On The Governance Of Public Pension Fund Management executive officer of the EPF is also on the board of governors, violating the principle of separation between governing and managing fiduciaries.

In general, due to the absence of proper incentive mechanisms in the appointment procedures of governors, these tripartite boards can be directed by fiduciaries not necessarily fit and proper for their role. Indeed, the main concern about tripartite boards is their lack of independence. In many developing countries; the politicization of representatives on the board often means that funds are invested imprudently and not necessarily in the interest of beneficiaries but rather in the interest of the sponsor's other public policies. Even in more developed countries, it is possible to link the difference in performance between private sector pension funds and public pension funds to the composition of their respective boards of governors. Mitchell and Hsin (1997) argue that a possible explanation for why the investment portfolios of U.S. public plans yield consistently lower rates of return than portfolios of private sector pension funds is that the two sets of funds operate under different rules. Private sector funds are managed by professional and qualified governors with a clear economic mandate, while public pension funds are managed by staff responding to economic as well as political pressures. The governing body of public funds typically is composed of eight members: three elected members (usually active employees), three appointees (often appointed by the state governor), and two ex officio members (such as the state treasurer or superintendent of schools).<sup>20</sup> Thus the better performance of private pension funds is hypothesized as being a result of the professional nature of their governing fiduciaries. Mitchell and Hsin then test this hypothesis on a sample of 168 public employee retirement systems using dummies for the presence of active employees and retired beneficiaries on the governing body. They find that the presence of retired beneficiaries on the governing body is associated with lower returns and conclude that either the type or the inappropriate selection of governors negatively affects performance.

Hence, two questions become relevant: (1) what are the appropriate qualifications for governors? and (2) how can independence of governors from political power be ensured?

Prudence (and logic) should demand the following from a governor of a pension plan:

- Governors should understand financial markets, risk management, and actuarial principles.

- Governors should be prepared to study and understand the promise and policies of the pension plan.

- Governors should clearly understand their conflicts of interest and commit to resolve them in favor of the plan's beneficiaries.

- Governors should enunciate and follow an appropriate code of conduct, behave only in an ethical fashion, and clearly understand their fiduciary duties.

- Finally, some basic criteria should be used in selecting governors so that persons without the morale status required by the position are excluded. Thus

20 Mitchell and Hsin (1997) analyze the governance structure and performance of public employee retirement systems, which are established by state and local governments for individuals like teachers and other school employees, police and firefighters, judges, and other civil servants.

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