Is BCI's Governance a Ticking Time Bomb?
For years, a major public sector pension governance time bomb has been hidden in plain sight.
But it may be too late to alert the bomb squad; the coronavirus pandemic and climate change may have already activated a countdown that can’t be stopped.
Investment management is a key component of sustainability and central to any pension governance scheme. Public sector pension funds face increased pressure to deliver higher investment returns so public pension stakeholders can avoid mandatory contribution increases. By definition, this means fund managers must take on greater risk to achieve the higher returns. But in the investment industry, greater risk means increased potential for loss.
The key question is whether those responsible for overseeing Canada’s public fund managers have the requisite legal power and board experience to investigate and redress governance failures that will inevitably arise from increased levels of risk, especially in light of the multitude of investment challenges created by the pandemic and climate change.
In April, it was revealed that the Alberta Investment Management Corp. lost around $2.1 billion of the approximately $118 billion of pension and trust fund assets it manages. The loss represented about a third of the AIMCo’s 2019 investment income.
In a press release, the organization’s chief executive officer Kevin Uebelein said the difficulties arose from a “bet” on stock market volatility that led to losses because “markets behaved in a manner never before seen . . . .”
The AIMCo’s board of directors launched an internal review, acknowledging that oversight of investment strategies and risk management is a board responsibility and concluded the volatility losses arose from a governance failure. The board quickly adopted changes designed to strengthen the organization’s risk culture, including a more stringent analysis, review and approval process that volatility investments or other derivative-based investment strategies would need to satisfy, including board approval above certain levels of exposure.
The AIMCo is closely aligned with the provincial government, which appoints all directors who must have experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company. However, the Alberta Investment Management Corporation Act places the onus on the board to set strategic direction for the AIMCo and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of its investment management business. From a governance perspective, Alberta has ensured that the AIMCo board has both the legal power and talent to investigate and redress governance failures.
In British Columbia, the B.C. Investment Management Corp. has more than $160 billion assets, with a lay board of seven directors. The chief investment officer, selected by the board, must “supervise the day-to-day operations of the . . . corporation, including a determination of which assets to buy and sell,” according to the province’s public sector Public Sector Pension Plans Act. In this regard, the board is hemmed in by the act, which states “the . . . board must not be involved in the investment decisions of . . . the corporation.” Hence, investment power within the BCI lies entirely with a single person — the CIO who is selected by a board that’s prohibited by law from considering precisely the work he’s hired to do.
If the CIO’s investments turn sour — he decides to place a losing “bet” on stock market volatility, for example — the board can terminate his employment. But poor investment outcomes have repercussions for years, decades even, and the BCI’s pension fund clients and their beneficiaries would be left holding the proverbial bag.
Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.
The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person.
I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business.
While it may be inconvenient to address pension governance in the middle of a global pandemic, it’s precisely because of the multitude of investment challenges created by the current crisis and climate change that now is the correct time to undertake this review.
Let me first thank Claude Marchessault for connecting with me earlier today on LinkedIn and sending me his comment.
Claude read my last comment on the early departure of AIMCo's CEO and he reached out to me.
Before I get into my thoughts on BCI's governance, let me share an important update on my AIMCo comment:
A friend of mine emailed me to ask me: “What about Mark Wiseman? He’d make a great CEO, he’s young, smart and it pays better than being a Chair.” I agree, didn’t think of Mark right off the bat because he’s the Chair but he’d make a great CEO. Of course, if he’s interested in the role, he’d have to step down as Chair and recuse himself from the search committee.
Also, on Tuesday morning, I received an email from someone who worked at PSP during André Bourbonnais's tenure, defending him against my "unsubstantiated accusation" that he was an "unmitigated disaster" at PSP.
This person wants to remain anonymous but cited Bourbonnais's many accomplishments at PSP, including beefing up Private Equity significantly, introducing Private Debt as an asset class, opening up international offices and drastically improving diversity at all levels of the organization.
I think it's only fair that I include all views here. I thank this person for sharing their feedback and no doubt, Mr. Bourbonnais has many achievements and was brought to PSP to expand private markets.
Please note my intention was not to attack André Bourbonnais or Gordon Fyfe or anyone else, just sharing some mixed reviews on his tenure (truth is you will always have different opinions on CEOs, some good, some bad).
I realize some people have different opinions than me, that's fine, but trust me, I always try to be fair and balanced in my comments and when I state things, it always comes from credible sources.
Anyway, let me tackle Claude Marchessault's comment above and I must say, he's very brave to publish it.
Why? A very close friend of mine who had a senior position at a big B.C. Crown corporation (not BCI) told me: "British Columbia is a beautiful place to live but it's by far the most corrupt province in the country. Every time the provincial government changes, they literally place their people everywhere and start changing all the public services contracts to firms that support them. This goes on everywhere but not to the level you see in B.C., corruption there is rampant and institutionally ingrained."
I must say, coming from Quebec, that shocked me a little but when I spoke to other people living in B.C. not only did they concur, they told me "it's very dangerous speaking out here".
So, I give Claude Marchessault full credit for speaking out publicly, not to mention I'm sure his comment irritated BCI's CEO/ CIO, Gordon Fyfe.
I’ve never met the author, but I have served for over 20 years as trustee to one of the BC public sector plans. I also served as director of BCI during the most important 7 years of BCI’s 20-plus years existence. That experience tells me that Mr. Marchessault is misinformed. BCI’s processes are rigorous, they have a culture of excellence, accountability and innovation and they have attracted some of the best talent — both experienced and up and coming — that can be found.
Uniformly, BCI client boards have put forward talented people in their own right and the province has ensured the chair position is filled with a proven, experienced leader. This model ensures the board is not simply a rubber stamp club. I believe the results speak for themselves and have no idea how events in Alberta have anything to do BCI.
I'm glad Mr. Blatchford posted this because I'm always a little suspicious of people contacting me out of the blue, wondering whether they have an ax to grind.
Indeed, two years ago, Mr. Marchessault praised the governance at B.C.'s public pensions in Benefits Canada, stating this:
While retirement income security is top of mind for many Canadians, British Columbia’s public sector pension plans are noteworthy models that can be emulated by sponsors seeking plan design solutions, particularly when it comes to governance.
Some other Canadian jurisdictions have introduced, or are in the process of developing, pension governance models similar to British Columbia, but none is as comprehensive and applicable to all public sector pension plans. For example, while the Alberta Pension Services Corp. and the Alberta Investment Management Corp. manage and invest for the province’s public sector plans, those plans aren’t jointly sponsored and the Alberta government still plays a major role in their management.
Why the change of heart?
BCI's results do speak for themselves, the pension has been managed well since the time of Doug Pearce, and this despite not having a professional investment board made up of experts like they do at other large Canadian pensions like AIMCo, CPP Investments, OTPP, CDPQ, and PSP Investments.
If you go to BCI's website, this is what you will read on the governance of its board of directors:
Our Board of Directors consists of seven directors who are appointed by our clients and the British Columbia Minister of Finance.
The Board’s accountabilities include: appointing the CEO/CEO (and monitoring and reviewing his performance); appointing auditors; approving policies, our business plan, budget, conflict of interest guidelines; establishing the employee classification system and compensation scale; and overseeing operations.
The Board is legislatively prohibited from being involved in investment decisions. Under the supervision of the CEO/CIO, investment professionals make these decisions, in accordance with policies established by our clients, and those established by the Board. The CEO/CIO is accountable for all investment decisions.
Importantly, while BCI's board does have important functions and oversees operations, it does not have to approve major investments like other boards do at larger peers.
It states flat out: "The Board is legislatively prohibited from being involved in investment decisions. Under the supervision of the CEO/CIO, investment professionals make these decisions, in accordance with policies established by our clients, and those established by the Board. The CEO/CIO is accountable for all investment decisions."
What I was told, this is a plan design flaw that dates back to Doug Pearce's time when he was leading the organization.
Someone reading that can easily conclude: "Holy crap! Are they nuts giving so much power to the CEO/ CIO? That's a recipe for disaster!"
Indeed, this is the angle Claude Marchessault is conveying in his comment above, but is it the right way to perceive things?
Not according to Dennis Blatchford, and not according to me either.
In fact, while Gordon Fyfe appears to have tremendous power as the CEO/ CIO of BCI, the truth is the Board is continuously monitoring and reviewing his performance and not only did they appoint him, they can just as easily fire him if they feel he's not doing his job up to their standards.
"Yeah but Leo, these Board members aren't experts like you, they don't really understand all the risks and complexities of all the investment strategies across public and private markets, so they can easily be fooled."
True, they aren't investment experts but they aren't idiots either. Here are BCI's Board members:
Peter Milburn, the Chair of BCI's Board, is a retired Deputy Minister of Finance and Secretary to the Treasury Board and that tells me he's very sharp. I can say the same of other Board members.
I was told by people who know the Board well that they're not investment experts but they're "very nice and very informed" and they all take their responsibilities very seriously.
Should they be given more power to approve of major investments like Boards do at other major pension funds?
Maybe but I'm not sure this would improve the governance at BCI or that it's in the best interests of all its clients and members.
In my experience, a strong pension Board asks a lot of tough questions but at the end of the day, it has to support senior managers and their investment decisions.
If the Board isn't clear on something, it can always hire outside help to get clarifications.
In his comment above, Claude Marchessault writes:
Modern pension governance theory dictates that an investment management board be composed of highly capable and experienced investment professionals from whom the CIO can receive guidance and who speak the CIO’s language. A diverse group of independent-minded people who bring knowledge, experience and careers’ worth of industry contacts to the boardroom table, who can contribute to policy-making and advance the objective of effectively investing funds.
The Public Sector Pension Plans Act has created a governance model for the BCI whereby the CIO has exclusive investment power over $160 billion in assets in a manner that doesn’t include board oversight, thereby putting the financial future of hundreds of thousands of B. C. beneficiaries in the hands of a single person.
I don’t see any justification for the B.C. government to allow this time bomb to continue ticking. Legislative amendments are required to provide the BCI with a professional board with onus to set strategic direction and to oversee the development and implementation of policies and procedures that govern the day-to-day conduct of the BCI’s investment management business.
Again, BCI's Board appoints the CEO/ CIO and can fire him if he's not fulfilling his duties according to their standards.
And having a Board made up of "highly capable and experienced investment professionals who speak the CIO’s language" doesn't guarantee you will avoid time bombs.
The author notes AIMCo's board of directors is appointed by the Alberta Government and they have to have the requisite qualifications and experience in investment management, finance, accounting or law or have served as an executive or director with a large, publicly-traded company.
Little did that do for AIMCo when it came to the volatility blowup that cost them $2.1 billion in losses. Where was AIMCo's experienced and highly qualified board before this happened and how come they approved VOLTS?
In my experience, every pension fund has blowups, some are so big that they cannot be hidden from public scrutiny.
The 2008 crisis highlighted the Caisse's massive ABCP exposure and let me tell you, very few in the media covered that blowup properly and that's a story that was buried by very powerful interests (if Quebecers only knew the truth, they'd freak!).
The same goes for PSP's blowup back in 2008. If it wasn't for Diane Urquhart and yours truly, most people would be completely oblivious, and let me tell you, that blowup could have potentially annihilated PSP if Gordon Fyfe didn't step in to shut down that credit portfolio (still took massive losses and if he had listened to me, we both would have been featured in a chapter of The Big Short!).
Both the Caisse's ABCP blowup and PSP's CDS blowup were much worse than what occurred at AIMCo back in March, and it represented a massive failure of governance despite having a very qualified board of directors.
Importantly, having a qualified Board doesn't guarantee you will never see another blowup at a major Canadian pension.
That brings me to another point, in Canada we love touting our great pension governance which boils down to three points:
- Separate public pensions from governments, have them operate at arm's length.
- Allow them to pay competitive compensation to hire and retain top talent so they can manage more assets in-house, significantly lowering fees and costs.
- Adopt risk-sharing so the risk of the pension plan is equally borne among retired and active members and the government (jointly sponsored plans).
The third point is smart plan design but the first two are critical to the success of Canada's large pensions.
But these are what I call "high level" governance points, very important to be sure but there is another equally important level which is below the surface:
- Is the board qualified, very informed and engaged?
- Are there clear delineations of duties and accountabilities?
- Who does the Chief Risk Officer report to? The CEO, CFO or the Board?
- Is there a Chief Performance Officer? If not, why not?
- Are there clear whistleblower policies governing many activities including fraud and harassment? Is the Board made aware by the Chief compliance Officer?
- Does the CEO also carry the CIO hat and is this optimal for the pension and its members?
- Are investment activities reviewed and audited by an independent and highly qualified third party which has the expertise to really understand all the risks and complexities?
I can go on and on, I literally wrote a massive report for the Treasury Board of Canada after I left PSP and looking back now, that report is very outdated and needs a complete revamp!!
I know a lot more now than I knew back then, a lot more and can literally write a book on the topic starting again with bogus benchmarks (my favorite topic).
The point is looking at governance at a higher level is like looking at Porsche without peeking into the hood to examine its engine. It might look great but it's really a lemon.
There's a lot of talk of the "Canadian model" but if you ask an expert like me, governance is something you need to always review every year and try to improve on.
It touches upon a lot of things, including diversity and inclusion. For example, does your pension hire people with disabilities? If not, why not?!?????
Never mind, I know the answer to that last question, it's not pretty, it's downright ugly and would expose widespread discrimination.
What else? The question of a CEO having a dual role of CEO/ CIO.
I've covered this on my blog somewhere but my thoughts are simple, a great CEO cannot be both, he or she must focus on running the bigger ship and the CIO must be held accountable for all investment decisions across public and private markets and all investments heads should report to the CIO, not the CEO.
In my opinion, the CEO should have as few direct reports as possible: the CIO, Head of HR, CFO, CRO (who should also report to the Board and cannot be fired without Board approval) and maybe a CTO (Chief Technology Officer).
Being a CEO of a major Canadian pension is hard enough, you simply can't do both functions properly.
A CIO needs to be able to look at opportunities across public and private markets and everything in between.
In my opinion, Julie Cays, Ziad Hindo, James Davis, Jean Michel, Dale MacMaster, Eduard van Gelderen, Satish Rai are all great CIOs and they understand their role very well, focusing purely on investments.
Ed Cass will be a great CIO at CPP Investments but investment heads still report to Mark Machin. Ed will be deciding allocations to asset classes.
Jeff Wendling, the new CEO at HOOPP still carries the CIO title but that's not a permanent thing, he will eventually appoint a CIO after things calm down from this pandemic.
And that leaves Gordon Fyfe at BCI. Gordon always carried both hats, he simply can't relinquish the CIO title.
Interestingly, after he left PSP, André Bourbonnais appointed Daniel Garant as the CIO, but when Garant joined Gordon at BCI, he wasn't made CIO. Instead, he was made the Head of Public Markets (he should have been appointed CIO in charge of both public and private markets but truth be told, at PSP, he was really just the CIO of Public Markets and has more power at BCI).
But I get it, Gordon Fyfe loves investments, he always did going back years when he used to sit in on the portfolio managers meetings every week at the Caisse (that's where we met).
I don't blame him, CEO carries a lot of weight and there's a lot of pressure and deadly boring things you need to do. Yes, they get the big bucks but they also deal with a lot of stuff that I can't stand. It's much funner being the CIO and getting paid the big bucks (not that it's easy and not full of pressure!!).
Also, while Gordon is the CEO/ CIO, I was told he runs every major investment decision through his senior managers (he still has the final say).
I'll wrap it up there but I covered a lot on this topic and I want you to take all this talk of ticking time bomb at BCI with a shaker of salt.
Can the governance be improved there? You bet. Can the culture be improved there? You bet, twice over! But this talk of an imminent ticking time bomb because the CEO/ CIO carries too much power is pure nonsense, in my opinion.
“And who are you? Leo de Bever? “ No, I'm Leo Kolivakis but you can call me Mr. Pension Pulse!
As far as Claude Marchessault, I thank him for sending me his comment even if he probably regrets it now.
Below, CNBC's Jim Cramer said Tuesday morning that some of the stock gains in the market are "insane," with investors recently buying certain names from Tesla to Royal Caribbean seemingly without regard for fundamentals or the state of the coronavirus pandemic and holding onto them.
A lot of speculative names (AYRO, BLNK, NIO, SOLO, XPEV) got slammed hard today but it doesn't mean much as they're still up huge year-to-date.
Second, Rob Sluymer, Fundstrat, on whether we're headed higher or lower from here. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Brian Kelly.
Sluymer is very bullish and thinks the next move is higher and he might very well be right but I'd be careful here as these markets can move on a dime.
Listen to Morgan Stanley's Mike Wilson on why he thinks the S&P is running out of gas. With CNBC's Melissa Lee and the Fast Money traders, Guy Adami, Tim Seymour, Dan Nathan and Steve Grasso.
Update: Mihail Garchev, former VP and Head of Total Fund Management at BCI shared this with me after reading this comment:
When I joined BCI, many people pointed out that BCI’s Board is a lay board. When I presented for the first few times, I thought to myself, this Board is actually at par with the Board of PSP, to which I have been presenting for many years. The board members, past and present, have been excellent at fulfilling their duties and asking tough questions but also being fair in their assessments and decisions.
Peter Milburn, the Chair of the Board, is one of the most exquisite and inquisitive minds I have encountered, and it has been a pleasure to be able to present, discuss and being challenged by him.
I am glad you are including Dennis Blatchford’s comments as Dennis was a great board member and has described the joint pursuit of excellence by BCI’s Board and management very eloquently. And Dennis is also right about the talent as well.
Another important point regarding governance is that BCI has a robust risk management department and oversight and is part of the regular board agenda. There are great professionals there, and it is led by Samir Ben-Tekaya, who built the department from the ground up, using the best of all other Canadian funds’ experiences.
While the Board may not approve deals, risk plays a significant role in the investment decisions and has a dedicated and well-working committee with strong support from the CEO. Because a number of very experienced people in the various departments come with their experiences from various other organizations, there is this “grassroot” risk culture where ideas, proposals and recommendations are discussed and challenged even before reaching any formal venue. It is a very organic process that improves the outcomes and gives a great example to younger professionals.
A final point related to governance is that an essential part of the BCI’s process is the two-tier decision-making structure. This is related to the multi-client structure where there is also an additional approval process for certain decisions by the client investment committees and then final approvals by their boards. There is also regular risk reporting to the clients. I believe some of the clients have more recently hired investment experts as members of their boards.
That said, I believe good governance is an ever-evolving subject and needs to adapt to the specific circumstances and level of organizational and investment strategy evolution. What worked in the past may not work in the future, and learning from past mistakes, ours, or others’, would only make the Canadian pension model stronger. A constant reminder of the importance of this is needed, and the original article points to a number of good practices in that respect.
I thank Mihail for sharing this as he is better placed than I am to comment on BCI's governance and I agree with the final paragraph where he states governance is an ever-evolving subject that needs to adapt to the specific circumstances and level of organizational and investment strategy evolution.
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