Stanford Governance Experts Seek Investment Fund Reform

Business Wire, June 4, 2007

Clapman Report Offers Best Practices for Pension, Endowment, and Charitable Funds

STANFORD, Calif. -- A committee of the Stanford Institutional Investors' Forum at Stanford Law School, in cooperation with the Arthur and Toni Rembe Rock Center for Corporate Governance, announced today new standards designed to improve fund governance and curb abuse of fund assets. The Clapman Report, a set of best practice principles for managing pension, endowment, and charitable funds, calls for institutional investors--who today are the central repository of capital in the United States--to adopt basic policies aimed at improving how they govern themselves.

The Clapman Report comes in the wake of several high-profile scandals that painfully illustrate the need for tougher governance standards--from New Jersey, where it recently surfaced that the state diverted $3.1 billion from its pension system, to Illinois, where a state teachers' retirement system trustee pled guilty to "pay to play" schemes involving million-dollar kickbacks, to California, where governance lapses by former City of San Diego retirement board members contributed to a $1.4 billion unfunded liability, to New York State, where the former comptroller, who exercised sole control and discretion over pension fund assets, stepped down in the face of serious allegations that he misused state funds for personal use. Governance issues have plagued charitable funds as well, most notably the Getty Foundation, whose president resigned amid accusations ranging from inappropriate funding of mortgage loans to using museum assets for personal benefit. The Red Cross also faced calls to reform its governance structure based on its response to the Katrina disaster and other leadership issues.

"As a committee we were bound by a central belief: fundamental fund governance standards ought to exist to safeguard beneficiaries' assets from questionable--and often illegal--practices, and to protect the taxpayers who end up footing the bill when institutional investors fail," said Peter Clapman, CEO of Governance for Owners USA, former chief investment counsel of TIAA-CREF, and chairman of the Stanford Institutional Investors' Forum's Committee on Fund Governance.

Clapman added: "Bad governance also weakens funds by eroding public support for them. Why, for example, continue to pay for a pension system that sucks money from education, transportation, and health care programs while increasing public debt instead of diligently saving for the future?" he said. "Our report provides institutional investors with a framework for developing proper checks and controls so that doesn't happen."

Among the Clapman Report recommendations are that funds should: 1) clearly define and make publicly available their governance rules; 2) mandate tough and transparent policies to address conflicts of interest; 3) take steps to ensure funds have trustees who are competent in financial and accounting matters; 4) establish clear reporting authority between trustees and staff; and 5) define appropriate responsibilities and delegation of duties among fund trustees, staff, and outside consultants.

The committee has asked the Council of Institutional Investors (CII), a not-for-profit association of 130 public, labor, and corporate pension funds with assets exceeding $3 trillion, and Institutional Shareholder Services (ISS), a respected and influential provider of voter advisory and corporate governance solutions to the institutional marketplace, to encourage its members and clients to adopt the Clapman principles.

The report's call for better oversight is appropriate given the importance of institutional funds in the American economy. In 2005 institutional investors owned 67.9 percent of the Fortune 1000. Not only do these funds represent the combined savings of teachers, union members, public servants, airline pilots, small business owners, firemen, police, and philanthropists, as well as employees of churches, colleges and universities, and other nonprofits, they wield significant power over the corporations in which they're invested.

"Fund governance is vital to institutional investment funds just as corporate governance is essential to publicly owned corporations," said committee member Joseph Grundfest, William A. Franke Professor of Law and Business at Stanford Law School and co-director of the Arthur and Toni Rembe Rock Center for Corporate Governance. "Good governance ensures better organizational performance, reduces the potential for fraud and financial abuse, and legitimizes institutional investors' demands on publicly owned companies to adopt and follow corporate governance standards."

"For the many institutional investors already practicing good governance, the Clapman Report serves as validation. For those who aren't, the principles are a much-needed wake-up call," said Chris Waddell, general counsel of the San Diego City Employees' Retirement System (sdCERS). Waddell, former general counsel of the California State Teachers' Retirement System (CalSTRS), joined sdCERS in November 2006.