Circling Back to the Caisse's 2009 Annual Report

A senior officer at the Caisse inadvertently brought something to my attention yesterday. When the Caisse released its 2009 results back in February, the annual report wasn't made available then, and I didn't provide a full discussion on it.

The Caisse did publish its 2009 Annual Report in mid-April, stating that accountability has greatly improved:
The Caisse de dépôt et placement du Québec released its annual report for fiscal year-end 2009 this morning, after it was tabled in the National Assembly by the Finance Minister.

In addition to the detailed analysis of the financial results published on February 25, the 2009 annual report contains a new section that, among other things, includes all the accountability reports requested by the Quebec government following the May 2009 Parliamentary Commission. Here are the highlights from these reports.

Report on the Caisse’s Contribution to Québec Economic Development

• The Caisse uses three levers to support its action in Québec: investment, partnerships and knowledge sharing.

The Caisse’s total assets in the private sector in Québec were $18.7 billion at the end of 2009, up $1.4 billion from 2008.

• In 2009, the Caisse launched various initiatives to support Québec businesses, totalling $1.6 billion.

The Caisse Roadmap

• Two-pronged plan to generate the returns expected by our depositors.

• The first part established in collaboration with our clients–is based on five priorities that will build solid foundations for the Caisse.

• The second part first based on our medium-term strategic thinking about the use of our existing comparative advantages and the need to develop new capabilities to meet our clients’ expectations.

Report on Risk Management

• Accelerated implementation of plan to strengthen risk management.

• Integration of risk-return concept in day-to-day operations.

Strengthening of risk management methodologies, tools and team.

Reduction in active risk of 13 specialized portfolios.

• Reduction in financing liquidity risk.

Report on Compensation Policy

• Implementation of a more demanding and rigorous compensation program based on long-term portfolio performance (4 years).

• Introduction of a qualitative risk management factor in the performance evaluation of portfolio managers.

Report on Strengthened Governance

• Review of Board composition and committee chairmanships.

• Integration of new directors.

• Review of director roles and responsibilities and mandates of the Board and its committees.

• Establishment of an effective relationship between the Board and management.

Significant decrease in incentive compensation for senior management

In keeping with its obligations under the Act Respecting the Caisse, the annual report also addresses the annual salary of the president and CEO and the five most highly compensated executives.

During the presentation of its financial results earlier this year, the Caisse indicated that the total amount of incentive pay would be cut by about 50% compared to 2007. The final reduction of the total amount was 52%. No incentive compensation was paid to Caisse employees in 2008.

For the senior management positions presented in this year’s annual report, incentive compensation was $1.1M, compared to $4.6M for 2007.

These incentive amounts were determined by a rigorous process of analysis and benchmarking, based on two principles:

• Paying for performance

- Incentive compensation reflects the major progress made in refocusing and simplifying the Caisse in 2009.
- The Caisse posted a net investment results of $12 billion for the year and outperformed its benchmark in the second half of the year.
- Ten of the 17 portfolios performed very well and surpassed their benchmarks for the entire year (click on image above).

• Competitiveness

- Compensation is commensurate with the Caisse’s results. Since 2009’s performance was below the median, incentive compensation was also below the median, between the 30th and 40th percentiles.

It was on this basis that the Human Resources Committee and the Caisse’s Board of directors approved the incentive compensation amounts.

The summary compensation table below (click on image to enlarge) is available on page 119 of the Caisse's 2009 Annual Report.

Moreover, the Caisse disclosed a summary of senior officers' pensions (p. 120) and a summary of their severance pay (p. 121). Interestingly, the Caisse's President & CEO, Michael Sabia, got a total compensation of $436,154 in 2009, a negligible sum for pensions, and gets zero in severance if he's asked to step down. As explained on p. 118, Mr. Sabia voluntarily waived the right to incentive programs and perks:
The compensation and other employment conditions of the President and Chief Executive Officer are based on parameters set by the Government in consultation with the Board. The annual base salary of Mr. Michael Sabia was set at $500,000. The other conditions of employment to which Mr. Sabia has a right are aligned with the Caisse’s policies and comply with its Regulation respecting internal management. He received $40,000 in annual fringe benefits and participated in the Caisse Employee Group Insurance Plan. Upon his appointment, Mr. Sabia waived participation in the 2009 and 2010 incentive compensation programs. For the duration of his mandate, he waived participation in any pension plan. He also waived severance pay, whatever the cause.

However, given mandatory participation in the Basic Pension Plan for Management (under CARRA rules), Mr. Sabia must participate despite his waiver. The mandatory plan represents an annual cost of $12,900 to the Caisse.
As you can see, there are no golden parachutes or perks for the Caisse's CEO. And the focus on transparency, risk management and accountability is the primary reason why after the disaster of 2008, the Caisse is on the right path.

So why am I circling back to the Caisse's 2009 Annual Report? Because I forgot to cover it when it came out in mid April since it was after they announced their results in February. But the real reason it's worth covering is because this is one of the best annual reports the Caisse ever produced, on par with bcIMC's 2009-2010 Annual report, which I just recently covered and praised for its transparency, simplicity and rigor.

Everything is there. Returns of specialized portfolios, the benchmarks covering each specialized portfolio (including benchmarks for private markets, hedge funds and commodities), an in-depth analysis of performance by asset class, a detailed discussion on risk management, and of course, a detailed discussion on compensation. About the only thing missing is a list of their main investment partners by asset class.

One of the things I really liked was Table 7 on page 24, shown below. It's basically the changes in benchmark indexes over the last five years (click on image to enlarge):

Benchmark indexes are key in understanding the Policy Portfolio risk ("beta" risk) and they also provide important information as to whether pension officers are being appropriately evaluated for the risks they're taking. The Caisse's benchmark indexes for each specialized portfolio do reflect the "beta" risk of each investment activity.

Let me conclude by going over something Mr. Sabia wrote in his message on page 11:
...we will need to deepen our understanding of a variety of asset classes and how a changing environment will shape them. So we will have to develop the skills and the agility that we will need to take full advantage of the opportunities we see. Among many other things, that means continuing to invest in the development of our people and in establishing partnerships with like-minded investors who share our long-term horizons.

We will do all of this in a well ordered way, always in line with our principles of simplicity, rigour, performance and focus on the client. We will do it step by step, always first developing the necessary skills and capabilities before we invest. It’s the only way to build— brick by brick—a solid organization that will meet the needs and the expectations of our depositors.
Investing in employees is crucial but it's not enough. You have to challenge each investment unit to stop working in silos, and start sharing information and thinking about the bigger picture and how their investment activities are correlated to other investment activities. You need to stimulate discussion not just at the level of senior management, but at the level of junior and intermediate analysts as well as operational and support staff.

Let them learn about hedge funds, private equity, commodities, infrastructure, real estate debt, etc. -- either through regular workshops or by attending quarterly investment discussions led by senior managers of each specialized portfolio. In short, employees need to feel engaged, and they need to see the bigger picture. That's what I find sorely missing in a lot of these big shops -- everybody gets lost in the weeds and they forget what the common purpose is all about.

[Note: I love teaching and presenting big picture ideas to employees. I also enjoy moderating debates among investment gurus, which is another way of stimulating discussion among senior officers and employees.]

Finally, please take the time to carefully go over the Caisse's 2009 Annual Report. It really is the best report they produced in a long time and among the best annual reports I've read this year.

I am working on a detailed comparison of Canadian public pension funds, but for many reasons this is a complex undertaking. Differences in fiscal years, maturities, funded status, risk profiles, liquidity profiles and investment policies make it very difficult to make direct comparisons. If I ever complete it, you will understand why comparing pension funds isn't as simple as it sounds.


Jonathan Jacob of Forethought Risk sent me these comments:
I sympathize as I have tried it myself. The worst offender is the benchmark relative comparisons as benchmarks are anything but uniform and mandates may be different. I think benchmarks and appraisal MTM are the most offensive aspects of public pensions these days – nice to see the Caisse marking down RE and PE (benchmark relative) – still wary as to benchmark values…
He is absolutely right on appraisals at public pension funds, but as I mentioned before, the Caisse has some of the toughest private market benchmarks in the country.