CIOs Discuss Overcoming Sector-Based Challenges with Management, Boards
Art by Mar Hernández
Certainly, the success of chief investment officers everywhere hinges on relationships with management and the board. But, that’s not to say all the issues that arise are the same everywhere. Investment chiefs in different sectors, from corporations to endowments, deal with matters that are, if not unique to the particular type of institution, at least shared at only some other organizations.
These issues aren’t all bad, of course. While some matters create tricky situations for CIOs, others can make life easier. Here’s a look at three sectors:
Public Corporations
The considerations corporate CIOs and investment committees face are colored by SEC and ERISA requirements. “Being a corporate investment committee member involves a very different set of legal and liability responsibilities,” says Greg Williamson, head of strategy for Pluribus Labs LLC and a former CIO of American Red Cross and BP America Inc. One result is that few investment committees have external board members, since outsiders typically hesitate to assume the liability such fiduciary responsibilities entail. Thus, investment committee board members often tend to include executives, like the CEO, treasurer, or CFO, who face that exposure, anyway.
The upside: Investment committee members often have a greater-than-usual understanding of the liabilities they’re managing, certainly compared to the boards of other institutions. Plus, for CIOs, “You see them every day, so there’s an ongoing conversation that might not take place at another kind of institution,” says Williamson. In addition, some investment committees tend to be hands-off, delegating the lion’s share of decision-making authority to the CIO and the investment team, according to industry observers.
Robert Hunkeler, vice president, investments, at International Paper, reports to an investment committee comprised of the CFO, chief legal counsel, treasurer, and head of human resources, but most decisions are made by the staff. It’s been that way since before he joined in 1997. “We can make decisions quicker and by people who really understand the issues,” says Hunkeler, who oversees $16 billion in pension, savings, and other plan assets.
Still, all investment committees make important decisions—and there can be a major misalignment between those members focused more on the business and the investment-oriented CIO. And committee members aren’t always sophisticated market analysts. One CIO recalls a member of the investment staff who worked for months on a plan for emerging market equities. When they presented it to the investment committee, which included the CFO and heads of various business units, the response was lukewarm. “One comment was that I wouldn’t invest in a country where you can’t drink the water,” says the CIO.
An equally important relationship is with the treasurer or CFO, since that’s the person to whom corporate CIOs typically report and who generally appear before the larger board more regularly that the CIO. By many accounts, that relationship works the best when both CIO and CFO have a similar approach to investments.
Take Charles Van Vleet. The CIO and assistant treasurer of Textron, who oversees $10.6 billion in defined benefit and defined contribution assets for the company’s US, Canada, and UK Plans, joined the company in 2013 with 25 years of experience on Wall Street. As luck would have it, CFO Frank Connor is a 22-year veteran of Goldman Sachs. “The fact that my CFO also has a Wall Street background helps,” he says. “We can move the conversation immediately to a deeply analytical level.” The result, according to Van Vleet, is the ability to discuss and resolve issues more expeditiously.
As you might expect, a particularly persistent headache facing corporate CIOs is defined benefit shortfalls. According to a recent survey of 102 plan sponsors conducted by MetLife last year, about two-thirds were interested in arranging an annuity buyout compared to 46% in 2015. “Dealing with pension risk and funding gaps—that’s the No. 1 topic,” says Hunkeler. But that can involve touchy subjects, like deciding which insurance company to use when spinning off liabilities. Addressing them requires holding multiple private conversations with board members before an official vote is taken, according to Hunkeler.
Endowments/Foundations
At universities, foundations, and other endowments, boards tend to include a lot of outsiders, according to Williamson. Plus, CIOs generally deal directly with the board more often than at corporations. But board members, many of whom aren’t businesspeople, also tend to be less knowledgeable about portfolio construction, risk management, and finance. If they have a specialty—say, hedge fund management—they may see the portfolio primarily through that particular lens.
It all means a lot of work for the CIO, who often ends up spending a lot of time on administrative and operational issues—or just educating board members. That requires working on forming a rapport with individual members, meeting one-on-one to discuss areas of concern. At the same time, “It’s not always easy to find the time, since this isn’t part of their normal daily activity,” says Williamson. He recommends sending out regular reports about investment activities and performance. According to one CIO, it’s also helpful to be the one who runs investment committee meetings. “It’s a podium through which you can guide discussions,” says the CIO.
In about half of endowments, responsibility for hiring and firing managers and other decisions lies in the hands of the investment team, according to Karl Scheer, CIO of the University of Cincinnati, where he oversees about $1 billion in assets. But Scheer, who joined the university in 2011, found that, even with a governance structure calling for a more hands-off board, it was important to “earn their trust by showing the investment committee we were good at what we do,” he says. “We wanted to give the committee a way to watch our process.”
To that end, he presented investment ideas before shooting the trigger, generally providing two to three alternatives, in part to get a better understanding of the board’s risk tolerance and other investing proclivities. And in some cases, when board members pushed back, he followed their advice. One result, according to Scheer, has been the development over time of what he calls a “culture of collaboration.” “This is something that evolves if you show you’re really listening.”
Public Pension Funds
Public pension fund board members typically are appointed by elected officials or are elected themselves. That creates a great many headaches for CIOs. For one thing, board members, who likely have no business or finance background, require a good deal of behind-the-scenes education, according to many industry observers. Plus, they likely are under pressure from the plan’s membership to champion specific policies. “They feel they represent their constituents,” says one former CIO. In addition, lacking business expertise, many board members may not be equipped to address the financial pressures plans are expected to experience thanks to a low-return environment, according to some CIOs.
One related problem area: the matter of compensation. Many public pension CIOs face high staff turnover, largely because boards don’t want to approve compensation that can compete with private financial sector companies. “They’re not paying enough to keep good people,” says the former CIO.
Still, some bigger public pensions have stepped, adding performance incentive pay to overall compensation. Take the $250 billion California State Teachers’ Retirement System (CalSTRS), which, since 2006, has paid a compensation package with base salary plus annual incentives based, in part, on investment performance above set benchmarks over a three-year period, according to CalSTRS. “Our incentive pay structure is one way that we can attract the talent necessary to deliver returns and pay benefits to California’s teachers,” said Deputy CIO Scott Chan in an email.
As for who makes the decisions, some public pension funds give their CIOs and investment teams all the authority to choose managers and the like, while many others don’t. In cases where the board is hands-on, the best time for CIOs to try to change the system is when they first come on board, CIOs say. For example, one CIO was able to persuade the board to redraw the investment staff’s responsibilities not long after joining the organization. “It was a honeymoon period,” says the CIO. Another useful tactic: bringing in third-party experts, like outside portfolio asset managers, to reinforce the message. “The board gets tired of hearing the CIO repeating the same thing over and over,” says the CIO.
In some cases, CIOs see a significant appetite for change among boards. “Pension funds are moving from a 20th century government-based model to a 21rst century, more private sector-like model,” says Dominic Garcia, CIO of the $16 billion New Mexico Public Employees Retirement Association.