Molly Janczyk: Day 1 of STRS Board retreat

From Molly Janczyk, February 1, 2008
Subject: Retreat: 1/30/08

I was unable to attend Wed. but rec'd a binder with presentations when I attended on Thurs. 1/31/08.

I found some items of interest:

I: FIDUCIARY BASICS:

Presenter: Ian Lanoff: Groom Law Grp.

...• Trustees (Board members) are held to higher standards (morals) than those of the market place

...• Basic fiduciary rules in STRS Ohio legislation derived from ERISA: Fed. Employee Retirement Income Security Act of '74

...• Tilte I of ERISA does not apply to STRS since STRS Ohio is maintained pursuant to plans under Section 401(a) of the Internal Revenue Code (the Code) but certain provisions of Title II of ERISA 401(a)(2) apply including 'exclusive benefit rule.'

**The 'Prudent Expert' Rule:

Ohio Revised Code (ORC): 3307 gives the Board its authority, requires the Board and other STRS fiduciaries to exercise thier duties "with care, skill, prudence, and diligence under that circumstances then prevailing that a prudent person acting in like capacity familiar with these matters would use.": This is called the Prudent Expert Rule.

Thus, when making investment decisions for STRS funds, a fiduciary is help to the standards of a prudent individual with experience managing assets.

**IMPORTANT:

The fiduciary:

...• has the duty to seek independent advice when he lacks to expertise

...• may rely on independent experts but NOT blindly do so as the fiduciary in NOT relieved of obligation to exercise his or her OWN judgment in decisions.

...• is not required to become an expert in the field but MUST take steps to ensure reliance on expert advice is reasonably justified.

...• must be educated to level appropriate evaluation of hired expert advice

NEEDED STEPS:

...• Investigate expert's qualifications; read necessary recommendations and understand it

...• QUESTION methods and assumptions not making sense: GOAL: NOT TO DUPLICATE EXPERT ANALYSIS BUT TO REVIEW IT TO DETERMINE THE EXTENT TO WHICH IT CAN BE RELIED UPON.

...• This standard requires fiduciaries to EXERCISE THEIR OWN JUDGEMENT in rejecting expert advice

...• If they determine expert is qualified, then they must at least consider the advice

CONSIDERING ADVICE CONSISTS OF:

...• REVIEW ALL RELEVANT DATA FROM EXPERT AND OTHER EXPERTS IN FIELD

...• Advice of hired/consulted expert might be rejected if incomplete or contradicted by advice of other experts.

...• Investment experts on Board and ALL Board members must use all personal skills they have and CAREFULLY HIRE, MONITOR AND EVALUATE THE EXPERTS UPON WHOM THEY RELY.
(*Require the proper level of education for Board members to be able to do so).

...• Delegation to experts is allowed; ABDICATION IS NOT

*DUTY OF LOYALTY:

"....investing funds solely in the interest of the members and beneficiaries and for the exclusive purposes of providing them with benefits and defraying reasonable administrative expenses."

The U. S. Supreme Court concluded that while performing trust business fiduciaries may wear only ONE hat: one of Trustee and MAY NOT wear a second hat as UNION REP or employer that appointed them.

Union may expect higher retirement benefits for special groups.

NO FIDUCIARY:

...• owes a group of union members, participating employers, legislature, Governor, taxpayers.

...• may mislead membership

...• forgets who they represent when communicating with media

II: STANFORD FUND GOVERNANCE BEST PRACTICE PRINCIPLES:
.....The Stanford Institutional Investors' Forum

.....Committee on Fund Governance
.....Best Practice Principles (31 pages in PDF)
.....(Click here for HTML version)

Presenter: Ian Lanoff
Groom Law Grp: www.groom.com
202-857-0620

A. Agony and Ecstasy of Board Service:

STRS:

...• $76 billion in assets
...• 450,000 members
...• 600 Staff

...• Invests $365 million daily

...• $4.5 billion in benefits paid annually

...• Meets with 18,000 members annually

...• Processes 45,000 retirement estimates annually
...• 26 Board meeting days per yr.

Governance Structure:
...1. Board
...2. Exec. Direc.
...3. Staff

***IMPORTANT

Board Roles:

...1. Long term strategy: sustainable fiduciary plan, welfare of ALL members, 1-3 yr. objectives
...2. Exec Direc (oversight of Exec. Direc.)
...3. Oversight: policy and metrics

Exec. Direc. Roles:
...1. Manage operations
...2. Representative to shareholders
...3. Link bet/ Board and Staff

Staff Roles:
...1. Execute daily operation
...2. Monitor legislative, economic and professional issues
...3. Advise Exec. Direc and Board

***GOVERNANCE ROLE CANNOT BE DELEGATED: IT COMES WITH THE JOB AND IS THE JOB The Board, Exec. Direc and Staff have clearly defined roles and are highly dependent on one another. Success is determined by how well they interact

Practice Break Out Grp Sessions: Instructions:

...• Get out as many ideas as possible to 80% agreement

...• Do not judge, evaluate, repeat or debate an idea

Assignment for Break Out Groups:

...• Interdependence of board, exec. direc. and staff roles:

...• List 3 important things needed from one another such as:

.... timely info, involvement in deliberations, efficiency, quick response, clear decisions.

**TRUSTEE ATTRIBUTES:

...• Loyalty to membership

...• Inquisitive

...• Willing to devote time and attention

...• Civil and constructive in debate

...• Cooperative in solving problems

With enough info provided to:

...• Ask intelligent questions, participate in discussion and vote responsibly

**TRUSTEE COMPETENCIES:

...• Basic understanding of modern day portfolio theory

...• Diversification principles

...• Basic financial analysis

...• Fundamental accounting principles

...• Basic features of STRS Ohio benefit programs

YOU CANNOT DELEGATE COMPENTENCIES! THEY ARE THE JOB!

BOARD TIME PRIORITIES

...• Welfare of membership as whole and fiduciary soundness of assets

...• Identify priority topics to which Board should devote time over next 12 mo.