Pension Risk Matters : Pension Risk News & Analysis : Investment Governance, Inc. : Pension Risk & Investment

Four years ago, valuation and risk professional Susan Mangiero, CFA, FRM launched the first blog devoted exclusively to the topic of pension risk and fiduciary implications. The blog (http://www.PensionRiskMatters.com) serves as a resource for trustees, board members, actuaries, auditors, consultants, money managers, attorneys and regulators who want to explore important ideas about pension risk issues and best practices.

According to Dr. Mangiero, CEO of Investment Governance, Inc., “The need for independent discourse about investment best practices is more relevant now than even four years ago when I created www.PensionRiskMatters.com. This award-winning blog covered topics such as internal controls, fiduciary breach, hedging, leverage and risk management well before Bernie Madoff and oversight failures hit the headlines. We’ve learned that risk comes in different forms. When ignored, it can spell the difference between disaster and retirement checks getting sent out on time.”

Since www.PensionRiskMatters.com launched on March 23, 2006, Dr. Mangiero and her team have spent considerable time listening to what institutional investors and their service providers and attorneys want in terms of data, education and independent research. As a result, Investment Governance, Inc. opened the doors to www.FiduciaryX.com on February 9, 2010. Focused on investment best practices research and education, this independent information portal consists of an online library, virtual reference desk, fiduciary-focused knowledge-base, expert blogs and a jam-packed calendar of webinars and discussions about topics such as how to deal with volatility, emerging global fiduciary standards, hard-to-value accounting rules and due diligence statutes. In addition, professionals who work for institutional investors such as pensions, endowments, foundations and college plans can enjoy social networking features such as Discussion Forums, Find a Peer and a Service Provider Ranking System.

Whether happily writing for www.PensionRiskMatters.com or working with other experts in the institutional investment industry on thought leadership pieces and training products for www.FiduciaryX.com, Dr. Mangiero asserts that “We are on the verge of a brave new world. There is no going back. Whether an individual is a de facto fiduciary or not, there will be continued pressure on buy side executives, their attorneys and service providers to evidence that everyone did their homework before allocating billions of dollars to any asset class or strategy. We are delighted to be part of that awareness campaign - showcasing countless decision-makers who are doing a great job but seldom have their work see the light of day. Real people are impacted when investment best practices are nowhere to be seen. We are excited to be able to make a difference with our education, training and research work and appreciate the many contributions of our like-minded colleagues in the investment industry.”

To learn more about FiduciaryX, visit http://www.fiduciaryx.com/video_tour, call (203) 929-0011 or email CustomerCare@InvestmentGovernance.com for a complimentary subscription. Also click here to sign up for a complimentary weekly ezine about investment best practices.

About Investment Governance, Inc.

Investment Governance, Inc. (formerly known as Pension Governance, Incorporated) is an independent research, analysis and training company. Our corporate mission is to empower institutional investors and their service providers with information and data that allows for improved decision-making with the fiduciary perspective in mind. Our services include consulting, conferences, communities, data analysis, training and benchmarking technology. Visit www.InvestmentGovernance.com, www.FiduciaryX.com and www.PensionRiskMatters.com for more information.

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On March 1, 2010, Dr. Susan Mangiero, CEO of Investment Governance, Inc. sat down to talk to financial and strategy expert, Mr. Pascal Levensohn. In this first question of ten, read what this Investment Governance, Inc. Advisory Board member has to say about information rights. Click here to read Mr. Levensohn's impressive bio.

SUSAN: How much information are limited partners entitled to (pensions, endowments, foundations, etc) receive from a venture capital ("VC") fund?

PASCAL: Section 17-305 (b) of the Delaware Revised Uniform Limited Partnership Act, which governs LP information rights according to DE law, specifically allows the GP to withhold from LPs “any information the GP reasonably believes to be in the nature of trade secrets or other information the disclosure of which the GP in good faith believes is not in the best interest of the Fund or could damage the Fund or its business or which the Fund is required by law or by agreement with a third party to keep confidential.” This would include the GP’s fiduciary duties and confidentiality obligations with respect to not disclosing portfolio company information without the consent of such company. The Act provides for a specific list of information that LPs are entitled to, and funds historically disclose that same information to their LPs—the top law firms in Silicon Valley model their LP agreement forms to be pretty consistent with Delaware law.

Specifically, Section 17-305 of the Act provides for the following:

(a) Each limited partner has the right, subject to such reasonable standards (including standards governing what information and documents are to be furnished, at what time and location and at whose expense) as may be set forth in the partnership agreement or otherwise established by the general partners, to obtain from the general partners from time to time upon reasonable demand for any purpose reasonably related to the limited partner’s interest as a limited partner:

(1) True and full information regarding the status of the business and financial condition of the limited partnership;

(2) Promptly after becoming available, a copy of the limited partnership’s federal, state and local income tax returns for each year;

(3) A current list of the name and last known business, residence or mailing address of each partner;

(4) A copy of any written partnership agreement and certificate of limited partnership and all amendments thereto, together with executed copies of any written powers of attorney pursuant to which the partnership agreement and any certificate and all amendments thereto have been executed;

(5) True and full information regarding the amount of cash and a description and statement of the agreed value of any other property or services contributed by each partner and which each partner has agreed to contribute in the future and the date on which each became a partner; and

(6) Other information regarding the affairs of the limited partnership as is just and reasonable.

The current state of the art for Agreements of Limited Partnership in venture capital allows the GP to override the information rights LPs have pursuant to the Delaware Revised Uniform Limited Partnership Act (the “Act”) as permitted pursuant to the Act and allows the GP to “adjust” identifying information given to the LPs in order to protect the identity of the Fund’s portfolio companies, which often is an issue in the case of Freedom of Information Act (FOIA) LPs. In addition, the partnership agreement allows the GP to restrict / withhold information from LPs if “the General Partner reasonably determines [such LP] cannot or will not adequately protect against the [improper] disclosure of confidential information, the disclosure of such information to a non-Partner likely would have a material adverse effect upon the Partnership, a Partner, or a Portfolio Company.” Other elements of the well drafted agreement do provide the LP’s with disclosure rights to their advisors, equity holders, etc. and provide remedies and protections to the GP with respect to GP withholding rights and improper LP information disclosure.

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In a recent Virtual Town Hall about what governance means in the investment world, guest speaker Mr. Wayne Miller mentioned a relationship between career risk and fiduciary reform. Chairman Emeritus of Denali Fiduciary Management, Miller said that many people abide by the status quo, however ineffective, rather than innovate and improve their fiduciary practices. The fear is loss of one's job by taking prescription actions to better manage how monies are allocated and monitored. My response was to suggest the opposite. Why would a professional willingly adhere to bad practices when doing so could imperil his or her job and the related ability to get a bonus and/or promotion?

Which is the chicken and which is the egg? Does doing the right thing jeopardize one's climb up the career ladder or immensely help someone advance?

Click here to access the full transcript and enjoy all FiduciaryX subscriber benefits. If you think you qualify for a free 90-day trial as an institutional decision-maker, email Sales@InvestmentGovernance.com.

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What is pension governance? More broadly, how does one characterize investment governance? Talk to a dozen institutional investors and you are likely to get a dozen different answers.

Brian Holden has an interesting take on this important query. In "Where there's a will: governance check" (Pensions Week, January 11, 2010), his suggestions include the following:

• Go beyond regulatory mandates to include best practices
• Balance the representation of stakeholders 
• Add knowledgeable individuals to decision-making bodies
• Introduce risk management principles to guide actions
• Manage pensions with beneficiaries and shareholders in mind
• Adopt a "dynamic and more businesslike approach"
• Establish a governance code "to provide guidance and assessment."

A lot of this sounds eerily familiar. I've been making many of the same points for years as have others. Increasingly, dissonant voices are coming together to speak a common language of reform. This is encouraging indeed.

Yesterday marks the official launch of FiduciaryX.com. Click to read "Investment Governance, Inc. Announces the Launch of FiduciaryX.com." We will be announcing all sorts of events and speakers in the coming weeks and months. On February 16, 2010 from 11:00 AM to Noon EST, we are holding a FiduciaryX Virtual Town Hall on the topic of investment governance. Email CustomerCare@InvestmentGovernance.com if you are not yet a subscriber but would like to participate in this exciting online event. We hope you will join us.

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Investment Governance, Inc. today announced the official launch of FiduciaryX^SM – a new research, education, data and social network portal for institutional investors and their service providers. Over two years in the making, this exciting online resource enables 24/7 access to investment best practices insights from experts and peers.

Designed by and for buy side professionals who control over $25 trillion in global assets on behalf of pensions, endowments, foundations, sovereign wealth funds, mutual funds, 529 college plans and family offices, www.FiduciaryX.com offers executives a cost-effective way to improve decision-making, ask questions, search documents, exchange ideas and potentially mitigate personal and professional liability. Subscribers enjoy access to the FiduciaryX Virtual Reference Desk, Knowledgebase and Service Provider Ranking System, industry leader blogs, discussion forums, online town halls, documents archive and much more.

Be part of an ongoing conversation or carry out a quick search about topics such as reviewing an asset manager's performance, setting up a derivatives overlay program, choosing a new investment consultant, assessing 401(k) fees, implementing an operational audit, dealing with new performance reporting rules or purchasing fiduciary liability insurance.

“Our team of programmers, researchers, educators and experts are passionate about using technology to promote transparency, enhance governance and empower institutional investors and their attorneys, advisors, actuaries and other service providers” said Dr. Susan Mangiero, founder and CEO of Investment Governance, Inc. “It is a true honor to work with those individuals and organizations that continue to enthusiastically support our mission of codifying best practices and enabling stewards to gain clarity about the elements that comprise procedural prudence. The paradigm is undeniably shifting towards greater fiduciary responsibilities and disclosures for buyers and sellers of products and services alike. We believe that the launch of FiduciaryX provides a golden opportunity to showcase superb ideas and recognize industry leaders whose diligence reflects a high standard of care on behalf of underlying beneficiaries such as retirees.”

To learn more about FiduciaryX, visit http://www.fiduciaryx.com/video_tour, call (203) 929-0011 or email Press@InvestmentGovernance.com.

Qualified investment decision-makers who are willing to provide a few hours of their time over the next several months are invited to become part of the FiduciaryX User Group. In exchange, these individuals will receive a courtesy one-year subscription to www.FiduciaryX.com. Email CustomerCare@InvestmentGovernance.com for more information.

About Investment Governance, Inc.

Investment Governance, Inc. (formerly known as Pension Governance, Incorporated) is an independent research, analysis and training company. Our corporate mission is to empower institutional investors and their service providers with information and data that allows for improved decision-making with the fiduciary perspective in mind. Our services include consulting, conferences, communities, data analysis, training and benchmarking technology. Visit www.InvestmentGovernance.com, www.FiduciaryX.com and www.PensionRiskMatters.com for more information.

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In my September 11, 2008 testimony before the ERISA Advisory Council, I described two buckets of organizations - those which deserve a gold star and those who don't. I went on to explain that the size of the "everybody else" bucket might be very large but that current reporting requirements make it nearly impossible to know about red flags in advance. This is cold comfort for shareholders and taxpayers who would prefer to know about financial runaway trains beforehand.

Unfortunately, those who attempt to provide more sunlight about their activities are not always rewarded. In a recent conversation with the CEO of a major asset management firm, I was told that this firm had provided detailed information about its fee structure to institutional clients. Instead of being rewarded, and because there are wide variations with report to how asset managers present performance data, sunlight led to storm clouds. Endowments, foundations and pensions responded by asking why the fees were so high. The reality was that the costs were in fact lower than those of comparable traders but, since competitors were not providing more than basic feedback, their costs were interpreted as lower and therefore "better." It's no surprise that the executive with whom I spoke expressed frustration. Here they were trying to do what they thought was the right thing and come clean with a detailed decomposition of what they charged. Instead of a reward, they were kicked in the proverbial shins.

In "Type-A-Plus Students Chafe at Grade Deflation" (January 29, 2010), New York Times reporter Lisa W. Foderaro describes a similar phenomena in the university sector. Where Princeton sought to minimize grade inflation by limiting the number of A's, top quality students found it harder to compete for jobs when graduates from other schools flashed their scores. Never mind that Princeton arguably tried to impart higher integrity data.

Is the message that transparency is window dressing and that no one really wants to have the low down on "true" outcomes? Alternatively, should we conclude that heightened disclosure rules are inevitable but it is incumbent upon providers of information to educate their recipients, i.e. make sure that underlying assumptions are clearly explained? If that does not occur, might well-intended parties (those who provide more detail than necessary) be impugned instead of rewarded for their forthrightness? 

Editor's Note: Click to read "Testimony by Dr. Susan Mangiero to ERISA Advisory Council Working Group on Hard to Value Assets," September 11, 2008. (Note that Pension Governance, LLC is now part of Investment Governance, Inc.)

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The following text is from an article I recently wrote for Mann on the Street (December 2009). As always, I welcome comments from readers. I am an avid believer in the notion that doing good means doing well. Click for the pdf version of "Investment Ethics: How to Make Money and Win Clients" by Dr. Susan Mangiero, CFA, FRM.

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