Incovenience

Inconvenient Truths

In my last post, I pointed to some ethical, social responsibility and reputational factors our Pension Board might consider when investing our money. There are , however, some inconvenient truths (one might want to consider the advice of the UK's Walker report). 

Well run companies do run afoul of prudent and honest practices. Consider the case of SC Lavelin and their bribery of foreign officials as they attempted to secure contracts in the middle east. Or consider the  major grocery stores here in Canada , recently accused of price fixing on bread.

I mean....really???

Who the hell are these people???

Who ever they are, those on the board have just lost whatever good reputations they had. But, in any case, these grocery chains had all the right policies and reporting. They met regularly with key institutional investors. They also reported on the implementation of their social responsibility policies. Each had whistleblower policies. Several even had anti corruption statements. 

So, Institutional Investors may be excused if they were duped. 

There are limits to due diligence when investing our money. 

There are other ways that Institutional and Retail Investors may be duped into believing that the corporation in which they are investing, is credible. 

Risk management may not be properly overseen, monitored or reviewed by the board. 

Remuneration may not be aligned with shareholder interest. This makes our own say on pay a very important function for our own board, as investors. 

Frankly, corporate disclosure may be inadequate, even when it is coming from the Lead Independent Directors.

So, a few questions which our Board may want to ask when reviewing our investments include:

• are the majority of board members independent? This is a legitimate question to pose and comes from OECD governance guidelines, Dey (if you are Canadian),NYSE, TSX, Cadbury)
• Is there organized: Induction/orientation, recruitment based on skills evaluation, continuous learning for board members?
• Do the NED's meet regularly without management? Can they hire independent advisors to investigate issues, on an as needed basis?
• Is there independent representation on the : Audit, Compensation and Remuneration Committees?
• Are there performance reports not only about the Corporation but also about the Board and management?
• Are Corporate Governance guidelines published?
• Are the positions of Board Chair and president separate?
• Are member service lengths delineated? After what period does a board member cease to be considered independent?
• Is there disclosure of :risk, finance and compensation, performance. and environmental and social impacts? (the latter might have been helpful to investors of Loblaws concerning their Joe Fresh Brand)

What might we expect our Board to report upon when investing our money. The company's:

• transparency
• honesty
• openness
• board independence
• the number of women on the board (and board diversity)
• accountability
• fairness (corruptibility) 
• risk management (and reputation)
• sustainability

I wonder , does the NBPSPP Board consider these factors when evaluating our investments?

Risk Management and NBPSPP: a primer

In the last posts several points were made about the importance of risk management by a Pension Board (being our pension board). 

The point made earlier is that risk has not been properly reported. 

What is risk.

It is the possibility that something unexpected or not planned will happen. There are 2 kinds of risks: an upside(when events turn out better than expected) and a downside (when things don't turn out well). In our case, we can't tell based on the reports we have received. This is because we are not told what to expect and how we are expected to get there. 

There is another problem. We receive reports about fund performance without a context. In this case, our fund increased by 7% and change. but, in a bull market, is that good? 

Not really when other funds perform at between 10% and 15%. 

Why care? 

Why should our Board care about risk management?

1. CCGG guidelines strongly recommend that this is a key feature of governance.
2. CAPSA recommends that this be a major function of a pension board.
3. CICA/CPA recommend this in their 20 questions booklet for pension boards.
4. ERM program helps protect our assets
5. It will increase the value of the Plan..which benefits us, of course.
6. The Board has a duty to us to prevent losses though error, omission , fraud and dishonesty. The Board also might want to consider its own D&O liability insurance. If the Board is expected to pursue a risk management program. and don't.. with a material impact to us, they may fid themselves personally liable.

You're a Pension Board member?

You're my Pension Board member?

You may want to reference, besides CCGG, CAPSA and CICA:

• Cadbury ('92)-identify risk, establish priorities, internal controls
• Combined UK Code ('03)- role of the Audit Committee, Risk Management Committees
• Turnbull Guidance-internal controls
• SOX (02)
• CSA Corporate Governance Guidelines NP 58-201 

So, screw up and know better?..get sued.

Just saying, ladies and gents. 

More on this tomorrow. I'm on a roll and have lots more.