European Institute Sovereign Funds Roundtable: Good Corporate Governance

1. EUROPEAN INSTITUTE Sovereign Funds Roundtable IT ALL BEGINS (AND ENDS) WITH GOOD CORPORATE GOVERNANCE Anne Maher Chief Executive The Pensions Board Ireland 16 - 17 May 2006

2. AGENDA • Background • Key Components • Good models – what they do • Conclusion 2

3. BACKGROUND • Greatly increased focus arising from corporate and accounting scandals, for example Enron • New legislation and regulation affecting accounting and corporate disclosure and governance, for example, Sarbanes-Oxley Act 2002 in US and Combined Code on Corporate Governance together with new accountancy regulation in UK • OECD guidelines for Pension Fund Governance, EU Pensions Directive, national pension regulators and supervisors all have disclosure and accountability requirements for private pension funds • General climate change also affects public funds 3

4. KEY COMPONENTS • Focus of liability on a governing body or person accountable to someone • Good governance of governing body/person • Effective accounts and audit requirements • Effective custody requirements • Public transparency and reporting to all stakeholders • Independent oversight 4

5. KEY COMPONENTS – Focus of Liability • Usually clear for private funds but not easy for public funds because of: • Large number of stakeholders • No supervisory authority in most cases • Important to have governing body or person with the responsibility • Liability should be established in law and be personal • Liability should be clear and relationship with other parties should be clear including: • The Government • The Public • Governing body/person must be accountable to someone – ideally to Parliament 5

6. KEY COMPONENTS – Good Governance of Governing Body This requires: • Independence – in particular from political pressure • Sound appointment and removal procedures • Conflict identification and management • Clear responsibilities and requirements • Clear mandates and objectives 6

7. KEY COMPONENTS – Effective Accounts and Audit Accounts • Should be required at regular intervals • Should be done to highest national (or international) accounting standards • Should have prescribed contents Audits • Can be provided internally • Must also be provided by external auditors who are independent • Must be regular • Must adhere to national (or international) auditing standards • Should include actuarial evaluation International Standard for Accounting and Auditing of Public Funds • Does not exist but would be helpful 7

8. KEY COMPONENTS – Effective Custody • Custody • Must be provided externally • Must be independent reputable institution providing custody services • May include sub-custodians but must cover all relevant areas 8

9. KEY COMPONENTS –Public Transparency & Reporting Requires • Reports to be published at regular intervals • Contents of reports to be prescribed • Reporting mechanism to the entity to which governing body is accountable, preferably Parliament • Public promulgation of reports • Mechanism for public to seek and obtain relevant information • Specific information to potential beneficiaries including statements of benefits 9

10. KEY COMPONENTS – Independent oversight Includes • External audit • External actuarial valuations of assets and liabilities • External verification of investment returns Desirable • A power for Government to commission independent examinations 10

11. GOOD MODEL – Canada Pension Plan Good governance → positive outcomes by defining responsibilities and accountabilities Some Key features: • Independence from political interference achieved by two separate juridical persons in the Canada Pension Plan (CPP) and the CPP Investment Board (CPPIB) • Clear role of CPPIB set out in Canada Pension Plan Investment Board Act • Appointment of CPPIB Directors process designed to ensure independent appointments – minimises risk of political interference 11

12. GOOD MODEL – Canada Pension Plan • Codes of conduct are public documents and two key aspects are: • Controls on personal investing • Disclosure of real or potential conflicts of interest • Independent auditing firm required • Procurement policy must be adhered to • External custodian required • Detailed signing authorities and limits • Minister may appoint an auditor to conduct special audit 12

13. GOOD MODEL – Canada Pension Plan CPPIB Annual Report distributed to: • Federal and provincial financial ministers • Members of federal parliament and provincial legislatures • Stakeholder groups • Public libraries • Posted on web-site 13

14. GOOD MODEL – Canada Pension Plan CPPIB Annual Report Content • Audited financial statements • Statement of corporate governance • Duties, objectives and mandate • Board committees • Decisions requiring board approval • Board performance review • Expectations of management • Objectives for past year and how met • Objectives for coming year • Total compensation of top-five officers 14

15. GOOD MODEL – Canada Pension Plan Further Transparency and Reporting • Rates of return • Market value of assets • Conference calls • Quarterly financial reports • Public meetings • Conducts broad dialogue and reporting campaign with Canadians coast to coast • Very good website Aim is • Disclose Disclose Disclose 15

16. GOOD MODEL – Norwegian Government Pension Fund – Global • Norwegian Storting adopted Act relating to Government Pension Fund in 2005 • Continuation of Petroleum Fund • Clear accountability role • Ministry of Finance is ‘owner’ • Major changes debated in Parliament • Central Bank (Norges Bank) is operational manager • New ethical guidelines at end 2004 including active corporate governance • The Government Pension Fund produces detailed Annual Report • Ministry of Finance also requires quarterly reports 16

17. GOOD MODEL – Norwegian Government Pension Fund – Global • Reports open to public and presented • On website • At press conferences • Ministry • Decides strategy • Sets benchmarks and risks parameters • Norges Bank measured against benchmark • Ministry uses independent consultants to get second opinion on performance 17

18. GOOD MODEL – Norwegian Government Pension Fund – Global The Government Pension Fund - Global Annual Report contains detailed information on: • Mandate • Return on Fund in that year • Fixed income management • Equity management • Corporate governance activities • Risk exposure • Organisation of management • Management costs • Reporting of accounts Also contains • Auditors report • Management mandate • Organisation chart of Norges Bank • Holdings of equities at year end • Fixed income investments at year end 18

19. GOOD MODEL – Norwegian Government Pension Fund – Global • Annual Report is model of transparency • Includes excellent features such as cost comparisons with other funds • Excellent website • Altogether very high level of transparency and accountability 19

20. GOOD MODEL – Irish National Pensions Reserve Fund Governing body • Commission consisting of Chairperson and 6 Commissioners • Commission is body corporate who can sue and be sued • Eligibility requirements • Disclosure of interest requirements • Commission control, manage and invest Fund • Commission accountable to Parliament • Has clear investment mandate 20

21. GOOD MODEL – Irish National Pensions Reserve Fund Investment Mandate • Strictly commercial investment mandate • To secure optimal financial return having regard to: • purpose of the Fund, and • payment requirements of the Fund provided the level of risk is acceptable to the Commission 21

22. GOOD MODEL – Irish National Pensions Reserve Fund National Pensions Reserve Fund Act, 2000 provides for: • Preparation of accounts and audit by the Comptroller & Auditor General (senior auditor in State) of the accounts • The publication by the Commission of an annual report of its activities and of the audited accounts of the Fund • The chairperson of the Commission to appear before and give evidence to the Committee of Public Accounts on the policies of the Commission in relation to the Fund • The chief executive officer of the Fund Manager to give evidence to the Committee of Public Accounts on the regularity and propriety of all transactions on the Fund and on the economy and efficiency of the Commission and the Manager in regard to the expenses of operation of the Fund 22

23. GOOD MODEL – Irish National Pensions Reserve Fund Accounts and Audits • Must keep all proper and usual accounts of moneys and other assets • Must include separate accounts of administration fees and expenses incurred by Commission • Audited Accounts of NTMA (the Fund Manager) must note record of expenses incurred by NTMA as Fund Manager • Accounts signed by CEO of Fund Manager and a Commissioner must be formally adopted by the Commission and submitted to Comptroller & Auditor General for audit not later than 4 months from end of financial year • Copy of audited account must go to Minister and be laid before each House of Parliament 23

24. GOOD MODEL – Irish National Pensions Reserve Fund Report and Information to Minister • Not later than 6 months after end of financial year Commission must make report to Minister of its activities for the year • This report must be laid before each House of Parliament • Each report must include: • Information on investment strategy • Report on investment return • Valuation of net assets and detailed list of assets • Information about investment management and custodianship • Information on fees, commission and other expenses incurred by Commission and Fund Manager • Report shall also include any other information the Minister may direct 24

25. GOOD MODEL – Irish National Pensions Reserve Fund Chairperson of Commission to appear before Committee of Public Accounts (PAC) • PAC is parliamentary committee responsible for examining and reporting on departmental expenditure • PAC holds public hearings and conducts tough examinations • Chairperson of Commission must appear before and give evidence to PAC at such times as PAC reasonably requests • Evidence given relates to policies of Commission, subject to confidentiality of commercially sensitive information 25

26. GOOD MODEL – Irish National Pensions Reserve Fund CEO of Fund Manager to appear before Committee of Public Accounts (PAC) • CEO must give evidence to PAC on: • Regularity and propriety of transactions recorded in any record subject to audit • Economy and efficiency of Commission and Fund Manager • Systems, procedures and practices employed by Commission to evaluate its effectiveness • Any matter affecting the Commission referred to in any report of Comptroller & Auditor General • CEO must not question or express opinions on policy of Commission 26

27. GOOD MODEL – Irish National Pensions Reserve Fund Other Requirements for Accountability • Minister may appoint person to examine any aspect of Fund and Commission – Fund Manager must assist this and give access to all records • Independent valuation of assets • Independent assessment of investment performance • Public Procurement procedures must be used for appointment of all service providers including EU Procedures under Public Services Directive 92/50/EEC • Appointment of custodians • Commitment to open and transparent reporting subject to preserving confidentiality on commercially sensitive information 27

28. GOOD MODEL – Irish National Pensions Reserve Fund Other Ways of Accounting to Public • Fund manager website www.ntma.ie • Press briefings • Conference presentations 28

29. CONCLUSION Good Governance • Is strong feature of funds which work well • Growing importance globally • Some evidence that it is a driver of organisational performance • No one ideal model as it must be country specific based on: • Capacity to regulate • Standards of accounting • Trust law • General governance quality • Must be there in legislation and in practice 29