On The Governance Of Public Pension Fund Management indicators. Fifty private pension fund executives were<sup>asked to list the most important</sup> "drivers" of organizational performance (Table 2). Six out of<sup>the eleven performance</sup> drivers identified are statistically significant at the 5 percent<sup>level andbelong to the</sup> category of good govemance.

Useem and Mitchell (2000) use two surveys of U.S.<sup>state and local pension systems</sup> carried out in 1992 and 1993 to show that the way public<sup>pensions aregovemed has an</sup> impact on investment strategies and how assets are invested.<sup>This, in tum, directlyaffects</sup> fund performance. Governance variables comprise indicators<sup>that are related to the</sup> structure of public pension goveming bodies as well<sup>as rules that guideits oversightof</sup> fund assets. These variables are regulatory restrictions on international<sup>investments,</sup> independent performance evaluation, board composition<sup>and size,and responsibilityof</sup> the board for setting investment policies and for choosing<sup>investments.Variablesrelated</sup> to the investment strategies used are step dummies for the use of<sup>tacticalinvestment,</sup> external fund management and some internal fund management,<sup>and the share of equities</sup> in total asset portfolios.

**Table 3. Impact of governance on public pension**<sup>**investmentstrategies**</sup>

|**Explanatoryvariable.:**<br>Govemancepolicy<br>|**Tactical**<br>investment<br>|**Equities**as<br>**per:entage**<br>oftotal<br>|**Allexternal**<br>management<br>|**some**<br>**Intemational**<br>managemeot<br>|
|---|---|---|---|---|
|Investmentrestrictions|-1.44<br>|-7.59<br>*|-0.41<br>|-0.24<br>|
||(0.46)*<br>|(2.34)<br>|(0.39)<br>|(0.33)<br>|
|Independent performanceevaluation|-1.60<br>|14.08<br>|0.55<br>|1.48<br>*|
||(0.38)|(2.34)*|(0.41)|(0.38)|
|Board purview<br>|||||
|Boardsetsasset allocation|1.88<br>|3.97<br>|0.75<br>|-0.41<br>|
||(0.40)*<br>|(2.64)<br>|(0.42)<br>|(0.37)<br>|
|Boardisresponsibleforinvestment|-0.12<br>|1.59<br>|-0.11<br>|0.05<br>|
||(0.37)|(2.15)|(0.36)|(0.30)|
|Boardcomposition andsize<br>|||||
|Numberofgovemors|-0.54<br>|0.63<br>|-0.11<br>|0.09<br>*|
||**(0.57)**<br>|(0.31)*<br>|(0.05)*<br>|(0.04)<br>|
|Planparticipantsasapercentageof|0.14<br>|-4.28<br>|-1.23<br>|0.67<br>|
|govemors|(0.66)|(3.97)|(0.70)|(0.58)|
|R<sup>2 </sup>orlog-likelihood/concordantpairs|209/82.2<br>percent"|0.226**|219/76.7<br>percent*|293/62.1**|

Note: ****** p < 0.01, * p < 0.05. Regressions are based on 254, 243,<sup>215,and 235 retirement systems, respectively;</sup> linear regression for equities is as a percentage of total; logistic regression<sup>is for other variables.Standard errors</sup> are in parentheses.

Source: Useem and Mitchell (2000).

Table 3 shows that, in general, governance variables explain<sup>a large shareof the</sup> variability of the investment strategy variables. However,<sup>not all governance indicators</sup> are always individually significant. International investment restrictions<sup>are highly</sup> significant in explaining whether funds adopt tactical<sup>investment strategies or whether</sup> funds invest a higher share of assets in stocks. Nevertheless,<sup>they are not significantin</sup> explaining the decision of pension funds to use internal,<sup>external,or a combinationof</sup> internal and external asset managers. Independent performance<sup>evaluation is highly</sup> significant at explaining all of the investment strategy<sup>variablesexcept the decision to</sup> outsource all asset management. Finally, the number of governors<sup>appearsto be</sup>

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