Pension plan governance practices have gotten off track, and incentives must be adjusted to ensure trustees’ interests are in line with those of plan beneficiaries, according to Edward Waitzer, senior partner at Stikeman Elliott LLP.

Speaking at a Toronto event hosted by the Shareholder Association for Research and Education on Thursday, Waitzer highlighted a number of problems with governance practices at both pension plans and corporations. He said boards and trustees have gotten bogged down by bureaucracy and processes, and have deviated from their original purpose.

“Purpose and process become disconnected,” Waitzer said. “We spend a disproportionate amount of time on governance, focusing on the process side and losing sight of the purpose side.”

By focusing on bureaucratic formalization, he said boards are working harder, but not necessarily more productively. They’ve lost sight of their ultimate goal, Waitzer said, which is to ensure the long-term sustainability of an organization, and the ability of the organization to fulfil its promises to stakeholders.

Governance standards fail to “create incentives for the kinds of sacrifices and innovation and adaptability that ultimately is what governance should be about,” he said.

Another problem is the misalignment of incentives in the financial services industry, according to Waitzer. He said pension plans have become too focused on short-term portfolio performance and on meeting industry benchmarks. They should be putting much more emphasis on the long-term sustainability of the plan, and their ability to provide retirement income security for current and future generations of beneficiaries, he said.

Waitzer suggested that the industry must realign incentives, placing a new emphasis on the fiduciary role that pension trustees play.

“It’s tricky to figure out how to get to true fiduciary behaviour,” he said. “How do we realign incentives to the interests of beneficiaries?”

He said conflicts in incentives must be managed more effectively, risks must be monitored more carefully, and decisions must be made with much greater consideration of their long-term repercussions.

Waitzer said an opportunity has emerged to address some of these problems. Every economic downturn, he explained, provides an opportunity to learn from mistakes made and to reflect on ways to improve the existing system.

“We’re at an inflection point,” he said. “We’re at a point of great opportunity.”

He noted that business leaders appear to be recognizing the importance of shifting their focus away from short-term incentives, towards longer-term goals.

“We’re in a period where there’s a renaissance in a desire to discuss what values in business should be,” Waitzer said.

IE