Communication with the Board and Board Challenges NAPPA New Member Orientation --Tuesday, June 26, 2012 Presenter: Jake McMahon, Missouri State Employees’ Retirement System COMMUNICATION WITH THE BOARD AND BOARD CHALLENGES 1. Board Governance Policies Advantages Helps maintain continuity Promotes Board’s policymaking role Helps control rogue Board members Provides crucial process for decision-making Examples of governance policies Describes the roles of the Board and Executive Director The Board establishes goals for the organization in the areas of investments, benefits, legislation, sound actuarial condition, and rulemaking (referred to as Ends policies at MOSERS) The Board directs the Executive Director to use any means possible to achieve the goals subject to specific executive limitations (actions that the Executive Director may not take to achieve the goals of the organization) The Board looks solely to and holds the Executive Director responsible for the operation of the system and the achievement of the goals The Executive Director is expected to make reasonable interpretations of these policies when operating the system on a day to day basis The Board monitors the progress of the Executive Director throughout the year by receiving periodic reports from the Executive Director, the Chief Investment Officer, and board consultants. This puts the Board in a position to know if its expectations are being met and to take appropriate action if necessary The Chief Counsel and Chief Internal Auditor have the authority to report directly to the board in the event the Executive Director violates the law or any of the executive limitations Resources MOSERS governance policy: https://www.mosers.org/About-MOSERS/Board-of- Trustees/Board-Governance.aspx Website of consultant used by MOSERS to establish the initial governance policies: http://www.carvergovernance.com/ Additional consultant governance outline/perspective: http://www.nasra.org/resources/cortexpractices.htm Governance policies help maintain continuity as Board members come on or go off the Board 2. New Board Member Orientation and Continuing Education for all Board Members Required by state law under section 105.666, RSMo: Each plan shall, in conjunction with its staff and advisors, establish a board member education program, which shall be in effect on or after January 1, 2008. The curriculum shall include, at a minimum, education in the areas of duties and responsibilities of board members as trustees, ethics, governance process and procedures, pension plan design and administration of benefits, investments including but not limited to the fiduciary duties as defined under section 105.688, legal liability and risks associated with the administration of a plan, sunshine law requirements under chapter 610, actuarial principles and methods related to plan administration, and the role of staff and consultants in plan administration. Board members appointed or elected on a board on or after January 1, 2008, shall complete a board member education program designated to orient new board members in the areas described in this section within ninety days of becoming a new board member. Board members who have served one or more years shall attend at least two continuing education programs each year in the areas described in this section. The Executive Director, CIO, and the Deputy Executive Director of Operations meet with new Board members within 90 days of appointment to explain operational issues and investments. The Chief Counsel and Chief Auditor also meet with new Board members to review governance, legal, and audit issues. (Copy of the outline I use for my meetings with new Board members is attached at the end of this outline) Ongoing continuing education is met by attending at least two of the following a year: a) education conferences designed for trustees or upper management, b) annual board education retreat, or c) attending a staff investment due diligence meeting with any of the system’s outside investment service providers Helps maintain continuity between Boards and makes for more effective board members 3. Role of the attorney at Board meetings (legal advisor role) Prior to the Board meeting o Educate and answer questions o Tailor communication with select board members o Sunshine law considerations At the Board meeting o Decorum at the board table o Don’t insist on particular outcomes – present options and prepare recommendations o Don’t misinform – be accurate so the board came make informed decisions o Don’t waste time – get to the point (board members are busy people) After the Board meeting o Follow up on any outstanding issues o Evaluate what went right and wrong o Make necessary adjustments 4. Strategic Role of the Attorney (counselor role) Pre – 2008 Market Crash v. Post – 2008 Market Crash o Adverse media coverage (and lessons learned) o Lack of trust for financial institutions and pension plans o Funding Problems and Political tensions o Pension reform and Board members who may have a conflict of interest Board Communications Planning Group o Certain upper management meet to review current Board issues between Board meetings o Strategize how best to communicate those issues to the Board and particular Board members o Advise the Executive Director Strategic Planning o Identify and preparing for upcoming changes to the organization o Consider what the role of the Board should be in strategic planning o Example of strategic planning issue: Succession Planning (one third of upper management at MOSERS is or will be eligible to retire in the next 5 years) – potential methods for dealing with this issue may include succession planning policy/budget approved by the Board and use of written contracts for certain key employees 5. Dealing with Individual Board Members Board members who may demand an excessive amount of your time Board members who are attorneys Rogue board members and the role of the governance policies 6. Board committees Time constraints during regular board meetings Tackling the hardest issues before presenting those issues to the Board during a Board meeting The opportunity to educate the committee and for the committee to have a conversation with key members of staff 7. Inherent Board structural problems Turnover and term limits Current problems even harder to solve Reforming board structure by statutory amendment (staggered terms, longer terms, appointment of certain board members with investment expertise, etc) 8. Questions & Answers/Discussion New Board Member Orientation Outline (Note, page numbers correspond to the governance policies booklet on the website) A. Fiduciary requirements 1. MOSERS is a “trust” - all property and funds are held in trust for the purposes of paying retirement benefits to members and beneficiaries (includes regular state employees, statewide elected officials, members of the general assembly, and judges). 2. Board members are “trustees” - the board has a duty to administer the retirement plans as provided in state law solely in the interests of plan participants and beneficiaries. 3. Duty of Loyalty – board members may not engage in self-dealing and should avoid conflicts of interest. 4. Duty of Impartiality – board members should treat members of MOSERS within the same category the same. 5. Duty to Invest – As investment fiduciaries, board members should act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims. (Section 105.688). The board should invest trust assets using a prudent investment process and monitor the investment program. The investment and monitoring process is set forth in the Board governance policies under the Investment Ends policy (page 32) and the Investment Limitations policy (page 56). B. Board Governance Policies Overview of the general concept behind the policies and the role of the Board and the Executive Director. The Board’s official connection to the organization is through the Executive Director (page 17). The Executive Director is accountable for all actions of staff (page 17). The Board instructs the Executive Director through written policies that describe the goals of MOSERS – those policies are called “Ends Policies” (page 18) The Board describes situations and actions to be avoided by the Executive Director – those policies are called “Executive Limitation Policies” (page 18). As long as the Executive Director uses any reasonable interpretation of those policies, he is authorized to make all decisions and take all actions necessary to operate the system and achieve the goals of MOSERS under the End Policies (page 18) The Board may modify policies as needed to clarify the goals of the organization or the executive limitations that apply to the Executive Director (page 18) The Board monitors the Executive Director performance to determine the degree to which the Executive Director has achieved Ends policies. This is done through periodic reports made to the Board in the areas of Investments, Benefits, Legislation, and Sound Actuarial Condition (page 19) The Board monitors the Executive Director performance to determine compliance with the Executive Limitation Policies. This is done through a combination of periodic reports and exception reports made to the Board by the Executive Director, the Chief Auditor, and the Chief Counsel (page 19) The Chief Auditor, the Chief Counsel, the Chief Investment Officer, the Chief General Asset Consultant, and the Hedge Fund Asset Consultant have limited authority to report directly to the board (pages 23 – 29) Ends Policy Examples: Investment Ends Policy (page 32) Member Benefits Policy (page 40) Legislation Policy (page 41) Executive Limitation Policy Examples: Global Executive Constraint (page 46) Communication and Support to the Board (page 55) Investment Limitations (pages 56) 4. Monitoring Executive Director Performance Executive Director annual report covering achievement of Ends Policies during the year and compliance with Executive Limitations (page 19) Chief Auditor and Chief Counsel annual and periodic exception reports regarding any non-compliance by the Executive Director of the Executive Limitations (page 21) CIO quarterly investment report (page 39) CIO annual asset allocation report (page 39) CIO asset/liability study provided at least every 5 years (page 39) Chief General Asset Consultant annual report on internally managed portfolios (page 57) Chief General Asset Consultant exception report to Executive Director and the Board of any material matter of concern regarding any investment process or the investment staff (page 28) Hedge Fund Asset Consultant exception report to Executive Director and the Board of any material matter of concern regarding any investment process or the investment staff (page 29) Chief Auditor annual report on internally managed portfolios (page 24) Chief Auditor annual report regarding the completeness of due diligence work done by the Chief General Asset Consultant (page 24) Chief Auditor annual report regarding the completeness of due diligence work done by the Hedge Fund Asset Consultant (page 24) CEM annual report regarding implementation costs of the investment program (page 39) 5. Examples of Other Policies affecting Board members: Board Meeting agenda planning and process to change the board’s governance policies (pages 7). Individual board members must notify the Chair and the Executive Director 2 weeks in advance of a regularly scheduled board meeting to get an item be put on the agenda (or the board can add an item during a board meeting to the agenda if two-thirds of the board members present during the meeting agree to add the item to the agenda). Board Member Code of Conduct (page 9). Includes duty of loyalty to membership, property of the system held in trust, members must avoid conflicts of interest, members should not attempt to exercise individual authority over the organization except as provided in the board’s policies, members will treat confidential information accordingly, and members will be properly prepared for Board deliberation. Board Member Continuing Education (pages 12-13). New board members receive orientation from the Executive Director and his staff. Members who serve a year or more have an annual requirement to attend two education events a year: MOSERS board retreat, MAPERS, NASRA, investment due diligence meetings, or any conference designed to educate trustees and plan administrators. Political Contributions by external service providers (page 50). External service providers may not make contributions with the intent of influencing a purchasing, hiring or firing decision at MOSERS. C. Sunshine Law 1. Board adopted new policy on open meetings and records (page 63): MOSERS will follow all sunshine law requirements of Chapter 610 with regard to meetings and records. All records that may be closed are deemed closed unless the Board by a majority elects to open a closed record. The executive director is the custodian of records and handles all record requests (in his absence, the board secretary and the deputy director of operations can act as custodian). The custodian has the authority to determine if a record can be closed after consulting with the chief counsel. The board will be advised on a monthly basis if the custodian determines a record has been closed. The board can vote to open a record. If a person who requests a record disagrees with the custodian’s decision to close a record, that person will be given an opportunity to have the decision reviewed by the Board. Committees of the Board do not have the authority to open a record that has been closed – only the Board has that authority. A member of the board who sends an electronic message to a majority of the board members should send a copy of the message to the custodian (Gary) and the message will be considered a record of MOSERS. 2. Applies to Board meetings Agenda of meeting must be posted at least 24 hours in advance and covers items of business to be discussed or decided. Open session may be attended by the public. Closed session is attended by the Board, the executive director, CIO, deputy executive director for operations, the chief counsel, and the board secretary. Other persons may be invited to attend who will aid the board in its deliberations during executive session (for example: external consultants such as outside legal counsel or the chief asset consultant). Deputy Treasurer and the General Counsel for OA may act in place of the Treasurer and the Commissioner of Administration in open and closed sessions. They also typically sit in during closed sessions. The reason for going into executive session must be announced and approved by a roll call vote. Besides the typical subjects, certain investment matters may be discussed and decided in executive session if discussion of the matter in open session would jeopardize the ability to implement a decision or to achieve investment objectives. 2. Applies to system records Membership records for retired general state employees pertaining to name, benefit amount, length of service, and employing department are open records and must be disclosed upon request. All other individually identifiable information must be closed subject to certain exceptions outlined in MOSERS board rule 1-3 (board rules are located on website: http://www.mosers.org/About- MOSERS/Board-of-Trustees/Board-Rules.aspx ). On the Money – website portal to get information about retirement benefits of elected officials and judges (does not include information about retired general state employees). The portal also has information on it about staff compensation and vendor information. Investment records are open except for investment records that disclose deliberations or tentative or final decisions on investments or other financial matters by the board in executive session which if released would jeopardize the ability to implement a decision or to achieve investment objectives. Also proprietary trade secret investment information may be closed. D. Board meeting agenda 1. Board packet mailed out two weeks in advance of the board meeting 2. Agenda for board meeting (will cover MOSERS and Deferred Compensation Plans) Action items Governance issues and compliance reports Executive session typically for legal matters, personnel, and certain investment issues 3. If board members (other than the Commissioner of Administration and the State Treasurer) fail to attend 3 consecutive board meetings without being excused for cause, they will be deemed to have resigned from the Board E. Appeals to the Board 1. The board has implemented an appeal process under its board rule 1-2 with regard to benefits and membership issues (board rules are located on website: http://www.mosers.org/About-MOSERS/Board-of-Trustees/Board-Rules.aspx ). 2. The appeal process is informal and occurs in executive session. Staff will prepare a memo in advance for the board that describes the issue and the member is copied on the memo. During the hearing, staff will provide the board with an overview of the appeal and afterwards the member will make a presentation and explain why staff’s decision should be overturned. After the presentation, the board will review the matter and vote to uphold or overturn staff’s decision. 3. If the board upholds staff’s decision, then the member may appeal by filing a case in Cole County Circuit Court. F. Benefit Advice to members Individual board members should refrain from advising members regarding their benefits – forward any questions to Gary Findlay who will have staff provide answers to the member.
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