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The Seven Habits of an Effective Board. Andrew Davison 6 September 2011. An effective board needs to: . (1) Focus on outcomes. Members want to ... and need to ... retire with the finances to maintain their standard of living That is why the fund exists

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the seven habits of an effective board

The Seven Habits of an Effective Board

Andrew Davison

6 September 2011

slide4

(1) Focus on outcomes

  • Members want to ... and need to ... retire with the finances to maintain their standard of living
  • That is why the fund exists
  • Focus everything you do on delivering on that objective
  • Always ask “does this enhance members’ retirement benefits?”
  • If not, why are you doing it?
slide5

(1) Focus on outcomes

  • The Pensions Regulator in the UK highlighted 6 key elements for achieving good outcomes:
  • appropriate decisions with regards pension contributions
  • appropriate investment decisions
  • efficient and effective administration
  • protection of scheme assets
  • value for money
  • appropriate decisions on converting pension savings into a retirement income
slide6

“You got to be careful if you don't know where you're going, because you might not get there.”

Yogi Berra

slide16

modern life about instant gratification

  • lack of patience
  • need returns immediately
  • unlike weight gain … compounding takes time
slide19

know the time for patience

Know the time for

patience

slide21

and, importantly,

don’t confuse

the two

slide22

(2) Be patient

  • Successful investing requires a sound plan and ... a lot of patience
  • The challenge is to:
      • develop a sound plan
        • understand the plan
          • believe in it and
            • allow it to work
  • but also know when the plan is either outdated or flawed and needs to be amended
  • Key function of trustees – know when to take action and when to simply do nothing
slide23

(3) Be brave

  • growth above inflation
  • communicate the danger of ‘waiting out’ periods of volatility in cash
  • reiterate at every opportunity
  • encourage risk taking by members with long time horizons ... don’t be afraid, it’s your duty
slide24

Understanding risk …

but not running away from it

slide25

Understanding risk …

but not running away from it

slide26

Understanding risk …

but not running away from it

A conservative portfolio will give you better downside protection over the short-term but you miss out on the opportunity to achieve higher returns with similar downside risk over the long-term in a higher risk portfolio

slide29

Be diligent, dedicated, organised

  • Your fund is like a business, it requires ...
      • time
      • focus
      • a clear strategy
      • your dedication, time and skill
  • or else it will not be successful
  • If the fund contained just your money how would you run it?
slide31

(5) The benefits of simplicity

  • the environment is already complex
  • adding complexity ...
    • makes it difficult to manage
    • makes it difficult to evaluate and monitor
    • adds cost
    • takes up time
  • members don’t understand
  • SO ... simplify wherever possible!
slide33

(6) Question?

  • One of your most common questions should be “WHY?”
    • WHY is our contribution x%?
    • WHY is our asset manager showing us that graph?
    • WHY is this report useful?
    • WHY is our asset manager telling us about bonds in Greece?
    • WHY do I need to see our asset manager’s top 10 holdings?
    • WHY is our consultant recommending XYZ asset manager?
    • WHY are our members not retiring with enough money?
    • WHY are we paying so much for risk benefits?
    • WHY are we interested in a passive fund right now?
    • WHY does our agreement state that?
slide34

(7) Be wary of compromise

  • Diversity in a board of trustees is healthy but ...
  • Compromise often leads to inappropriate decisions
  • Examples:
    • Two multi managers – over diversification – 9 local equity managers
    • 50:50 split between multi manager and single active manager – liked both presentations
    • Three money market portfolios – couldn’t decide
slide35

To conclude

  • An effective board provides the ideal environment for the board itself, and the fund’s members, to make excellent decisions that will give them the highest probability of accumulating sufficient assets to maintain their standard of living in retirement
  • You can have 7 habits ... or 2 habits ... or 20 habits ... as long as you focus on this