As If We Didn’t Already Have
Enough to Worry About, We
Have to Talk About Board
Governance NOW?
Presentation by Christopher W. Waddell
Senior Attorney, Olson Hagel & Fishburn, Sacramento, CA
Corporate Governance Fellow, Stanford Law School
CALAPRS Trustee’s Roundtable
October 16, 2009
OVERVIEW
• A little background, please—Who am I and why
am I here today?
• An overview of the Arthur and Toni Rembe Rock
Center for Corporate Governance at the
Stanford Law School and its programs
• The Clapman Report and Clapman 2.0
• Other pension fund governance challenges:
– SEC Rulemaking
– A.B. 1584
Who Am I And Why Am I Here
Today?
• Former General Counsel for CalSTRS and
SDCERS
– CalSTRS governance initiatives
– SDCERS reform efforts
– Now in private practice
• Corporate Governance Fellow at the Arthur and
Toni Rembe Rock Center for Corporate
Governance at Stanford Law School.
The Rock Center at Stanford Law
School
• Funded by a gift from venture capitalist Arthur
Rock and his wife Toni Rembe Rock with three
objectives:
– Bridge the gap between governance theory and
practice
– Advance intellectual understanding of the governance
process
– Strengthen corporate governance as an independent
area of teaching and scholarship
The Rock Center at Stanford Law
School
• Rock Center Programs of Benefit to Public
Retirement Systems (To Date):
– Stanford Securities Class Action Clearinghouse
– Recent conference: “Diversity on Corporate Boards:
When Difference Makes a Difference”
– Fiduciary College
– Stanford Institutional Investors Forum
Fiduciary College
• A two-day program for trustees and senior
managers of public, corporate and union funds
as well as endowments and foundations on
topics such as fiduciary duties and liabilities,
board governance, ethical issues, staff
accountability, and relationships with sponsors.
• Presentations from experts in the field in a notfor-profit, academic atmosphere geared toward
experienced trustees and staff.
Fiduciary College
• March 25-26, 2010
• Overlap with CALAPRS New Trustee Training is
Deliberate
– Opportunity for joint lunch session with Kirk O.
Hanson, Executive Director of the Markkula Center
for Applied Ethics at the University of Santa Clara
– Expose new trustees to future educational
opportunities
Stanford Institutional Investors’
Forum
• The Stanford Institutional Investors Forum
provides an opportunity for many of the nation’s
largest and most sophisticated institutional
investors to meet in a confidential setting, closed
to the press and public, to discuss current policy
issues of concern to the institutional investor
community.
Stanford Institutional Investors’
Forum
• More than just talk
• Stanford Fund Governance Initiative (SFGI)
– Identify principles of best practice that promote better
governance of pension funds.
– Develop tools that assist pension fund leaders to
implement those principles.
– In May, 2007, SFGI released the “Clapman Report,”
which set forth best practice principles in five key
areas.
Clapman Report
• Transparency of a fund’s rules and governance
structure
• Fund leadership
• Trustee attributes and core competencies
• Addressing conflicts of interest and related
disclosure issues
• Delegation of duties and allocation of
responsibilities
Transparency of a Fund’s Rules and
Governance Structure
• A fund should clearly define and make publicly
available its governance rules
– Gathered in one location that is clearly accessible to
persons involved in the governance process and the
public
– Ideally posted on the System’s website
– Annual affirmation of understanding and compliance
by board members
Fund Leadership
• Identify and disclose its leadership structure
• Governing body should consist of qualified,
experienced individuals dedicated to fulfilling
their fiduciary duties to fund beneficiaries
– Doesn’t mean that board members have to come in
as experts, but that they must take reasonable steps
to acquire the skills to serve appropriately as a
fiduciary.
Fund Leadership-Continued
• Board should promote policies that strengthen
fiduciary principles in the selection and
monitoring of trustees
• System should establish clear lines of authority
between its governing body and staff
• Board should have authority to select or dismiss
key staff and have access to unconflicted,
qualified external counsel and consultants
Trustee Attributes and Core
Competencies
• Board members should have a thorough
understanding of the fund’s obligations to its
beneficiaries, the fund’s economic position and
strategy, and its relevant governing principles.
• The board should include individuals with
relevant investment and financial market
expertise and experience
Trustee Attributes and Core
Competencies--Continued
• Board members should obtain education that
provides and improves core competencies
• Board members should be able to obtain
intelligible explanations of recommended actions
from staff, advisors or colleagues
– No such thing as a “dumb” question
• Annual evaluation of trustee skills
What are the “Core Competencies”
• Loyalty to best interests of fund’s beneficiaries
• Ability to disassociate personal viewpoints from
objective requirements of fiduciary obligations
• Willingness and ability to dedicate the necessary
time and attention to system business
• Understanding of the system’s operating
environment and underlying economic and
structural relationships
Core Competencies--Continued
• Understanding of the obligations of a fiduciary
relationship
• An inquisitive nature
• Ability to consider and debate issues in a civil
and constructive manner
• Effective communication and interpersonal skills
• A substantive base of knowledge
Addressing Conflicts of Interest and
Related Disclosure Issues
• Establish and publicly disclose its policy for
dealing effectively with situations that raise
either:
– An actual conflict of interest; or
– The potential for the appearance of a conflict of
interest
• Regular reporting and disclosure of actual or
potential conflicts
Addressing Conflicts of Interest-Continued
• Periodic verification of compliance
• No undue influence on any person to engage in
a transaction that creates an actual conflict or
appearance of impropriety
• Public disclosure of information sufficient to
ensure that trustees and staff are fulfilling their
fiduciary duties
Delegation of Duties and Allocation of
Responsibilities
• Board should be permitted to rely on the
expertise and advice of appropriately selected
and unconflicted consultants and staff
• Consultants should be required to comply with
fund’s conflict of interest and ethics policies.
• Fund should evaluate cost/benefit evaluation of
expenditures
• Effective monitoring of all service contracts
Observations
• Recognition that any set of best practices must
be flexible and adaptable to the unique
circumstances of each fund—not “one size fits
all.”
• View recommendations as a conceptual
framework to measure adequacy of existing
policies and/or need for new policies
Observations-Continued
• Policy development is a hard, grueling process.
Given other demands on pension funds in era of
scarce resources, most systems are not going to
be able to make significant progress without
assistance.
Clapman 2.0
• Goal: To Provide “Off-the Shelf” tools, including
model governance policies and self-assessment
instruments, for consideration, easy adaptation
and adoption by pension funds
• Target date for completion is June, 2010
• Input from smaller systems needed and is
welcome
Why Now?
• Defined benefit pension plans are under assault
as they never have been before
• “Perfect storm” of investment losses and
governance scandals
• Potential pension initiative(s) in 2010
• Legislative and regulatory actions already
underway
SEC “Pay-to-Play" Rulemaking
• Background
– CalPERS policy banning campaign contributions
overturned by court
– SEC initial rulemaking effort in 1999
– CalSTRS policy/regulations adopted in 2006/07
– New York pay-to-play scandal in 2009/Investigations
by NY Attorney General and SEC
Proposed SEC Rules
• Prohibits investment advisors from providing
compensated services to a public retirement
system if campaign contributions were made to
elected officers or candidates for office
• Prohibits investment advisors from engaging
third party “placement agents” to solicit business
from a public pension fund
SEC Rules--Status
• Comments were due on October 6, 2009
• SEC can adopt, modify, or drop proposed rules
following receipt of comments
• Quick resolution not expected
Meanwhile, Back at the Ranch
• A.B. 1584 signed by Governor Schwarzenegger
on Sunday, October 4 and takes effect
immediately as an urgency bill
• Key Provisions:
– The special two-year “revolving door” law previously
applicable only to CalPERS and CalSTRS is now
applicable to all California pension systems
A.B. 1584
• Key Provisions—Continued
– All California public retirement systems are required
to develop and implement placement agent disclosure
policies by June 30, 2010 following a model adopted
by CalPERS
– Action not required unless Board determines, in good
faith, that this is consistent with their fiduciary duties
under Article 16, Section 17 of the CA Constitution.
A.B. 1584
• Key Provisions—Continued
– This means that system has option NOT to adopt a
policy—for example, where the system doesn’t invest
in asset classes that typically attract placement
agents (i.e., private equity) and placement agents
have not been involved in system investments.
– Separately, law requires placement agents to disclose
gifts and campaign contributions made to any elected
board member
A.B. 1584
• What should systems do?
– Make an initial assessment on potential need to adopt
a policy
– Wait and see re: SEC rulemaking
– Absent law change, must either adopt policy or, by
vote of the Board, elect NOT to adopt a policy by
June 10, 2009
QUESTIONS?