An Interview with Carlos Panksep By: Gabriel PotterMBA, AIFA®

As a term, “stewardship” can seem like a vague, corporate buzzword that lacks solid meaning. For the benefit of our readers, how would you define stewardship? 
We have a fairly well-defined definition of stewardship. We specifically go into the investment stewardship aspect as opposed to the broader definition of stewardship. We define an investment steward as the person who has the legal responsibility for managing investment decisions, so that would include the plan sponsors, trustees and investment committee members. Typically, the investment steward isn’t an investment professional themselves, but they are responsible for selecting and overseeing the investment professionals to act as the experts for a plan or foundation and endowment or any other entity like that. Hopefully, the principal who underlie their role are those of loyalty and care, those two principals provide the basis for the trustworthy conduct of the stewards who are entrusted with other people’s money.

For a eleemosynary – a foundation or endowment – what is the key benefit of good stewardship? 
For a foundation or endowment, we think the key benefit is that good investment stewardship maximizes the return on the donated assets. So as a steward you are responsible to ensure the donor’s assets, or the investment of those assets, are maximized. When the donor organization hands over the funds, they place an enormous amount of trust that the funds are going to be utilized as prudently and effectively as possible. And that starts with just the basic stewardship of the funds: “Where do we put the funds and how are they invested until they are used.” And that could have a material effect on the longevity of the foundation and its need to continually get more funds. The better the funds are used the less need to continually get more assets. That is a key benefit, the investment benefit.

For a defined benefit plan – like a pension – what is the key benefit of good stewardship?
One key statistic for a defined benefit plan is its funding level—stewards must maintain the funding of a defined benefit plan so it can meet its obligations in the long term. A key benefit of good stewardship would be that cost and investment decisions are managed. In other words, if you have high costs or imprudent investment decisions, that will negatively affect the plan’s ability to meet its future obligations and its liabilities. So, a good steward of a defined benefit plan is going to manage things like that—costs and investment decisions—very carefully so that the funding of the plan is maintained at its highest possible level. A good steward can’t necessarily change the liabilities, but they can have a direct impact of how well the plan is funded to meet those liabilities. 

For a defined contribution plan – like a 401(k) –what is the key benefit of good stewardship? 
Well, in this case we are talking about a plan naturally, where the participants are making their own decisions. But what the key benefit of good stewardship here would be that that steward has established a very good investment lineup, a selection of investment decisions that the participant can make that are prudent. What the outcome here is that the participant can trust that the steward has established an investment climate which is going to be in their best interest and that it’s provided at a reasonable cost to them. It’s like the steward has taken the first stop of doing the investment shopping and making sure that everything in the shopping basket is a good quality product at a reasonable cost and prudently selected so that the participant now has a universal selection that are a good starting point. As in the case of defined benefit plans, I think the performances and costs again will have a direct impact on the participants’ ultimate retirement nest egg. So it’s equally important to get those investment decisions made prudently to start with.

There are some external standards for stewardship. For example, charitable donors can investigate foundations and endowments on various sites like Charity Navigator. This site shows how much a donation will support a cause and how much supports other costs (staffing, fundraising, and so on). Furthermore, it will give donors an accountability and transparency score. Are there any stewardship standards for other types of institutions?
In Canada, the Imagine Canada Standards program offers accreditation to charities and nonprofits that demonstrate excellence in board governance, financial transparency, fundraising, staff management and volunteer involvement. In the UK, the Pension Quality Mark, run by the National Association of Pension Funds Limited, is for firms which have Defined Contribution plans and want to demonstrate their value to staff through an independent standard.

How can institutions demonstrate their commitment to stewardship? What principles should they be espousing? What certifications might they aim for?
Any kind of steward, the first step they need to do undertake is a fiduciary assessment. And so there are many different styles of fiduciary assessments that we can offer—simple ones right through to the complex and comprehensive assessment. We also have an assessment which zeros in on service provider disclosures, so that’s another commitment to good stewardship, making sure that all of the disclosures are in place. And even another one which focuses on participant disclosures, so is the steward, who is ultimately responsible for participant disclosures according to regulation… what do they do to ensure that the participants are getting all the disclosures they should be getting. So, that’s a pretty big demonstration of a commitment to stewardship, to undertake any one of those assessments. The principals that we are espousing, of course, are the 21 prudent practices for investment stewards, codified in a handbook which can be downloaded and made available. As far as certifications, they should be shooting for their own CEFEX certification. If you are working with a CEFEX advisor, you can get your plan certified as well. You can find more information here:

What’s the best success story you know related to improvement in stewardship? 
We had one situation where one of our certified stewards (this was a couple years ago) had a set of service providers and they made some changes to the service providers. They made some changes to the services providers –sometimes these things happen for any host of reasons—and when the steward came in to do the renewal fiduciary assessment, we collectively looked at the stewards and we found some areas where the stewards could have improved the disclosures they were receiving from the service providers. I guess how did this turned into a success story is that through a fiduciary assessment, they were able to work with the service providers to significantly improve the disclosure of the services that were being provided and ultimately bring a much better definition on around what the service provided was to deliver on a regular basis to them. Poor stewardship would mean that you wouldn’t have this defined, and there would be a very poor definition on what was supposed to be delivered and how you monitor that. So, the outcome of this was that the stewards, following a fiduciary assessment, they identified what was deficient were able to succinctly turn that around into a program for monitoring the new services being provided by the service providers.

What has been the biggest failure you’ve seen in terms of stewardship? What went wrong and, ideally, what lessons can others learn?
We had a case of a steward, now this was steward as a service provider, where they were trying to achieve certification—and they did not, they just failed, they just couldn’t get certified. And the reason they couldn’t get certified was because while their intentions were good, they did not have documented processes in terms of performing the stewardship function. They ultimately got fined and ultimately put out of business. The lessons to learn is that you may have good intentions, however it’s absolutely necessary as a steward to have defined processes in place. It’s not because they didn’t have defined processes that they went out of business, however it was indicative of the immaturity of the firm that ultimately, I’m sure was a factor in them going out of business. That I think is a failure, if you are going to be a steward—whether it’s as a steward of a plan or as a service providing steward—you must, you have absolute responsibility, of having a very defined set of processes and ultimately what that means for example, is that if you personally were to leave then someone else could just walk in and do the steward job so that it establishes a much more robust framework for being that steward.

Imagine you sit on a board of a regional foundation and you have the authority to adopt a single measure to improve stewardship. A commitment to good stewardship is an enduring and continuous process, and nobody expects your single action to fix every problem. With that caveat aside, what small action might you recommend to have the greatest positive impact? 
I think the most important thing would be the to ensure that the Investment Policy Statement of the plan, foundation, endowment, etc. is as solid as it can be—that IPS is the single most relevant piece of documentation that a steward could establish—to make sure that it contains the several different elements we describe in our standard and to make sure that it is used on a regular basis when the plan or foundation meets with service providers and amongst themselves to look at the ultimate performance of the plan. There are many cases good IPSs are not in place at all and even when they are in place, how often we still see that some improvements could be made to the IPS. 

1/2 Question: What was your favorite Olympic highlight from Sochi?)
I’m not sure you are going to want to print this, but I’m a Canadian and I had two events which brought enormous pleasure and gratitude: both the men’s gold and the women’s gold. But the highlight has to be unfortunately for the US women’s team that were up 2-0 in the gold medal game that they eventually fell to the Canadian team, 3-2

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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