ANALYSIS

Washington reviews governance, pay and in-house investment

The pay levels, amount of in-house investment activity and governance structure of the $83 billion Washington State Investment Board (WSIB) may be under review following a rigorous debate that included a presentation to the board by KPA Advisory’s Keith Ambachtsheer.

The proposed review will include examination of which investment capabilities it is important to have in-house, and whether the success of the fixed income and real estate operating companies could be transferrable to other asset classes.

The board agrees that any structural change needs to be strategically thought out and discussed by the board after further information seeking, but Treasurer of Washington State, Jim McIntire, says now is a good time to start drafting a proposal for the next two years.

Executive director of WSIB, Theresa Whitmarsh, says the board is taking a considered approach to any change.

“The board is looking at these and other important governance issues, but given their complexity and today’s economic challenges, they are moving slowly and thoughtfully in determining what, if any changes should be made or pursued,” she says.

Whitmarsh says challenges facing the fund include the increasing capacity to manage global funds, tangible assets, active market securities funds, and other innovative vehicles, as well as the ability to attract, develop and retain skilled staff.

With regard to in-house investment capabilities the board heard that “procurement constraints also present obstacles to organisational movement”.

By way of example, the chief investment officer, Gary Bruebaker, says the time-consuming public procurement process for public equity emerging market equities managers cost the fund money.

“During the time it took to hire managers, emerging markets ran up 70 per cent and WSIB lost out on that money,” he says.

The board also cites the inability to move into tangible assets because of failed recruitments, due in turn to low salary levels. According to a 2010 salary survey, the WSIB offers on average 22 per cent below the median salary level of its peers, says chief operating officer Victor Moore.

But Bruebaker says he has mixed emotions about implementing performance pay.

The WSIB manages investments for 17 retirement plans, and at the end of June, 31 per cent of its assets were in fixed income, 35 per cent public equities, 18 per cent private equity, 10 per cent real estate, and the rest allocated to tangible assets, innovation and cash.

Whitmarsh says staff are seeking direction from the board on what governance initiatives they will support and what they will not.

The options range from a complete spin-off, such as the Canadian funds, to finding a way to get exceptions from some state restrictions because of unique circumstances.

Chair of the board, Patrick McElligott, agrees the WSIB needs to find a “different way of doing things”.

According to a presentation by Ambachtsheer, the possible responses include doing nothing, tweaking the current organisational model, or changing the current model.

“The ‘tweaking the current model’ approach strives for additional operational productivity enhancements/cost savings, a strengthening of the board selection/development process, and the leveraging of cooperative strategies with like-minded investment organisations,” he says. “The ‘change the model’ option would identify the ideal organisational model, assuming the board had the freedom to do what it needed.”

Ambachtsheer says the likely features of the change model would include:

  • Arms-length charter to deliver clearly-defined services to clearly-defined clients/beneficiaries
  • Authority to develop and implement the new organisation’s own strategic plans
  • Strong oversight by a board with the requisite skill/experience set and “passion for the cause”
  • Board has approval authority for the new organisation’s budget, including compensation structure and levels, and contracting/procurement rules/policies.

Whitmarsh does note, however, that the appropriation process is more of a challenge to WSIB than the salary setting authority, and staff are not proposing to implement a change in the salary setting process.

Ambachtsheer says the board needs to figure out the vision for the organisation, key pieces of that, and reach consensus.

He suggests the board examine its present state, and its future outlook, and then come forward not with solutions, but challenges ahead.

He says the board should talk about its mission statement and what sets it apart from other organisations, how to achieve that mission, and its passion for the cause and how to maintain that.

 

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