Many governments are struggling to ensure the sustainability of their national pension plans and exploring avenues of change. Canada responded to this challenge in the 1990s with a series of reforms, one of which was the creation of the Canada Pension Plan Investment Board. A necessary condition for effective reform was the federal and provincial governments’ decision to develop a distinctive governance structure that is appropriate to our mandate to invest significant funds belonging to contributors and beneficiaries.

Governance practices of the board of directors.

We are continuing to see progress towards the long-term policy goals envisioned by the stewards of the Canada Pension Plan. The long-term sustainability of the CPP was confirmed again last December by the Chief Actuary of Canada in his 21st Actuarial Report. His conclusions were based on a series of demographic, economic and policy assumptions vetted for their reasonableness by an expert panel of private sector actuaries.

Because expert advice was sought and followed in creating the CPP Investment Board, our founding legislation in 1997 anticipated and responded to concerns about Crown corporation governance raised in 2004 by the Auditor General of Canada and subsequently in a Crown governance review conducted by the Treasury Board of Canada Secretariat.

The governance structure spelled out in the Canada Pension Plan Investment Board Act contains such disparate provisions as a unique director-selection process, board responsibility to hire the chief executive officer and clearly specified accountabilities to Canadians. These provisions collectively strike a careful balance that defines our arm’s-length status from governments and our accountability to Canadians.

The Treasury Board’s review recognized that, although principles of good governance are applicable to all Crown corporations, uniform governance structures for diverse Crown corporations would not be appropriate. The CPP Investment Board, for example, is required to assure CPP contributors that investment professionals, with the oversight of a board of directors, will make investment decisions. This means the organization must operate at arm’s length from governments, but with effective accountability.

Consistent with our arm’s-length but accountable status, the board of directors, not government, has the responsibility for identifying and appointing the chief executive officer. Accordingly, when John MacNaughton announced his retirement last May, a search committee of the board of directors sought the next CEO with the assistance of a global executive search firm. In December, the board of directors was delighted to announce the selection of David Denison, a talented executive with more than two decades of experience in global financial services companies in Canada, the United States and Europe. In his short tenure as chief executive officer, David has demonstrated his leadership in preparing the organization for the next stage of its rapid growth and the diversification of the portfolio. This continuing diversification is necessary to improve risk-adjusted returns for the long term.

A second distinctive governance feature of our legislation is the requirement that the board of directors establish code of conduct and conflict of interest procedures for officers and employees. The federal and provincial finance ministers who serve as our stewards believed our board of directors would be best able to assess how to achieve the high standards of conduct expected of a Crown corporation competing in financial markets. High standards of conduct depend on the personal integrity of our leaders and their commitment to disseminating appropriate values. Ensuring these personal characteristics in our leaders has been a clear priority in our CEO searches.

The board of directors also created the position of external conduct review advisor. The CPP Investment Board’s code of conduct requires officers and employees to act as “whistleblowers” if they become aware of suspected breaches in the code or conflict of interest procedures. While a number of internal people are designated contacts for “whistleblowers,” the external conduct review advisor is also available to provide confidential advice to employees and directors on questions relating to conduct or conflict of interest. The organization has been extraordinarily well served by Purdy Crawford, our first external conduct review advisor. His judgment, informed by wide experience as a chief executive officer, corporate director, lawyer and contributor to public policy, has greatly assisted employees and directors.

The expertise and independence of audit committees has been of particular concern in public and private companies. As a result of the CPP Investment Board’s external nominating committee process, chaired by Michael Phelps, we are able to include on our audit committee individuals with expertise that is particularly relevant to an investment organization that is part of a large pension plan.

Our arm’s-length status is balanced by our accountability through such requirements as mandatory reporting. Again, the organization has enhanced its transparency by going beyond the legislated standard. In addition, the CPP Investment Board’s decision to adopt a strong disclosure policy and practices are evident in our extensive and continuous communications program.

Public meetings held in each participating province every other year provide another form of accountability to Canadians. Our meetings last autumn gave us perspectives on issues that are regularly discussed internally, such as diversification of the CPP reserve fund, social investing and our proxy voting guidelines. These public meetings are only one dimension of a much broader program of interaction with our stakeholders.

Other mandated forms of accountability are less noticeable to most Canadians. Our legislation requires that a wide-ranging special examination of the organization’s systems and practices be conducted at least once every six years by our external audit firm. The successful results of the special examination were communicated to the federal and provincial finance ministers last June. These systems and practices must be constantly monitored to ensure their adequacy for a growing organization with more diversified and complex assets.

A further form of accountability is provided by the triennial review of the CPP, which examines a wide range of CPP matters including issues pertaining to the CPP Investment Board. The federal and provincial finance ministers who serve as joint stewards of the CPP began the triennial review of the plan this spring.

This year has been one of transition and change. The board of directors thanks John MacNaughton for his professionalism during the transition period to the new CEO, in addition to his contributions outlined in last year’s report. We also extend our sincere thanks to the senior management team, who are most affected by leadership change, for their professionalism and flexibility during this period.

This year, we welcomed Peter Hendrick and Phil MacDougall as directors and said goodbye to Gilbert Gill. We thank him for his contribution and his willingness to serve longer than contemplated.

An independent board of directors is crucial to effective oversight. Our stakeholders have directors with a wide range of expertise and experience who are independently minded and behave collegially in the interest of the organization. We strive to challenge ourselves to continuously improve the board’s oversight process.

I express my deep gratitude to the directors for their commitment, insights and support.

Gail Cook-Bennett
Chairperson