Saturday, January 31, 2009

STRS Retirement Board Retreat, Day 2

Friday, Jan. 30th, 2009
Retreat location: STRS Bldg., 7th Floor

Notes by Mary Ellen Angeletti

A.M. Session: All Board members were in attendance except for Steve Puckett and Tai Hayden. A summary of Board discussions from Thursday's session regarding the application of governance principles to section 3307.15 was shared:
Top Three Priorities:
...1. Determine what are policies versus administrative procedures and memorialize these decisions
...2. Focus on investments, including general education, asset allocation, investment strategies and risk
...3. Learn how to deliberate and disagree in a constructive manner
Other Items Noted (in no particular order):
...• Be prepared for discussion by doing "homework" ahead of time
...• Be sensitive to stakeholders' positions
...• Continue to pay reasonable expenses to run the system efficiently without starving the budget
...• Think openly & look at things through the eyes of your peers
...• In Board deliberations, clearly articulate understandings of expert advice & how that advice informs Board member's opinion
...• Question the current nature of recommendations. Be inquisitive
...• Create a checklist of information sources to use in Board decision-making
...• Look at the possibility of using more than one consultant in some areas
...• Open up channels of communication with other public pension board members, use other systems as a reference
...• Use "Fiduciary Impact/Member Impact" grid
...• Anticipate (contingency planning)
...• Form an ad hoc board governance committee
...• Continue education about fiduciary issues/continue to use Ian Lanoff
A summary of Board discussions from Thursday's session regarding state and federal relationships was shared:
Top Three Priorities of this topic were:
...1. More legislative contact by Board members in concert with Governmental Relations staff
...2. Contingency planning
...3. Continue membership in coalitions
Other Items Noted (in no particular order):
...• Be visible at ORSC meetings
...• Stay informed of pertinent legislation (state & federal)
...• ID positive issues for member action
A summary of Board discussions from Thursday's session regarding fiduciary and financial contingency planning was shared:
Top Three Priorities of this topic were:
...1. Identify issues & trends
...2. Begin using a disciplined, long-term, documented contingency planning process [NOTE: Dr. Leone offered that this topic was not adequately discussed in the past. Conni Ramser felt it was adequately discussed]
...3. Determine & implement appropriate communication strategies
Other Items Noted (in no particular order):
...• Receive education around issues
...• Think and act in best interests of members
...• Be flexible (things change)
...• Have an open mind
...• Encourage constructive discussion
Following the sharing of the summary above, Steve Mitchell, deputy executive director of investments, and Matt Downie, investment policy officer of investments, made a presentation of corporate governance and shareholder activism and the role of STRS Ohio. This presentation was based on previous discussions with the Board in the mid-1990s when a decision was made to maintain an aggressive proxy voting policy. The discussion also was based on previous discussions with the Board in the fall of 2002 at which time the Board discussed hot topics (IPO allocations, investment protection principles, mutual fund proxy voting disclosure, & tax havens) and made a decision to address these issues in the proxy voting policy, letters, and other policies. STRS current approach to corporate governance & shareholder activism was discussed next. It consists of:
...1. STRS Voting Proxy Voting Policy:
......a. aggressive proxy voting
......b. semiannual proxy voting review/presentation to the Board
......c. annual proxy voting policy review
...2. CII Membership-Council of Institutional Investors is a nonprofit association of public, union and corporate pension funds with combined assets exceeding $3 trillion. Member funds are major long-term shareowners with a duty to protect the retirement assets of millions of American workers. CII has 140 members.
......a. semiannual conferences
......b. newsletters, primers & teleconferences
......c. CII direct engagement focus list process
......d. CII policies committees/council letters
......e. access to information about how other members address issues like proxy voting, corporate governance, etc.
...3. CFA Institute Membership:
......a. corporate governance manual:
.........• corporate ethics, standard code of conduct
.........• evaluation standards for executive compensation
.........• guide to environmental, social & governance factors for listed companies
.........• shareowner rights
...4. STRS Ohio Securities Litigation Policy (There have been 353 security litigations)
...5. Iran & Sudan Divestment Policy & Program
A discussion ensued regarding the effectiveness of corporate governance efforts on long-term stock performance. There is no evidence of better long-term performance based on governance scores. Dr. Leone said that STRS has an obligation to protest the current practice of bailout money being used for bonuses, trips, etc. by companies in which STRS invests. He then asked if there were any triggers which signal that a company is guilty of abuse of governance principles. He used the example of Fannie Mae. Mr. Mitchell reminded us that STRS is active in proxy voting and audits are conducted. Conni Ramser referred to the book each member has which includes the voting records. Dr Leone took issue that STRS is not critical enough of companies with whom we have investments. Conni asked Dennis to what extent he felt that STRS should be involved. "Should we add additional staff?" Terri Bierdeman offered that at present, discussions center on the stimulus package, regulatory reform of banking, and a strengthened FCC is favored. Bill Neville, STRS counsel, gave a summary of the suits brought by STRS against some of these companies which has brought in billions of dollars. STRS is very active in changing audit procedures, removal of company board members, etc. Recommendations & options involve being active in corporate governance and shareholder activism which ensures that the shareholder's right to vote is used (proxy voting). STRS is also engaging with other companies to change the way they act (engagement). Mary Ann Cervantes wanted the Board to consider a proposal to establish a committee to address corporate governance. Mr. Brooks said STRS might be very active and/or get other entities to join with STRS. However, STRS is not going to issue shareholder warnings. Regina Burch asked about CalPERS aggressiveness and the fact that they seem to have the ear of senior management of companies. A summary of the Board discussions of corporate governance and shareholder activism and the role of STRS followed:
Top Three Priorities:
...1. Determine costs/benefits of playing a more active role in corporate governance reform
...2. Explore forming a Corporate Governance Subcommittee
...3. Remain involved in collaborations & coalitions that are focused on corporate governance reform
Other Items Noted (in no particular order):
...• Communicate corporate governance reform successes to membership
...• Identify & review "hot button" issues
...• Monitor where STRS Ohio is in relation to other pension plans (i.e. comparison charts)
...• Continue reviewing proxy voting policies
...• Continue aggressive litigation
...• Remember that fiduciary duty trumps concerns about such issues as tobacco and Iran (but not fraud)
...• Don't be reluctant to address corporate problems because of "We're in this for the long haul"
Following a mid-morning break, Laura Ecklar, Director of Communication Services for STRS, presented an overview of STRS public relations. She began with a definition: "Public relations is the management function that identifies, establishes, and maintains mutually beneficial relationships between an organization and the various publics on whom its success or failure depends." "Publics" was defined as:
...1. membership (actives, retirees, candidates running for Board members)
...2. legislators
...3. staff/associates
...4. employers (school boards)
...5. Board members, new Board members
...6. general public
She described the process of public relations with a circular model composed of 4 parts:
...1. situation analysis (research)
...2. develop strategies
...3. talking actualities & communication
...4. evaluation (research)
To answer the question of how does her department know if their P.R. is working, she cited that the research provides the answers. Examples would be the STRS surveys. They indicate:
...a. approval of fund management
...b. health care is IMPORTANT
...c. improvement in a lot of Dr. Leone's critical issues
...d. Board votes & takes action & STRS P.R. reports that action
...e. not all Board members agree but the Board must speak collectively
...f. Board members are following fiduciary responsibilities Current trends are pocketbook issues concerning health care and service credit.
Mr. Brooks said, "Corporate P.R. tends to be positive." Ms. Ecklar offered that good corporate P.R. tells the good and the bad news, is transparent, tries to be proactive, and gets out in front of issues. She used the example of the Fordham report and the way in which STRS P.R.'s fast action (informing members) took the steam out of a big media rush. She mentioned that one case study (the Iran mandatory divestment issue) came very quickly. In this case, all of the pension systems were impacted. The STRS call center helped as well as media coverage and in the end, the issue was NOT mandated. She offered that the best P.R. is when the Board does a good job. Dr. Leone praised the quality of STRS publications. Dr. Leone expressed criticism of STRS' P.R.too. He said that STRS public relations must start admitting when the Board and/or staff is wrong. For example, he said in 2000, STRS said, "Nothing is wrong." Yet Herb Dyer had said, "The money here at STRS is ours to spend. Retirees need to go out to dinner less." Yet later he said that Dr. Asbury admitted that the staff was not reporting the information. He raised the issue of the 8 to 1 vote last March regarding handing out the bonus checks which was a mistake and was later changed. Yet STRS P.R. was unable to admit that a mistake had been made on this issue. Mr. Brooks asked, "How do Board members respond to members' inquiries?" He said that he is presently selectively responding to emails. He asked, "What is the Board member's role regarding inquiries, editorials in the paper, etc." Ms. Ecklar said that it depends on the individual issue. Then Dr. Leone asked, "What should I do if I see illegal actions by Board members?" He was told to address the issue to STRS legal counsel.
A summary of Board discussions of STRS Ohio Public Relations followed:
Top Three Topics:
...1. Assist Board members in how to interact with members (i.e., personal contact, correspondence, etc.)
...2. Make sure messages are transparent; develop a game plan for communicating long-term strategy reviews
...3. Maintain budget to support great quality of publications and documents
Other Items Noted (in no particular order):
...• Continue to encourage use of e-mails and recordings of meetings, particularly through monthly reminders
...• Inform the Board of pending issues (trouble shooting)
...• Stop acting as if the Board members are knowledgeable about legal and management issues when they are not
...• Be mindful of terminology
...• Be more informative about the totality of Board decisions
An Executive Session Lunch Break followed.
Following lunch, a Board self-assessment occurred in which there was consensus that they need to work on commitment, to engage in much more discussion, to encourage interaction, and to focus on fewer items.
The retreat concluded at 3 p.m.
Larry KehresMount Union Collge
Division III
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