Editorial

We expect to hear this month that the fund, which manages an $11-billion equity portfolio on behalf of Canadians, will be freed of the passive investment limitations that have been in effect since its creation at the end of 1997. The board was initially restricted to 100% passive portfolio management, which was later dropped to 50%. This third stage removes any such restrictions.

That the board is now free to pick and choose investments as it sees fit raises fears--among some--that it will fall prey to political influence from Ottawa. This is due in part to the process by which the board's directors are chosen.

Here's how it works. Each federal and provincial finance minister assigns a member to the nominating committee. That committee makes its picks, which are then sent back for review by the finance ministers. The federal finance minister consults with his or her provincial counterparts, and then makes the final call.

Despite assertions that the board acts at "arm's length" from government (as its Web site insists), does the direct role played by federal and provincial finance ministers open up a governance gap at the CPP Investment Board? Is there a risk here that this important pool of Canadian pension assets will be invested based on political rather than economic considerations?

The answer is no. There are legitimate checks and balances in place to protect CPP beneficiaries from meddling politicians. First, the board is legally obliged to invest in the best interests of contributors, without incurring undue risk of course. Second, the board sets investment policy, but it does not make individual investment decisions. That's up to management. This is clearly laid out in the Act under which the board operates.

"To do anything other than advance the objectives as set out, you'd have to have a collusion of directors who were prepared to violate a piece of legislation," says MacNaughton. He correctly describes that as "improbable." These board members--the current list includes former senior bank executives and academics--serve a three-year term, and are effectively insulated from political interference.

For the record, MacNaughton says this change does not rule out buying any indexes. Rather it will free him and his team up to make the active/passive call more strategically. That will be a must if the board is going to achieve its estimate of growing the equity portfolio to $130 billion by 2011.