The growing focus on accountability finds the CPP Investment Board well grounded in two ways: first, a strong governance model that allows investment professionals to operate successfully in the private sector world of financial markets, subject to the oversight of an independent board and strong public sector accountability; and second, a strong internal accountability framework for the performance of the portfolio and for the development of the organization.

Shareholders are demanding more information from the companies in which they invest. Taxpayers want greater disclosure and openness by governments and their agencies. And stakeholders, of all kinds, want to know that those charged with safeguarding their interests perform this task effectively and with appropriate accountability. The CPP Investment Board supports these developments.

In an environment characterized by greater emphasis on accountability, the CPP Investment Board is well positioned. Almost a decade ago, the federal and provincial finance ministers structured the CPP Investment Board with a strong governance framework that was tailored to our mission and provided both our organization and governments with the tools for effective accountability.

The CPP Investment Board governance model allows us to fulfill our mandate as a professional investment management organization, operating in the private sector world of financial markets, with high levels of accountability. Three types of broad accountability are addressed below, each of which was enhanced by developments that occurred this year:

• The CPP Investment Board's accountability as fiduciaries to ensure the strength, growth and development of the CPP fund
• The accountability of independent investment professionals to an independent board of qualified directors
• The accountability of the CPP Investment Board to the federal and provincial finance ministers who serve as stewards of the Canada Pension Plan

Fiduciary Accountability
The principal way we are accountable as fiduciaries is through our numbers – that is, the returns on our investments after adjusting for the risk taken. The positive investment results of 2006 strengthen the CPP fund significantly. Moreover, the organization significantly advanced the CPP Investment Board's objective of diversifying the portfolio and reducing risk by completing several major transactions with a total value of more than $7 billion. These are noteworthy accomplishments in their own right but are also symbolic of the expected future evolution of the portfolio.

Fiscal 2006 was a year of transformation in which significant advances were made toward identifying the strategy, people and processes required to position the portfolio for the continued investment performance required to help sustain the CPP fund for the long term.

Management, ably led by David Denison in his first full year as president and chief executive officer, initiated a fundamental and detailed strategic review of the portfolio and the organization, with the board of directors participating at key stages. The planning process resulted in a comprehensive and shared view of how to grow the portfolio effectively over the next few years and build the capability to deliver results.

The review culminated in a framework designed to maximize the opportunities for future growth of the fund. It encompassed the full scope of portfolio and risk-management strategies, as well as an articulation of organizational goals and requirements. The strategy also responded to a change in the external landscape which involved the elimination of two regulatory constraints – the foreign property rule and a regulation affecting fixed income investments. Both changes allow management to position the portfolio better from both a return and a risk perspective.

The board and management made important decisions as a result of this review process, two of which have particular relevance for our accountability as fiduciaries.

The first was a simple but profound commitment to designing a portfolio to capture risk-adjusted returns in excess of passive market returns, and to measure that added value against a reference portfolio invested passively within traditional asset classes. This decision reflected the view that future passive returns from traditional asset classes may well be insufficient to meet the requirements of the fund and that talented management investing in a broader set of strategies could achieve higher returns.

The second significant decision involved a renewed commitment to managing the CPP fund by focusing on the total portfolio. Since to truly meet this objective requires substantial additional portfolio and organizational complexity, a detailed approach to effective management was agreed upon. Both these choices are discussed further in the remainder of this report.

2006 was also a year of building organizational strength with the additions of experienced and talented leaders for our Portfolio Design and Risk Management, Private Investments, Real Estate Investments and Human Resources departments. Equally important was the commitment to expansion of strategic partnerships with external investment managers, as an important way of adding to the investment talent working on our behalf.

While we will monitor and adjust the individual elements of the strategy over time as needed, we believe this framework will contribute to the CPP Investment Board's long-term performance and accountability.

Management Accountability
Effective management accountability to a board of directors makes demands on both the board and management. Directors must be engaged and knowledgeable in order to provide effective oversight and make a substantive contribution. The board of directors has committed the time for continuous learning about the organization's developing investment strategies and risks associated with them. This education is provided by both internal and external experts.

Management accountability to the board of directors has been enhanced this year through the direction outlined in the strategic review process. The CPP Reference Portfolio, described in the Management's Discussion and Analysis section of this report, provides the potential for significant clarity to investment, performance evaluation and incentive compensation proposals and decisions. Clarity, in turn, enhances accountability.

The changes in management accountability that took place this year are possible because our original governance platform defined management's accountability solely to an independent board of directors with investment, financial and governance experience, rather than to a cabinet minister or other government officials. As intended, our investment professionals operate at arm's length from governments, which is critical to our ability to compete in the private sector. Combined with the board of directors' accountability to its stewards, as described later, a careful balance between independence and accountability is achieved.

Other decisions by our stewards were designed to ensure that focus and accountability reside at the level of the board of directors and are not diffused through less precise accountability frameworks. The board, rather than a cabinet minister, appoints, evaluates and has the power to dismiss the chief executive officer. The audit committee has the same powers and jurisdiction with regard to the external auditor. In short, the board was given the tools it required in order to be held accountable for the organization's performance – a fundamental principle underlying governance best practices.

Finally, the ministers decided that the board should be accountable to them in their capacity as stewards of the Canada Pension Plan, as described below.

Accountability to our Stewards
The CPP Investment Board is accountable to its stewards. This past year, management participated in the federal/provincial Triennial Review of the Canada Pension Plan, appearing before the 10 stewards of the CPP last September. Against the background of the review of governance practices of Crown corporations by the Treasury Board, the federal Justice Department and the Gomery Inquiry, management was able to demonstrate that our governance model, policies and practices are equal to or stronger than a variety of proposals to strengthen Crown governance. This merely confirms the extraordinary foresight of the CPP reformers in designing the organization in 1997 and the work done by our board and management to build on this strong foundation.

While the Triennial Review is one of the most visible forms of accountability to the stewards, other forms include the quarterly reporting of results and the ability of the federal finance minister to call a special audit at any time and to commission a special examination by an external auditor every six years.

Accountability is facilitated by good disclosure. The CPP Investment Board chose to go further than our legislation requires and disclose substantive information to help Canadians understand where and how we invest the portfolio, the financial performance of the fund and how we manage the organization. We voluntarily disclose more than any other pension fund in Canada on our website, which currently contains over 1,200 pages of information.

Accountability is deeply ingrained in our legislation and our governance model and in the policies and practices of the board, officers and employees.

Integrity and Conduct
On behalf of the board of directors, I wish to thank Mr. Justice Ted Hughes Q.C. for acting as our external conduct review advisor. His direct experience in this field, familiarity with the public sector and stature in the legal community benefited us on a number of occasions even before he agreed to serve as our advisor. More recently, we welcomed the Honourable Frank Iacobucci, whose experience as a justice of the Supreme Court of Canada, a senior public servant and long-time legal scholar is an ideal fit for external conduct review advisor.

On behalf of the board of directors, I wish to recognize David Denison and his management team for their outstanding work in formulating the strategic direction for the next five years and defining the organization and the accountabilities of the investment professionals required for effective implementation. I thank my fellow directors for their dedication to the work of the CPP Investment Board, which serves the 16 million Canadians contributing to and benefiting from the Canada Pension Plan.

Gail Cook-Bennett
Chairperson