© Copyright 2000 Rogers Media. The following article first appeared in the August 2000 edition of BENEFITS CANADA magazine.

Governance rewards

There's a link between pension plan governance and performance. And stronger returns are only part of it.

BY BARBARA CLAPHAM

Derek Bok, a past president of Harvard University, is fond of saying, "If you think education is expensive, try the alternative." A similar philosophy applies to pension plan governance--the cost of having a good governance policy is much less than the risk of not having one at all. A plan that lacks a comprehensive governance policy is taking a gamble that could be just as detrimental to the plan and its members as any other kind of business or financial risk.

Governance can be looked at in two ways. It can be seen as an obligation required to satisfy legal and regulatory requirements, or it can be regarded in a more positive and proactive light.

Several studies have shown that funds with good governance perform better than those that overlook this aspect of their operation. How much better? Dr. Gail Cook-Bennett, chairperson of the Canada Pension Plan (CPP) Investment Board, concedes that "it is very difficult to put an actual figure on the amount."

Cook-Bennett notes, however, that large institutional investors, such as the CPP, Ontario Teachers' Pension Plan and the Caisse de dépôt et placement du Québec are very interested in good governance. These groups, as well as comparable institutions in the United States, believe there is a definite correlation between good governance and return. Even though it may not be possible to come up with a precise number, the perception is that the value is significant.

We are not just talking about increased returns either. Cook-Bennett points out that good governance also "provides the stakeholders of the plan with a sense that things are being done properly, so there is a value-added [component] in terms of the integrity of the institution as well as any rate of return difference there might be. There is that extra dimension."

BEST PRACTICES

There is no one definitive approach to good governance. However, institutions that have implemented such a plan tend to have several practices in common. They include:

• A board of directors. Perhaps the most important factor is to have a diverse board of directors with a breadth of professional experience that is relevant to the pension fund.
• Clear responsibilities. It is critical that there is a clear demarcation of duties between the board of directors and the managing fiduciaries. The board should oversee the operation and ensure that certain responsibilities are carried out by management.
• A strategic plan. The board and management should develop a strategic plan together to determine the goals of the organization and how they will be achieved. The process differs from plan to plan, but the important factor is that the strategic direction is identified.
• Good communication. Active discussion and debate should be encouraged--this is an essential part of the process. The strategic plan should be well documented so that the review process will determine if the goals were actually achieved.
• Risk management. Every plan faces risks which must be identified. Policies also need to be developed and implemented to deal with these risks.
• Monitoring and review. The effectiveness of the governing process needs to be measured to see if governance goals are being achieved.

Developing, implementing and monitoring a good governance plan increases the integrity and performance of your organization. Good governance is not only common sense, it's a good investment strategy.

Barbara Clapham is a contributing editor with BENEFITS CANADA.

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CONFERENCES

TMAC Annual Conference
From Sea to Sky a
nd Beyond
Sept. 24 to 27, 2000Vancouver Convention and Exhibit Centre

Keynote speakers are John Wetmore, president and chief executive officer, IBM Canada, and Frank Abagnale (known as the Great Imposter) who lectures at the FBI Academy.

To register, call (416) 367-8501 or (800) 449-TMAC; E-mail: info@tmac.ca.

The Romanow Commission has released its final report on the future of healthcare in Canada.

For Commissioner Romanow's recommendations, click here.

Click here for Senator Michael Kirby's report, "The Health of Canadians – The Federal Role: Recommendations for Reform."