CORTEX Effective Board Governance Presented by Tom Iannucci Cortex Applied Research April 2006

2 CORTEX About Cortex?  Pioneer in pension governance;  Origins in management consulting;  Independent boutique firm;  Only consulting firm dedicated to pension governance;  Process-driven to achieve strong client buy-in;  Track record of facilitating change.

3 CORTEX Our Services  Role clarification  Governance policies and support  Strategic planning  Board training  Board self-evaluation  Governance reviews/audits  Investment consultant search  Specialty projects (organizational)

4 CORTEX The Firm  Founded by Dr. John Por in 1991  A core team of professionals  Mix of backgrounds: Law, finance, economics, engineering, fund administration  Over 75 governance clients U.S., Canada, Europe Public, corporate, DB, DC

5 CORTEX Sample Clients  Colorado PERA  CalSTRS  Louisiana SERS  Maryland State ERS  San Francisco ERS  Virginia Employees  Alameda County  Kern County  Sonoma County  Ventura County  LA Fire & Police  Mississippi PERS

6 CORTEX Investment Consultant Management/ Staff BOARD The Governance Function Actuary Investment Managers Legal Counsel Sponsor Members / Beneficiaries

7 CORTEX Our Beliefs on Governance Good Governance: is crucial to organizational success doesn’t occur naturally has to be consciously designed requires ongoing efforts and attention

8 CORTEX Our Mission To assist retirement systems in identifying and implementing organizational best practices for achieving optimal performance.

9 CORTEX A Best Practices Organization  Meaningful, agreed-upon goals  Clear roles (Board, staff, vendors)  Knowledgeable Board & staff  Measuring/monitoring the right things  Policies/processes in place  Sound investment philosophy

10 CORTEX Fiduciary Duty vs. Board Effectiveness  Fiduciary Duty: Loyalty to the beneficiaries Prudence  Board effectiveness: Processes and practices designed to ensure:  Fiduciary duties are met; AND  Superior performance is achieved

11 CORTEX Loyalty Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctillio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inveterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions. Only thus has the level of conduct of fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court. Chief Judge Cardozo (Meihnard v. Salmon)

12 CORTEX Prudence Prudence is process:  Clear delegation  Knowledgeable players  Sound policies  Due diligence  Appropriate reporting

13 CORTEX Effective Boards  Demonstrate prudence  Abide by duty of loyalty  Focus on the important but not urgent  Support optimal performance This rarely happens naturally!

14 CORTEX Why Not?  Fiduciary knowledge not easily gained  Turnover among Board and staff  Lack of common terminology  Human tendency to focus on interesting/urgent

15 CORTEX Designing A Governance Framework Mission / Purpose Reality Check  Policy Framework Monitoring Systems Fiduciary Knowledge Decision-making Structure Meeting Operations

16 CORTEX Achieving Governance Best Practices 2 Stages: 1. Build a governance framework Role clarity Governance policies 2. Build knowledge and strategy Board training program Strategic planning

17 CORTEX Phase I How To Begin Role Clarity:  Board  Board Officers  Committees and Committee Chairs  Executive Director

18 CORTEX Typical Role-related Issues  What is the right committee structure for us? What is the role of each committee?  What is the role of the Board: Staff hiring and termination Directing staff Hiring and terminating managers Due diligence Stakeholder communications

19 CORTEX Role-related Issues (cont’d)  How much authority should the Chair have? Determining committee chairs/members Board travel  What authority does the ED have? Staff hiring and direction Expenditures Hiring service providers Portfolio re-balancing Selecting vendors Due diligence Making policy recommendations

20 CORTEX Governance Policies Samples:  Board Education  Board Operations  Board Communication  Board Evaluation  Executive Director Evaluation  Vendor Selection  Policy Process  Code of Conduct  Board Travel

21 CORTEX Typical Policy Issues  What would a good board orientation program look like? Continuing board education program?  Should there be term-limits for officers and committees?  What routine reports should the Board expect? How frequently?  How should meetings operate?

22 CORTEX Policy Issues (cont’d)  How should the Board communicate: Members County Employee groups Vendors Media  How should we evaluate the ED?  How should we evaluate ourselves?  What do we do if board members don’t behave or abide by our policies?

23 CORTEX Benefits  Ability to demonstrate prudence to the outside world: A formal governance program is becoming industry standard (fid. audits)  Maximize likelihood of strong performance (investment & admin.) More efficient/focused decision-making Clear, effective working relationships

24 CORTEX Phase II  Updating/refining the framework  Continuing board training  Strategic planning

25 CORTEX Who Hires Us? Generally, two types of clients:  Those that have experienced an organizational conflict of some sort;  Those that are functioning well and wish to refine/continue current practices.

26 CORTEX Option A  Deliverables: Develop charters for each key player Develop 5 governance policies  Process: Board/staff survey Board and staff interviews Working sessions with staff to draft policies and charters Presentation for Board to discuss and adopt policies and charters  Completion:4-5 months

27 CORTEX Option A - Variations  Spread project over two years: Year 1 – charters Year 2 – policies  Less efficient and ultimately more costly

28 CORTEX Option B Governance Workshop  Board survey and interviews  Telephone interviews  ½ day workshop: Educational Interactive  Governance action plan

29 CORTEX Option C Strategic Planning  Process: Strategic planning survey Interviews and working sessions Statement of Strategy/Business Plan Workshop  More effective as a follow-up to governance policy framework

30 CORTEX Questions and Discussion