A fiduciary is anyone who is placed in a position of trust by another. Fiduciary duty is what has held civilization together since the beginning of human history. Our lives are better off for it, and we see examples of it everywhere we go: of the duty of parent to child, spouse to spouse, and often later in life, child to parent; doctor to patient, policymaker to constituent, manager to stockholder; and the list goes on. Trustees on an investment board also have a fiduciary duty to beneficiaries or donors. Like other types of fiduciaries, they are entrusted to act in others’ interests, and not their own. Fiduciary duty is at the heart of this book.
Despite the long-term decline in defined benefit plans in American corporations, other retirement programs persist, including public and remaining corporate pension plans, managed and discretionary profit-sharing plans, and of course, the now ubiquitous 401(k), 403(b) or defined contribution plans. These programs continue to play a crucial role in providing retirement security and should be protected and sustained as much as possible. That responsibility lies within the fiduciary duty of the board of trustees overseeing these plans.
The field of investing is complicated, at times unnecessarily so, and most people are neither trained nor prepared for overseeing investments. Only a handful of states require some type of instruction as part of the basic educational curriculum for high schoolers.1 Widespread financial illiteracy not only plagues our collective ability to invest as a society, but also hampers our ability to manage and maintain the basics of personal finance, including household budgeting and the responsible use of credit. This makes the role of the financial fiduciary even more critical to our economic health.
As a long-time practitioner in the field of investing, Chris has had the opportunity of working with many different clients over the years, and the chance to see the full range of activity and behaviors against a backdrop of a constantly shifting market environment.
About ten years ago, Chris began teaching what has now become “Sustainable Finance” in the Applied Investment Management (AIM) Program at Marquette University, taking over from Sarah, who originally designed the course, believed to be one of the first in the nation. The AIM program teaches select finance undergraduates applied training in investments. Graduates of the program go on to pursue careers in asset management, private equity, wealth management, and other roles across banking and finance. The focus of this course has been on ethics in the investment profession, but covers several other important topics, including corporate governance and socially responsible investing.
It has been said that the best way to become an expert in anything is to become a teacher of the subject. That was the case for Chris. Back when Chris was an MBA student, two decades ago, corporate governance was just coming into its own as a topic in MBA courses. So, when he began teaching it, he became a student all over again.
As he learned more about how the structure and organization of corporate boards could be empirically linked to organizational performance, he began reflecting on the many boards and committees he had worked with over the years with respect to their investments, and he wondered whether the different behaviors from these groups impacted their performance, and how this might change over time. In addition, he considered, with respect to his role as the investment consultant, to what degree his role was integral and influential in this process. Chris felt and had observed that these factors were important and seemed to impact the outcomes over time, but he didn’t know how to go about answering these questions to any point of conclusiveness.
This led to our collaboration. Sarah is a corporate governance scholar who has spent her career developing methods for analyzing board governance factors, but also has practical experience in serving on a public pension plan board. Sarah, for seven years, chaired the Milwaukee County Public Pension Board investment committee. When Chris approached her on this topic, thinking it might make for an interesting Ph.D. research thesis, she immediately saw the potential for work in this area.
Between the two of us, we had a solid set of skills and experiences to identify and frame our research questions. Moreover, we were aware that the US public pension system was under siege. We hypothesized that if trustee governance mattered at all, it would matter most for organizations under stress. At the same time, we hoped, but did not know, that the results of our work could help, in albeit a small way, to alleviate the crisis.
The thing about exploratory research is, while you may have some ideas about the phenomenon you are looking into, you really don’t know what you will find. In our case, we ended up finding some compelling evidence. And by the way, we shouldn’t call this “new”. There have been several others before us who have contributed their knowledge and findings to this area. Keith Ambachtsheer, a luminary in this field, was doing work back in the early 1990s. He was one of the first to see the importance of governance and did some of the initial survey work. Gordon Clark and Roger Urwin, in collaboration with Willis Towers Watson, have been systematic in their development of theory around this topic, and have been influential, particularly in working with industry on this. And there have been, of course, others whom we will also encounter at various points in this book.
Our goal in our work, and where we saw an opportunity to contribute, was in measuring the empirical relationship of governance factors to financial outcomes. The challenge was to gather data to do just that. But, we did it, and today we house the first and only public pension governance database, and we are working on expanding our work into other peer groups and related ESG areas.
So, why the Five Imperatives? First, what is an imperative? Webster’s defines it as something that is “expressive of a command”, an “obligatory act or duty”,2 as something that is “not to be avoided”, but “necessary”. For a board with great responsibility, nay, a fiduciary-level of responsibility to others whose livelihoods or missions depend on it, the use of the term “imperative” could not be more relevant.
Why focus on these five? In our view, most complexity can be broken down into a few digestible components. If we came to you and said we have 42 factors we want you to think about regarding your board governance (or even 144 factors, as one of our board evaluation instruments, the Governance Self-Assessment Checklist (GSAC), has the capacity to evaluate), your eyes would, no doubt, glaze over.
Instead, if we came to you and said, “There are five critical things that you, in running your organization’s or even your own personal investment portfolio, must keep sight of”, then we might have a different discussion.
So, the goal of this book is to put our work and findings in the hands of the practitioner. In making this guidebook a practical guide, we have structured this book to address the five most critical areas facing every organization with an investment mandate. Each area has several subtopics related to it, which we will spend time with, but at the end of the day, and by the end of the book, we want this to be something that each trustee can take back to their boards and begin incorporating into regular practice and use to ultimately more effectively fulfill their fiduciary duty.
How to Use This Book
This book is divided into five sections, the Five Imperatives. Each section is further broken down into chapters that cover various topics under each imperative. We have also introduced within each section an investment subtopic, with a more technical emphasis geared toward the practitioner—a deeper dive into the mechanics of how to address a subject which relates to the overarching theme of the section. This book may be read cover to cover, or it can be picked at or used as a guide for later reference.
Our vision for how our work may impact the boards now and in the future is to help them to focus on the major drivers of positive change, and for us the big three are: Governance, through assessment and self-evaluation; Performance (of both a financial and impact or “double-bottom line” nature), through effective oversight and reporting; and finally, Impact, through proper evaluation and application of portfolio investments that drive better returns, mitigate risk, and home in on certain factors that better express the values and mission of the organization.
Footnotes
1
https://www.ecs.org/high-school-graduation-requirements/
2
https://www.merriam-webster.com/dictionary/imperative