Governance Of Public Pension Funds: Lessons From Corporate Governance And International Evidence believed that they were fully inforned, the trustees were not even aware of the programs operated by the organization. They were unaware of these programs because they did not involve issues related to their particular expertise. These members clearly lacked the necessary information to meaningfully monitor the organization, and their actions in addition did not focus on achieving any specific goal. As Miller stated, the focus of the board's actions were "primarily on form, not on substance." For the boards with criteria for measuring performance, however, a comprehensive strategic plan aimed at achieving those goals was easily developed.

# **_IV.E_** _Roles of the Board_

The board may have control over a wide variety of decisions with respect to the fund, including the setting of actuarial assumptions, investment of fund assets, setting of benefits, and other decisions that relate to the management of the fund. In this sense, the governing board of a pension fund is more involved in the running of the organization than is a corporate board of directors. Where a corporate board may assist in the general setting of strategy, it serves mostly to provide advice to management and to monitor management's behavior on behalf of shareholders. In public pension funds, the board typically takes on an active management role, including delegation to professional managers, in addition to monitoring the pension fund staff.

In the United States, the board typically has authority over investment decisions. For example, a sample of state and local pension funds in 1998 showed 88 percent of funds to have investment authority. For the remaining 12 percent, investment decisions were most likely made by a state investment board that is separate from the board of trustees. The board also usually had control over actuarial assumptions and benefits decisions (89 and 68 percent, respectively). The funds in our international survey showed a similar use of authority. The responses indicated that for 92 percent of the funds the board has authority over investments and for 77 percent it has authority over actuarial assumptions. In addition, 73 percent of the boards have authority over the selection of managers of fund activities.

> One of the key roles of the board is to develop an investment strategy that maximizes returns at a risk level tolerable to the fund's stakeholders and that provides sufficient liquidity to meet benefit payment requirements (Mitchell 2002). To establish a strategy that is right for the fund, the board must decide how to allocate its assets and who will manage the funds: should it outsource to a private firm or employ the fund's own staff to conduct investments? The asset allocation decision involves many different factors, including the division between equities and fixed income investments, the level of diversification, the sectors of the economy in which to invest, whether or not to invest

> outside the borders of the country, and so on.

With respect to the use of investment managers, approximately 75 percent of U.S. state and local plans used external managers for all fund assets. From the international sample, only one fund of the 25 funds that responded to the question reported using external managers for all assets. The average fund used external managers for just 13 percent of its portfolio, but more than 50 percent of funds did not outsource any assets at all. Of those funds using external asset managers, less than 40 percent had explicit, written criteria for selecting managers. This creates the possibility of trustees granting asset

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