CORTEX Effective Governance: Key to Managing Fiduciary Risks in Turbulent Times Tom Iannucci Cortex Applied Research Inc.

2 CORTEX Messages Good Governance: is crucial to strong performance and effective risk management doesn’t occur naturally has to be consciously designed requires ongoing efforts and attention

3 CORTEX Top Risks  Inaccurate/untimely benefit payments  Breach of fiduciary duty  Communications risk  Human resource risk  Poor investment performance  Board dynamics

4 CORTEX Based on a survey of 50 large pension sponsors across North America, with aggregate assets over $400 billion 25th percentile Median 75th percentile Maximum Mean (fund weighted) Mean ($ weighted) 38 bp 66 bp 182 bp 1,600 bp 211 bp 139 bp Source: Keith P. Ambachtsheer & Associates Inc. Excellence Shortfall

5 CORTEX Barriers to Excellence RankBarrierCited 1Poor process (including structure, communication & inertia98% 2Inadequate resources48% 3Lack of focus or clear mission43% 4Conservatism35% 6Inadequate technology13% 7Conflicting beliefs8% 7Difficult markets8% 9Lack of innovation5% 9Suppliers5% Based on a survey of 50 large pension sponsors across North America, with aggregate assets over $400 billion. Source: Keith P. Ambachtsheer & Associates Inc.

6 CORTEX Good Governance Doesn’t Come Naturally  Human bias towards action  Turnover among fiduciaries  Lack of common terminology among fiduciaries  Tendency to focus on the urgent rather than the important

7 CORTEX Inconsistent Terminology Seldom do governing and managing fiduciaries share common terminology Governance Policy Strategy Oversight Micro-management Fiduciary duty Performance

8 CORTEX Traditional Governance Approach  Board time is focused on investments  Board is very hands-on  Few policies (exception: investments)  Unclear goals and objectives  A lot of time spent on important/urgent matters (i.e. fire-fighting)  Unclear Board/staff roles

9 CORTEX Traditional Focus (A) Important & Not Urgent (B) Important & Urgent (C) Not Important & Urgent (D) Not Important & Not Urgent

10 CORTEX Mission/Purpose Reality Check  Board/Committee Operations Policy Framework Monitoring Systems Fiduciary Knowledge Decision-making Structure A Policy-based Approach to Board Governance

11 CORTEX An Effective Decision-Making Structure  Roles are clear, documented, understood and accepted  Delegation consistent with expertise and time availability need for objectivity  Minimal overlap in responsibilities  Separation of policy and implementation

12 CORTEX A Decision Map Level Planning/ Policy Investment Program/ Strategy Management/ Implemen- tation Oversight/ Control BoardApprovesMonitors Investment Committee Reviews & Recommends to Board ApprovesMonitors Executives & Staff Develop & Recommend to Committee ManagesMonitors

13 CORTEX The Board as Risk Controller  Establish purpose – mission, goals and beliefs  Define risks and tolerance levels  Establish policies to manage risk  Monitor compliance and implementation  Periodic review (i.e. reality check)

14 CORTEX The Administrator as Performance Maximizer  Maximize performance  Policy analysis and recommendations  Implement policies  Monitor and report on operations and compliance with policies

15 CORTEX The Need for Policy Turnover and lack of common terminology imply a need for documented policy: Governance policy (conflict of interest, communications, education, travel, etc.) Investment policy

16 CORTEX A Policy-focused Board (A) Important & Not Urgent (B) Important & Urgent (C) Not Important & Urgent (D) Not Important & Not Urgent

17 CORTEX How Do We Get There? A comprehensive governance framework, which takes the form of a Board Governance Manual: Policies on roles & responsibilities Policies to guide board practices:  Trustee education  Trustee communication  Board operations  RA performance evaluation  Etc. Ongoing maintenance

18 CORTEX Messages Good Governance: is crucial to the success of a Fund doesn’t occur naturally has to be consciously designed Requires ongoing effort and attention

19 CORTEX Benefits  Potential for improved performance  Enhanced risk management (focus on important & non urgent)  More efficient decision-making (clearer roles)  Institutional memory (lessens impact of trustee/staff turnover)