Board Governance - POLICY TYPE - BOARD-EXECUTIVE DIRECTOR LINKAGE

(Adopted September 14, 1999, with amendments through November 15, 2007)

Global Governance-Management Connection
Unity of Control
Accountability of the Executive Director
Delegation to the Executive Director
Monitoring Executive Director Performance
Chief Auditor Connection
Chief Counsel Connection
Chief Investment Officer Connection
Chief General Asset Consultant Connection

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Global Governance-Management Connection

The Board’s official connection to the operational organization, its achievements, and conduct will be through a Chief Executive Officer, titled Executive Director. The only exceptions will relate to the Chief Auditor, Chief Counsel, Chief Investment Officer, and Chief General Asset Consultant whose connections to the Board will be described respectively in the policy titles: “Chief Auditor Connection,” “Chief Counsel Connection,” "Chief Investment Officer Connection," and "Chief General Asset Consultant Connection."

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Unity of Control

Only officially passed motions of the Board are binding on the Executive Director.

Accordingly:

1. Decisions or instructions of individual Board members, officers, or committees are not binding on the Executive Director, except in instances when the Board has specifically authorized such exercise of authority.
   
   
2. In the case of Board members or committees requesting information or assistance without Board authorization, the Executive Director can refuse such requests that require, in the Executive Director’s opinion, a material amount of staff time, funds, or is disruptive. (The exception would be when such request is in connection with the Board member’s capacity as a member of the System and such request would be responded to for any member of the System.)
   

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Accountability of the Executive Director

The Executive Director is the Board’s only link to operational achievement and conduct, so that all authority and accountability of staff, as far as the Board is concerned, is considered the authority and accountability of the Executive Director.

Accordingly:

1. The Board will never give instructions to persons who report directly or indirectly to the Executive Director.
   
   
2. The Board will refrain from evaluating, either formally or informally, any staff other than the Executive Director.
   
   
3. The Board will view Executive Director performance as identical to organizational performance, so that organizational accomplishment of Board stated Ends and avoidance of Board proscribed means will be viewed as successful Executive Director performance.
   

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Delegation to the Executive Director

The Board will instruct the Executive Director through written policies, which prescribe the organizational Ends to be achieved, and describe organizational situations and actions to be avoided, allowing the Executive Director to use any reasonable interpretation of these policies.

Accordingly:

1. The Board will develop policies instructing the Executive Director to achieve certain results at a specified cost. These policies will be developed systematically from the broadest, most general level to more defined levels, and will be called Ends policies.
   
   
2. The Board will develop policies, which limit the latitude the Executive Director may exercise in choosing the organizational means. These policies will be developed systematically from the broadest, most general level to more defined levels, and they will be called Executive Limitations policies.
   
   
3. As long as the Executive Director uses any reasonable interpretation of the Board’s Ends and Executive Limitations policies, the Executive Director is authorized to establish all further policies, make all decisions, take all actions, establish all practices, and develop all activities.
   
   
4. The Board may change its Ends and Executive Limitations policies, thereby shifting the boundary between Board and Executive Director domains. By doing so, the Board changes the latitude of choice given to the Executive Director. But as long as any particular delegation is in place, the Board will respect and support the Executive Director’s choices.

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Monitoring Executive Director Performance

Systematic and rigorous monitoring of Executive Director job performance will be solely against the expected Executive Director job outputs: organizational accomplishment of Board policies on Ends, and organizational operation within the boundaries established in Board policies on Executive Limitations.

Accordingly:

I. General Procedures

1. Monitoring is simply to determine the degree to which Board policies are being met. Data that does not do this will not be considered monitoring data.
   
   
2. The Board will acquire monitoring data by one or more of four methods: (a) by Internal report, in which the Executive Director discloses compliance information to the Board, (b) by External report, in which an external, disinterested third party selected by the Board assesses compliance with Board policies, (c) by report from the Chief Auditor.
   
   
3. In every case, the standard for compliance shall be any reasonable Executive Director interpretation of the Board policy being monitored.
   
   
4. All policies that instruct the Executive Director will be monitored at a frequency and by a method chosen by the Board. The Board can monitor any policy at any time by any method, but will ordinarily depend on a routine schedule.

II. Specific Procedures for Reviewing Executive Limitations

1. Global Executive Constraint

• Exception Report by Chief Auditor and Chief Counsel made to the Board immediately following the discovery of potential violation of the policy.

2. Treatment of Consumers

• Annual Report made by the Executive Director, which outlines efforts to satisfy the policy requirement. The report should also cover the following areas: communications, satisfaction surveys, consumer complaints, evaluation of effectiveness of the phone system (include telephone statistics), and any other pertinent information.

3. Treatment of Staff

• Annual Report made by the Executive Director that outlines efforts to satisfy policy requirement. The report should also cover the following areas: maintenance of written personnel policy, staff grievances, turnover rate, exit surveys, and any other pertinent information.

4. Budgeting

• Exception Report by Executive Director at the next Board meeting if Executive Director anticipates additional expenses in excess of 10 percent of the overall budget or an expense category (i.e. the operations or investment budget), any unscheduled salary increases, or the unscheduled expansion of staff. (Unscheduled includes any salary increases or staff expansion not included in the Board approved budget.)

5. Financial Condition and Activities

• Exception Report by the Chief Auditor following the discovery of potential violation of the policy.
  
  
• Annual Report by the Executive Director, which outlines efforts to satisfy policy requirements.

6. Emergency Executive Director Succession

• Exception Report by Executive Director at the next Board meeting if Executive Director anticipates changing the organizational structure in a manner that eliminates the position of the Deputy Executive Director/Chief Operations Officer and/or the Deputy Executive Director/Chief Investment Officer.

7. Asset Protection

• Annual Report by the Insurance/ Risk Manager Consultant that outlines efforts to satisfy policy requirement.
  
  
• Exception Report by Chief Auditor if Executive Director allows improper wear and tear or insufficient maintenance of plant and equipment or permits improper controls of funds under the policy. The report shall be made at the next Board meeting following discovery of the condition.
  
  
• Exception Report by Chief Counsel if Executive Director unnecessarily exposes the System to claims of liability. The report shall be made at the next Board meeting following the discovery of condition.

8. Compensation and Benefits

• Annual Report by the Executive Director outlining the results of a salary survey. Salary surveys should be performed at least every other year.

9. Communication and Support to the Board

• Exception Report by Executive Director at the next Board meeting if Executive Director anticipates any problem satisfying the policy requirements.

10. Investment Limitations

• Exception Report by the Executive Director and/or Chief Investment Officer if policy violated along with a detailed explanation of the violation and action being proposed or taken to remedy the situation.

*Unless otherwise stipulated by the Board, annual reports by the Executive Director will be mailed to each Board member by no later than September 1 of each year. The Board will consider the report as part of its evaluation of the Executive Director’s performance at the November Board meeting.

*In addition to the Exception report requirements outlined above, the Chief Counsel and the Chief Auditor will issue an annual Exception report, which will be mailed to each Board member by no later than September 1 of each year. The Board will consider those reports as part of its evaluation of the Executive Director’s performance at the November Board meeting.

III. Specific Procedures for reviewing Executive Director Performance with regard to the Achievement of Ends Policies

1. Investments

• Quarterly, the CIO will submit a report to the Board addressing the System’s success or lack thereof in accomplishing the investment “ends” based on the benchmarks described within this policy at the total fund level and asset class levels. This report will also include a summary of due diligence meetings held throughout the quarter, and will also provide the Board with a brief commentary by the CIO and/or CGAC which summarizes their thoughts on the market and key strategic decisions made in the quarter along with justification for those decisions.



• Annual Report during the third quarter by outside consultant evaluating implementation costs of Investment program.

2. Benefits

• Annual Report at the September Board meeting by the Executive Director, which outlines efforts to satisfy specific policy requirements.

3. Legislation

• Report by the Executive Director at the next Board meeting summarizing staff response (technical and fiscal information) to proposed legislation.

4. Sound Actuarial Condition

• Annual Report at the September Board meeting by the retained actuary. These reports will serve as the basis for establishing the contribution rates for the ensuing fiscal year that must be certified to the Commissioner of Administration before the first of October each year.
• The retained actuary shall conduct an experience study comparing actuarial experience with assumed experience during the period being examined. The next such experience study report shall be presented to the board in 2012 and shall be for the four-year period ending on June 30, 2011. Subsequently, the experience study shall be completed for five-year periods with the first such study to be presented to the board in 2017, covering the five-year period ending on June 30, 2016. The experience study report shall include, but not necessarily be limited to analysis of and recommendations regarding the following assumptions:
• Withdrawal rates before and after the five year vesting period
• Retirement rates
• Disability rates
• Pay increases
• Mortality ratesboth before and after retirement
• Investment returns considering both real returns and inflation

The experience study report shall be provided to each Board member and the executive director and will serve as the basis for determinations regarding whether or not demographic or economic assumptions should be modified by the Board.

• An actuarial audit report shall be prepared by an actuarial firm, other than the retained actuary, selected by the Board as required by Board Rule. The next such audit shall be presented to the board in 2013 and shall be for the five-year period ending on June 30, 2012. Subsequently, the audit shall be completed for five-year periods with the first such study to be presented to the board in 2018, covering the five-year period ending on June 30, 2017. This report provides the Board with an independent assessment of the quality of the work of the retained actuary and the reasonableness of the related fees.

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IV. Tentative Schedule for Review Required by the Governance Policies

(See Appendix A)

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Chief Auditor Connection

A direct, but limited, access to the Board by the Chief Auditor is an exception to the exclusive role of the CEO in connecting governance and management.

1. The Chief Auditor’s sole access to the Board is for submission of reports specifically requested by the Board or for submission of audit reports that the Chief Auditor believes should be reviewed by the Board.

1. On a routine basis, the Chief Auditor is to submit monitoring data on Board policies at a frequency established in the Board policy “Monitoring Executive Director Performance.”
   
   
2. The Chief Auditor is to offer his or her opinion to the Board if, in the view of the Chief Auditor, any action of the Executive Director or other staff is either illegal or in violation of a policy.
   

2. The Chief Auditor in all other ways, except as noted in Section 3 below, is subject to the Executive Director's management authority over all staff and has no direct access to the Board, except to report that in his or her judgment, the Executive Director is impeding the exercise of the Chief Auditor's official access as described in Section 1 of this policy or seeking to inappropriately influence the content of the Chief Auditor's reporting or impairing the independence of the Chief Auditor.
   
   
3. In the event the Executive Director intends to terminate or suspend the employment of the Chief Auditor, the Executive Director shall provide the Board with two weeks advance notice prior to the effective date of the termination or suspension. (With appropriate notice to the board, the Executive Director may suspend the employment of the Chief Auditor with pay prior to the effective date of termination). The Executive Director will communicate the reason for such termination or suspension in a memorandum distributed to each Board member that explains the rationale for such action. The Board may elect to investigate the basis for the termination or suspension as it deems appropriate under the circumstances including, but not limited to, interviewing the Executive Director, the Chief Auditor, or any other employee or person. The Board may also establish any timeframe for the investigation deemed appropriate under the circumstances and direct the Executive Director to refrain from implementing such termination or suspension pending the completion of such investigation.

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Chief Auditor Connection

The Chief Auditor has specific responsibilities relating to the governance process. Those responsibilities include, but are not limited to, the following:

Responsibilites:

1. The chief auditor, or an external consultant selected by the chief auditor, shall issue an evaluation to the Board at least once every five years or when the policy benchmarks are changed, reporting on the accuracy and appropriateness of the investment policy benchmarks being utilized to gauge the performance of the investment program. In addition, the chief auditor shall annually perform a review of the accuracy of the policy and strategy benchmark calculations.
   
   
2. The chief auditor, or an external consultant selected by the chief auditor or the executive director, shall issue an annual report regarding the independence, viability, and performance of the chief general asset consultant (CGAC).
   
   
3. The chief auditor shall conduct audits of all internally managed portfolios and file audit reports with the board. The timing and scope of such audits shall be determined by the chief auditor based upon a properly completed risk assessment. The format of any such audit reports shall be determined by the chief auditor after consulting with the executive director and CIO.
   
   
4. The chief auditor shall prepare an annual internal audit plan that describes the audits and reviews planned for the upcoming fiscal year. The annual internal audit plan shall be based on a properly completed risk assessment. A brief listing of planned audits and reviews shall be presented to the board during the March board meeting in executive session, in order to solicit audit concerns expressed by the board members. The annual audit plan shall be prepared by the chief auditor and presented to the board and the executive director during the executive session of the June board meeting for consideration and approval. The executive director shall receive a copy of the audit plan one month in advance of the June board meeting. Any material changes to the current audit plan shall be approved in the same manner.
   
   
5. The chief auditor shall communicate with the external auditors after each annual financial statement audit to determine if the external auditors wish to discuss any issues with the board during the executive session of the November board meeting. Such meeting with the external auditors, if requested by either the Board or the external auditors, will include only the board members, board secretary, and the external auditors. The board shall also receive a copy of any management letters (which generally describe auditor recommendations to improve the internal control structure) prepared by the external auditors and any applicable memos from staff that provide responses to the auditor’s concerns and recommendations.
   
   
6. All other duties and responsibilities shall be described in the Internal Audit Charter. The Internal Audit Charter shall be prepared by the chief auditor after consultation with the Executive Director and shall be approved by the executive director, board chair, chief auditor, and internal auditor.

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Chief Counsel Connection

A direct, but limited, access to the Board by Chief Counsel is an exception to the exclusive role of the CEO in connecting governance and management.

1. The Chief Counsel’s sole access to the Board is for submission of opinions specifically requested by the Board. The Chief Counsel is also authorized, after consultation with the Executive Director, to bring legal issues to the attention of the Board.
   
   
2. If the Chief Counsel has reason to believe that any action or proposed action of the Board, a Board member, the Executive Director, or other staff is either illegal or in violation of a MOSERS Governance Policy, the Chief Counsel shall provide the Board with an opinion with regard to the specific matter.
   
   
3. The Chief Counsel in all other ways is subject to the Executive Director’s managerial authority over all staff and has no direct access to the Board, except as provided in this policy.
   
   
4. In the event the Executive Director intends to terminate or suspend the employment of the Chief Counsel, the Executive Director shall provide the Board with two weeks advance notice prior to the effective date of the termination or suspension. (With appropriate notice to the board, the Executive Director may suspend the employment of the Chief Counsel with pay prior to the effective date of termination). The Executive Director will communicate the reason for such termination or suspension in a memorandum distributed to each Board member that explains the rationale for such action. The Board may elect to investigate the basis for the termination or suspension as it deems appropriate under the circumstances including, but not limited to, interviewing the Executive Director, the Chief Counsel, or any other employee or person. The Board may also establish any timeframe for the investigation deemed appropriate under the circumstances and direct the Executive Director to refrain from implementing such termination or suspension pending the completion of such investigation.
   
   
5. Chief Counsel shall direct all legal matters pertaining to potential or actual litigation to Outside Legal Counsel retained by the Board and develop strategies in conjunction with the Outside Legal Counsel to resolve all such matters. The Chief Counsel, Outside Legal Counsel, and Special Outside Legal Counsel shall keep the Board apprised of all potential and actual litigation.
   
   
6. The Executive Director is authorized to retain Special Outside Legal Counsel to assist in legal issues pertaining to specialty areas such as tax and investment matters if the Executive Director determines that those legal services could be provided more efficiently by such counsel. In that event, the Chief Counsel shall direct related legal matters to the Special Outside Legal Counsel. The Executive Director shall notify the Board within 14 days after hiring or terminating Special Outside Legal Counsel and inform the Board of the rationale for the action taken.
   
   
7. Chief Counsel shall monitor the performance of and review all billing statements from the Outside Legal Counsel and Special Outside Legal Counsel.

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Chief Investment Officer Connection

A direct, but limited, link to the Board by the Chief Investment Office (CIO) is an exception to the exclusive role of the Executive Director in connecting governance and management.

1. The CIO’s sole access to the Board is for submission of investment reports, information or communications required by these policies, and any other information or opinions specifically requested by the Board with regard to the investment program.
   
   
2. The CIO in all other ways is subject to the Executive Director’s decisions made in accordance with the Executive Director’s responsibilities under these governance policies.
   
   
3. The CIO may be employed through a written contract between the Executive Director, the Board, and the CIO.
   
   
4. The CIO shall monitor the performance of and review all billing statements from the CGAC and all other outside service providers (external money managers, securities lending managers, specialty consultants, and the master custodian) to ensure accuracy.

 

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Chief General Asset Consultant Connection

The Chief General Asset Consultant (CGAC) serves under contract at the pleasure of the Board. The contract shall outline certain reporting requirements applicable to the CGAC related to the oversight of the investment program. The Executive Director shall ensure that the contract between the Board and the CGAC includes in addition to other mutually agreed to contractual requirements, at least the following:

• Upon learning of an issue that the CGAC believes is material regarding deviation from prudence, objectivity, guideline adherence or any other matter of concern involving Staff, the CGAC is to express that concern in writing to the Executive Director and provide the Chair of the Board with a copy. The Executive Director will have three business days to respond to the issues identified by the CGAC. Copies of his or her response will be sent to the CGAC and the Chair.
  
  
• If the CGAC believes the issue warrants immediate action, he or she must make this clear in the original correspondence and, in addition, recommend action to be taken. In this instance, a concerted effort must be made by the CGAC to contact the Board Chair, by phone, at the time the original correspondence is sent, in order to provide a verbal description of the issue, the proposed action, and the justification for both.
  
  
• Upon receipt of the Executive Director’s response, the Chair and the CGAC will review the response at the earliest practical time and determine the proper course of action. As determined by the Chair and the CGAC, Board members will be contacted if it is concluded that further immediate action is required.

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