The Case For a Chief Performance Officer
What is the most focused on and talked about subject in the investment industry? Performance, and yet this industry still lacks the role of a chief performance officer (CPO).
Although all companies can benefit from one, the Pension Fund sector of the industry stands to benefit the most. Pension Funds differ from other investment firms in that their objective is to meet the pension obligations of their beneficiaries. The actual benchmark for every pension fund is the ability to meet all pension liabilities and not some broad market index. Furthermore, the pension boards overseeing these funds exist to protect the interests of the beneficiaries and to play a critical role in ensuring the best management is in place.
In terms of governance, pension funds resemble for the most part other investment firms with a CEO leading the firm, a CIO in charge of strategy, a CRO overseeing the management of risk, a COO ensuring operations can meet the demands of the fund and a CCO making sure controls are in place and the rules are being followed. These C-Suite individuals all speak to the board directly providing their feedback on their areas of expertise. The CCO, the CRO and the COO are independent (or should be) but only the CEO and CIO provide feedback on performance. In other words, there is no independent feedback on performance to the board.
Pension Funds Organizational Structure
Oversight is important in any kind of business but more so when it comes to pensions. Pensions represent income that employees are dependent on for when they retire, at an age where their opportunities for income generation will be limited.
While funds have made great strides in governance, there are still pension funds that have individuals occupying multiple roles. For instance, it is not unusual to find the CEO hold the CIO title (chief investment officer) or the COO (chief operating officer) hold the CCO title (chief compliance officer).
Sadly, there have been circumstances where the CEO holds the CIO and CCO titles. In these cases, there is very limited oversight and practically no independence. For arguments sake, let’s assume that each title is held by a separate individual and that the CRO, CCO and COO titles are independent. The roles of the CEO and CIO are to help guide the fund’s investment strategy and ensure its being executed by its portfolio managers and traders. The CRO (chief risk officer) provides feedback to the risk management portion to help guide investment decisions. The COO runs the operations to ensure the data, reporting and its underlying calculations, and technology can meet the fund’s needs. Lastly, the CCO provides oversight with respect to the rules and regulations the fund must comply with, usually with support from legal counsel.
The Board’s role in all this is to oversee the proper management of the fund and provide independent oversight to the fund. Unfortunately, they don’t receive independent feedback of the firm’s performance. This includes what kind of strategies have been employed, how they have been executed and everybody’s contribution to performance, including that of the board’s. What they do get to review is what comes from the same people managing the fund and whose compensation is directly tied to the fund’s return.
In addition, the board lacks the skill set to fully understand the underlying components of performance and accurately identify the sources of out-or-underperformance. There are still stories coming out in the media where pension funds experienced “sudden” significant losses. They only seem sudden because there was no truly independent review and understanding of what was going on. If you keep ignoring the sound of dripping water in your home and one day your roof caves in, did it all happen “suddenly”?
A chief performance officer (CPO) would provide the feedback that the firm and board greatly need. From the firm’s point of view, the CPO’s performance team can provide a greater understanding of the effectiveness of strategies and the managers behind them. From the boards point of view, gone will be poor explanations of underperformance and over exuberant ones for outperformance. A more consistent and balanced approach would be taken providing the board an independent and detailed explanation in words they can understand, placing them in a better position to do their job.
Moreover, on a more technical and operational point of view, a CPO would bring to the firm true operational independence when it comes to performance and the skill set that no other department has. Portfolio managers and risk managers do not understand the return mechanics of a basic return formula, especially how they impact the more complicated products that are all the rage. Operationally, unbeknownst to most, the performance department is beholden to whomever has access to the data. It is not uncommon for the front office to request the back office to adjust trade dates or make adjustments on transactions or market values without the knowledge of the performance team. The CPO position would put an end to this since the performance department would have final say on the data it uses for its calculations, all based on best practices. Lastly, and most importantly, it would bring independence in performance. The pension fund would have a more complete independent and oversight structure with a CPO than without one.
The lack of independence in the area of performance analysis and review is most striking for a pension fund when you take into consideration the care that was taken to ensure Risk and Compliance are independent. Not to minimize these areas or make them seem less important, because they are vital to well-functioning fund, but performance is the most talked about aspect of any portfolio or investment product and there is little to no independence when providing feedback to the board.
The CPO office would be able to provide independence in performance analysis/review and operations. Some might say to just put performance under Risk, but assigning performance to the Risk department would not be ideal since the risk department plays a role in the management process of the fund and they contribute to performance. Their analysis is not limited to ex-post but as well as on an ex-ante basis. Their forward looking analyses contribute to the decision making process of the portfolio management team. As such, they are not independent of any performance analysis review. Furthermore, their skill set and understanding differs from that of performance specialists. The danger here is that common sense decisions by the performance members might not seem reasonable to the risk team thus running the risk of having the right performance analysis/review/process be overturned because risk sees it differently.
In the area of performance analysis and review, to maintain independence, the CPO would only analyze on an ex-post basis, this way the performance department avoids being part of the fund’s asset management process. Any ex-ante analysis should be done by the front office who is responsible for the investment decisions of the fund. The CPO would provide invaluable feedback to identify the true alpha generators from the pretenders. Keep the right people in place and hold the investment management department accountable. Vague explanations of underperformance using inappropriate benchmarks as a reference would become things of the past.
The CPO would report directly to the Board providing him/her the support to do his/her work. Performance is an area that is tightly guarded by the c-suite for one reason: the bonus structure. Past experience has shown that the front office will not hesitate to prevent performance from doing its job. Furthermore, past experience also shows that CCOs and CROs don’t always provide the best control mechanism in a firm, if they are led by weak individuals. This is not to say any CPO would fix everything, because if you hire a poor CPO, one with little to no understanding of performance and poor ethics, the CPO position would prove to be no better than just assigning it to a portfolio manager.
Adding a truly independent CPO who is not tied to the performance compensation structure, who is not involved in the investment management decisions, and can report to the board without fear of reprisals is what can set apart a pension fund. An environment where the best people are in the best position will provide the long term health the fund needs to support its beneficiaries.
Who to hire
In the previous section, I mentioned CROs and CCOs that are not up to task but if you hire the wrong person for the CPO position, you are gaining nothing and wasting a lot. It already has occurred where a large pension fund filled the position of Director of Performance with someone with no prior experience in the field to lead the performance department. Due to the sensitivity of performance great caution must be taken when looking at filling the CPO position with the right individual.
The person required is someone who has dedicated his/her career to the field and, unlike a “rising star” who gets fast tracked to climb the corporate ladder, has spent a considerable amount of time doing the grunt work and gaining invaluable experience. Experience that can be only gained through on the job training. There’s a reason why you need to accumulate flying hours as a pilot to progress. There are no rising stars there.
Furthermore, they need to have the CFA and CIPM designation at the minimum, the only performance designation in the industry, a strong knowledge of both the theoretical and practical side of performance (this part only comes with experience), vision, courage to support the department’s staff, an ethical character to stand up for what’s best for the pension beneficiaries and not the front office. Someone who is able to evaluate portfolios and managers and has a strong analytical side as well to the practical.
Change is never easy in life and even harder in the corporate world, but Pension Funds have a golden opportunity in front of them by opening up their minds and see the potential to grow in ways unimaginable a few years back. The Chief Performance Officer should become a staple in Pension Funds helping protect the livelihood of millions of individuals in a world that becomes more uncertain by the day.
First, let me thank Ioannis Segounis for sharing this superb comment with me, it is packed with unique insights that can only come from someone who has worked in the pension industry and has extensive experience in performance analysis.
Second, let me apologize to him for sitting on this comment for two weeks, I've been busy covering large pensions and today is the day I decided that enough is enough, I'm posting this gem of a comment.
Third, I'm sick and tired of hearing my own voice, I talk up diversity & inclusion but I need to practice what I preach and the best way to do this is to bring my readers more diverse views from industry experts.
And Ioannis Segounis is an industry expert when it comes to investment performance analysis. He has the fancy titles to prove it -- BEng, MBA, CFA, CIPM -- but if you meet him, he's one of the nicest and most humble guys you'll run across in the industry.
He previously worked at CN Investment Division and briefly worked at another consulting shop prior to setting up Athos Investment Services, named after the famous Mount Athos in Greece, an important center of Eastern Orthodox monasticism.
Like me, Ioannis isn't a particularly religious person but he has unquestionable integrity and he works extremely hard on behalf of his clients.
In my opinion, he makes a very persuasive case for a) hiring a qualified and experienced chief performance officer and b) having that person report directly to the Board provided he or she has the full backing of the Board and CEO.
Did I ever tell you the time I was in a board meeting at PSP and we ended up talking about governance and real estate benchmarks?
I remember this like it happened yesterday. Two heavyweight board members -- Carl Otto and Jean Lefebvre -- started huffing and puffing about the real estate benchmark.
At one point, Carl Otto (God rest his soul, he died a few years ago) turned directly to me and asked me: "Leo, do you think the real estate benchmark (at the time is was CPI + 500 basis points) accurately reflects the risks the real estate group is taking?".
I took a deep breath, looked at Gordon (Gordon Fyfe, the then CEO) and he looked at me and said: "Answer the question".
I looked at Carl and Jean and said: "Well, no, they are taking huge opportunistic risks which is why they're delivering 20 or 30%+ returns in some of their investments and trouncing their benchmark."
At the time, I can see André Collin, PSP's then Head of Real Estate, was fuming and if looks can kill, I'd be a dead man (little did I know at the time, I was a dead man, my time at PSP was quickly expiring).
What followed immediately after, I'll never forget. Gordon asked me to leave the boardroom for five minutes. I was right outside and can hear them shouting and screaming.
After a few minutes, Liette Richard, Gordon's trusted assistant, asked me to come back into the boardroom.
Paul Cantor, the then Chair of the Board (God rest his soul too), took a vote on the real estate benchmark, it was approved to stay unchanged but Jean and Carl abstained.
After a long day, I went to see Gordon and asked him why he put me on the spot like that. He said I did my job, answered truthfully but it didn't matter, nothing was going to change.
I didn't understand until he told me straight out: "I brought André here to lead Real Estate and I promised him some things, I kept my promise."
That's when I remembered George Orwell's Animal Farm when the pigs said: "All animals are equal but some are more equal than others".
And let me tell you, André Collin was part of the "untouchable pigs" at PSP back then (pigs in the Orwellian sense, not literally). He moved a couple of years after I left that organization, joining Lone Star Funds, quickly climbing up the ranks there to lead that Fund.
He's now president of North America and Latin America at Lone Star, reporting to William Young, Global President and Chief Legal Officer, but still making more money than he could have ever dreamed of, and a hell of lot more than his old pension peers (good for him, he's in the major leagues and is very good at opportunistic real estate which is why John Grayken hired him).
Anyway, I'm getting off track with this walk down memory lane at PSP. My point being, if we had a Chief Performance Officer back then, I could have been spared all this third degree at that board meeting and someone else could have had a target on their back!!
But like Ioannis Segounis rightly states in his comment above, there is no independent feedback on performance to the boards at Canada's large pensions. None, zero, zilch!
Sure, there is a CFO and they make sure that performance is calculated according to industry's best practices across public and private markets, but that's not the same as having an independent, dedicated Chief Performance Officer who is able to analyze the numbers carefully and thoroughly, offering the Board expert analysis and advice.
In an ideal world, both the Chief Risk Officer and the Chief Performance Officer would report directly to the Board and have their full backing.
In practice, the CRO reports to the CEO and has an in-camera session with the Board that typically lasts 15 to 30 minutes.
Also, I am fine with a CEO carrying both hats (CIO/ CEO) as long as this doesn't impact their performance and duties as CEO or CIO.
Jeff Wendling at HOOPP and Gordon Fyfe at BCI are carrying both hats (although Jeff recently told me he will revisit this next year) and it can be done but in my opinion, a large pension needs a dedicated CIO because there is simply too much going on to be good at both jobs (not that I blame them, the investment side is the fun part, being CEO isn't always fun).
But I agree with Ioannis, a CEO can't hold the Chief Compliance Officer title too, it then opens the door to conflicts of interest.
Anyway, the point of this comment was to provide the case for a Chief Performance Officer at all pensions, especially large ones engaging in complex internal and external strategies.
I think Ioannis Segounis makes a very persuasive case and I would ask my readers to contact him directly at Athos Investment Services to ask him how he can help your organization improve its performance measurement and reporting (he truly is top notch at what he does). You can join him directly at email@example.com.
Let me put it to you this way, if you don't have a dedicated Chief Performance Officer, you are flying blind and need a little prayer to make sure everything is up to snuff.
Below, Federal Reserve Chairman Jerome Powell spoke Wednesday following the central bank's two-day policy meeting. The Federal Reserve announced that it will keep interest rates near zero for years until the US economy heals from the effects of the Covid-19 pandemic and the labor market normalizes.
The Federal Open Market Committee will provide its quarterly update on where it sees GDP, unemployment and inflation heading. It also will take up the issue of whether it should provide clearer guidance on what it will take to raise rates in the future, and it could switch its bond-buying strategy to go beyond supporting market functioning to one that backstops the broader economy as well.
Also, an older 60 Minutes clip, a pilgrimage to the Byzantine monasteries of Mount Athos, the spiritual center of the Orthodox Church. My father has been there a few times and told me: "It's stunning and spiritual but they wake you up in the wee hours of the morning to pray and you pray a lot throughout the day, so I don't think you would enjoy it."
Yeah, definitely not for me, I value my sleep too much but who knows, maybe I'll go some day and discover the mystical beauty of Mount Athos for myself.