attached as Appendix A. For each completed survey,
the 45 rankings were also averaged to create a single ‘CEO Score’ for each of the 81
response sets for which there was CEM fund data. Figure 1 below shows the distributionof resulting ‘CEO Scores’ based on the 2005 rankings, as well as those based on theearlier 1997 rankings to the same 45 statements.
With respective means of 4.8 and 4.9, the 1997 and 2005 ‘CEO Score’ distributions
suggest a tendency to assign high rankings. This result can be interpreted in one of two
ways. The first is that, on average, the pension funds represented in the two surveys reallydo have, on average, exceptional oversight, management, and operations capabilities. The
second interpretation is that there is a tendency in surveys of this nature to rate on thehigh side. We lean towards the second interpretation, meaning that our analysis should
focus on the relative, rather than the absolute values of the statement rankings and overall‘CEO Scores’. This position is supported by the experience of Capelle Associates with
their Organizational Assessment Questionnaire. With nearly 9,000 responses from 35
The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page vii

organizations outside the pensions ‘industry’, the average score on the same six-point
scale is 4.9.
Figure 1 – Relative Frequency of CEO Scores 1997 vs. 2005

% Relative Frequency

40.0%

30.0%

20.0%

10.0%

0.0%

≤3.5

>3.5≤4.0>4.0≤4.5>4.5≤5.0>5.0≤5.5

1997

3.8%

7.5%

20.0%

27.5%

28.8%

>5.5≤6.0
12.5%

2005

2.5%

9.9%

11.1%

28.4%

25.9%

22.2%

CEO Score

1997 CEO Scores
Mean = 4.8
Standard deviation = 0.6

2005 CEO Scores
Mean = 4.9
Standard deviation = 0.7

Table 4 lists the six statements receiving the lowest rankings in 1997 and 2005.
Remarkably, they are the same six statements, with even the order of the rankings almost
unchanged. The strong suggestion is that the selection and evaluation processes forboards of governors were seen to be problematic in 1997, and they continue to be seen as
problematic today. This board competency problem is the likely root cause of the othercontinuing pension fund problem areas suggested by the 1997 and 2005 rankings: board
micro management and uncompetitive staff compensation. Table 5 lists the six statementswith the largest 1997/2005 ranking changes. The positive news here is that the
responding pension fund executives see some improvement over the course of the lasteight years in the effectiveness of the fund oversight and management functions, and intheir ability to attract and retain desirable employees.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page viii

Table 4 – Six Lowest Scoring Statements in 1997 and 2005
Ranking
40
41

42

43

44

45

1997
Compensation levels in ourorganization are competitive.
My board of governors does
not spend time assessing
individual investment
managers or investments.
My board of governors
examine and improve theireffectiveness on a regularbasis.
Our fund has an effective
process for selecting,developing, and terminating
members of the board ofgovernors.
I have the authority to retain
and terminate investment
managers.

Performance-based
compensation is an importantcomponent of our organization
design.

2005
Compensation levels in ourorganization are competitive.
My board of governors does
not spend time assessing
individual investment
managers or investments.
My board of governors
examine and improve theireffectiveness on a regularbasis.
I have the authority to retain
and terminate investment
managers.

Ranking
40

Our fund has an effective
process for selecting,developing, and terminating
members of the board ofgovernors.
Performance-based
compensation is an importantcomponent of our organization
design.

44

41

42

43

45

Table 5 – Six Statements with the Largest Score Changes

Ranking
1
2
3
4

5
6

Statement
I have clearly-written documents describing our mission, vision,values, strategic positioning, and operations and resource plans.
My board of governors examine and improve their own
effectiveness on a regular basis.
Superior investment performance reduces future contributions.
I can describe our operational plan relating to what we are goingto accomplish in terms of quality, quantity, timeliness, andresource requirements.
Employee turnover is low.
Compensation levels in our organization are competitive.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

Score
Change+ 0.55+ 0.54- 0.53+ 0.53+ 0.43+0.42
page ix

Governance Quality and Organization Performance
A priori, we would expect the quality of pension fund governance to impact pension fundperformance. Over the longer term, well-governed funds should be able to generatehigher returns (adjusted for risk and expenses) than poorly governed funds.
Ambachtsheer, Capelle, and Scheibelhut tested this hypothesis in 1998, using the CEO
Scores as defined above as proxies for governance quality. For fund performance proxies,
they used a metric called Net Value-Added (NVA) supplied by CEM Benchmarking Inc.
NVA is a pension fund’s excess return over its passively-implemented asset mix policy,
net of all investment expenses. In a sample of 80 pension funds, they reported astatistically significant peak NVA/CEO Score co-efficient of 0.4 (t=2.0) for the 4-year
observation period ending in 1997. Statistically weaker, but still positive regression
coefficients were found for 4-year observation periods ending in years prior to, and after1997.
We repeated this statistical analysis with the new 81 CEO Scores based on the 2004
survey and the 4-year NVA metrics for these 81 funds, as reported by CEM. We found a
statistically significant peak NVA/CEO Score coefficient of 0.8 (t=2.7) for the 4-year
observation period ending 2003. Statistically weaker, but still positive regression
coefficients were found for 4-year observation periods ending in years prior to 2003. It
remains to be seen how the post-2003 pattern of NVA/CEO Score coefficients will
unfold. Taking the CEO Score range to be effectively from 3 to 6, a coefficient of 0.8
implies the ‘top’ CEO Score funds outperformed the ‘bottom’ ones by an average 2.4%
per annum (i.e., 3 x 0.8) over the 2000-2003 period.
While these now-dual (i.e., based on the 1997 and 2004 CEO surveys) findings of apositive statistical association between proxies for governance quality and fundperformance are encouraging, they are subject to some important caveats. First, thegovernance quality proxies are based on the self-reported ratings by the funds’ own chief
executives. Second, while the NVA performance metrics for the funds were adjusted for
expenses and differences in asset mix policies, they were not given active risk-related‘haircuts’ [7]. Third, 4-year observation periods are arguably short periods for measuring‘longer term’ fund performance. Fourth, the statistical findings do not ‘prove’ that thecausality necessarily runs from governance quality to fund performance. It could also run
the other way, with good (bad) achieved fund performance leading to perceived good(bad) governance quality.
Having listed these caveats, we did uncover a statistical clue that supports the proposition
that higher CEO Scores do indeed indicate higher levels of governance quality. One of
the cost categories in the CEM database is ‘Oversight / Management Costs’, which
captures fund costs allocated to the internal governance, management, and control
functions. A reasonable hypothesis is that high governance quality funds ‘invest’ more inthese functions than funds with low governance quality. So statistically, there should be apositive relationship between Oversight / Management Costs (OMC) and Pension CEO
Scores, after adjusting for fund size. The OMC-CEO Score coefficient in 2004 was infact 1.4 (t=3.0). So again, taking the Pension CEO Score range to be from 3 to 6, theThe State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page ximplication is that high-scoring funds spend an average 4 basis points (i.e., 3 x 1.4) more
per annum on the internal governance, management, and control functions than lowscoring funds. This is an additional $4M per year for a $10B fund. Clearly, the CEOs andboards of governors of the high-scoring funds are putting their money where their mouth
is. This is an encouraging finding.
In Conclusion: Board Competency Still Problematic
A key goal our study was to assess the current status of pension fund governance, andidentify opportunities for improvement. So what can we now say about these issues? We
conclude that while there appear to have been some improvements at the executive level(e.g., formal strategic planning processes are on the rise, resulting in clearer management
focus on such issues as resource planning, organization design, and compensation), board
competency continues to be a problem. The selection process for board members is
deficient in many cases. Self-evaluation of board effectiveness continues to be theexception, rather than the rule. Weak oversight functions lead to difficulties in sorting out
the competing financial interests of differing stakeholder groups. They also lead toorganization dysfunction. Specific examples are lack of delegation clarity between board
and management responsibilities, board micro-management, and non-competitivecompensation policies in pension funds. Despite the cited caveats, the positive
correlations found between proxies for fund governance quality and fund performancelends urgency to correcting these shortcomings.
The study suggests the following five opportunities to improve pension fund governance:
•
•
•
•
•

Redesign pension deals to eliminate the ‘competing financial interests’ problem.
Develop templates for ideal boards of governors composition, and integrate thesetemplates into actual selection processes.
Initiate board effectiveness self-evaluation processes.
Achieve clarity between the respective roles of boards and management.
Adopt high-performance cultures with competitive compensation policies.

The study findings also have public policy implications. The most obvious implication
may be for pension regulators to require that pension funds disclose on a regular (e.g.,annual) basis what steps they are taking in the five governance improvement opportunity
areas listed above.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page xiNOTES[1]

See, for example, the recent Graham, Harvey, Rajgopal study (2005) which foundthat most corporate financial executives would sacrifice value-creating projects if itmeant falling short of the current quarter’s consensus earnings estimate, or break up asmooth progression of reported earnings.

[2]

An ambitious paper by Merton and Bodie (2004) attempts to develop an overall
theory of financial system design by bringing together three related theories offinance: neoclassical, behavioral, and institutional. The focus of the institutional
theory dimension is to deal with market frictions and agency problems. It stops shortof prescribing optimal governance practices and organization structure.

[3]

See the cited 1997 article “Improving Pension Fund Performance” by Ambachtsheer,
Capelle, and Scheibelhut (1997).

[4]

A comprehensive framework is provided by Ron Capelle in “Improving Pension
Fund Performance: Organization Design and Governance” (1998).

[5]

In the ‘old’ pension management paradigm, boards of governors were expected toexpress investment policy as a ‘policy asset mix’. There is growing recognition that arisk budget approach based on estimating and managing mismatch risk relative topension liabilities is part of a superior ‘new’ pension management paradigm.

[6]

The means/standard deviations of the 1997 and 2005 ranking sets for the six highest
scoring statements were 5.46/0.84 and 5.48/0.79 respectively. The comparable
metrics for the six lowest scoring statements were 3.70/1.80 and 4.05/1.74.

[7]

There are two approaches to assigning risk-based ‘haircuts’ to returns: utility-based
and arbitrage-based. The question of which approach is superior is yet to be resolved.
For further discussion see Ambachtsheer, “Adjusting Investment Returns for Risk:
What Is the Best Way?” (2006) at www.kpa-advisory.com.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page xii

REFERENCES
Ambachtsheer, Keith, Craig Boice, Don Ezra, John McLaughlin, “Excellence Shortfall in
Pension Fund Management: Anatomy of a Problem”, Working Paper, 1995, cited in
Pension Fund Excellence (by Ambachtsheer and Ezra, John Wiley & Sons, 1998), page 18.
Ambachtsheer, Keith, Ronald Capelle, and Tom Scheibelhut, “Improving Pension Fund
Performance”, 1998, Financial Analysts Journal, Nov-Dec.
Capelle, Ronald G., “Improving Pension Fund Performance: Organization Design and
Governance”, 2004, Colloquium on Pension Management, Rotman School of Management,
University of Toronto.
Clark, Gordon L., Emiko Caerlewy-Smith, and John C. Marshall, “Pension Fund Trustee
Competence: Decision-Making in Problems Relevant to Investment Practice”, 2006,
Journal of Pension Economics and Finance, 5, 91-110.
Clapman, Peter et al., “Committee on Fund Governance: Best Practice Principles”, 2007,
The Stanford Institutional Investors’ Forum, May 31.
Graham, John, Campbell Harvey, and Shivaram Rajgopal, “The Implications of Corporate
Financial
Reporting”,
2005,
National
Bureauof
EconomicResearch,
http://ssrn.com/abstract=491627.
Merton, Robert C. and Zvi Bodie, “Design of Financial Systems: Towards a Synthesis of
Function and Structure”, 2004, Harvard Business School Working Paper.
O’Barr, William, and John Conley, Fortune and Folly – The Wealth and Power ofInstitutional Investing, 1992, Business One Irwin, Homewood, IL.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
June 2007

page xiii

APPENDIX A
2005
Rank

1997
Rank

Statements

1

1

I can describe our mission (why we exist).

2

4

I ensure the setting of clear, appropriate, understandable and wellcommunicated performance standards for our external investment
managers.

3

10

I can describe our values (how we work together).

4

13

I can describe our fund's strategic positioning (how we provide
better value to stakeholders than alternatives).

5

12

There is a high level of trust between my governing fiduciaries
and the pension investment team.

6

11

Developing our asset mix required considerable effort on the partof myself and the governing fiduciaries and it reflects our best
thinking.

725

I can describe our operational plan (what we are going toaccomplish in terms of quality, quantity, timeliness and resource
requirements).

822

Employee turnover within the pension fund organization is low.

93

My governing fiduciaries do a good job of representing theinterests of plan stakeholders.

10

16

I can describe our vision of where we should be in the future.

11

14

There is a clear allocation of responsibilities and accountabilities
for fund decisions between the governing fiduciaries and thepension investment team.

12

6

I ensure the setting of a clear, appropriate, understandable andwell-communicated framework of values and ethics for our
employees.

1318

We examine and improve our internal processes on a continuous
basis.

14

19

Those reporting directly to me understand and share our vision,
mission, values, strategic positioning, operation plan and resource
plan.

15

7

People in our organization do what they say they will do.

16

9People in our organization collaborate well on teams and projects.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
Appendix A: June 2007

page xiv

17

24

My governing fiduciaries approve the necessary resources for us
to do our work.

18

17

I ensure the setting of clear, appropriate, understandable and wellcommunicated performance standards for our employees.

192

My superior investment performance reduces the futurecontributions of the underwriters of the pension promise (usuallycompany shareholders or taxpayers for DB plans).

20

15

My governing fiduciaries set a clear, appropriate, understandable
and well-communicated framework for values and ethics.

21

31

My governing fiduciaries hold me accountable for our
performance and do not accept sub par performance.

22

29

I can describe our resource plan (obtaining and optimally utilizing
the required human, financial and information technology
resources).

23

5

I ensure that our organization does not accept sub par
performance from our employees.

24

21

My organization uses its time efficiently (well focused and does
not waste time).

25

8

My superior investment performance enhances benefit security
and the potential for higher pensions for plan participants.

26

32

My governing fiduciaries understand and share our vision,
mission, values, strategic positioning, operation plan and resource
plan.

27

23

My organization uses its time effectively (deals with the rightissues).

28

35

My governing fiduciaries have good mechanisms to understandand communicate with plan stakeholders.

29

39

I have clearly written documents describing our vision, mission,values, strategic positioning, operational plan and resource plan.

30

30

My governing fiduciaries do a good job of balancing overcontrol
and undercontrol.

31

33

My governing fiduciaries set clear, appropriate, understandable
and well-communicated standards for our organizational
performance.

32

20

My governing fiduciaries and related committees use their time
efficiently (focused and do not waste time).

33

26

I ensure that the organization has a good process for selecting,

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
Appendix A: June 2007

page xv

developing and terminating employees.
34

27Managing the pension fund is perceived to be an important part ofour sponsoring organization(s).

3528

My governing fiduciaries and related committees use their timeeffectively (deal with the right issues).

36

38

I have the necessary people and budget to do the work.

37

34

I have the necessary managerial authority to implement long term
asset mix policy within reasonable limits.

38

36

My governing fiduciaries have appropriate turnover (neither too
high nor too low).

39

37

My governing fiduciaries have superior capabilities (relevant
knowledge, experience, intelligence, skills) necessary to do their
work.

40

40

Compensation levels in our organization are competitive.

41

41

My governing fiduciaries do not spend time assessing individual
portfolio manager effectiveness or individual investments.

42

42

My governing fiduciaries examine and improve their own
effectiveness on a regular basis.

43

44

I have the authority to retain and terminate investment managers.

44

43

Our fund has an effective process for selecting, developing andterminating its governing fiduciaries.

45

45

Performance based compensation is an important component of
our organizational design.

The State Of Global Pension Fund Governance Today: Board Competency Still A Problem
Appendix A: June 2007

page xvi