Delivering on Stewardship and Entrepreneurship - Can it be done?
An analysis of the Ontario Teachers' Pension Plan
When I flew into London City Airport a few weeks ago I didn’t realise that it was part-owned by 336,000 Canadian teachers and retired teachers.
As I’ve since discovered, that the Ontario Teachers’ Pension Plan (OTPP) owns companies, infrastructure, real estate, and many other investments around the world to administer and pay the pensions of their members.
At first glance it wouldn’t appear to be a beacon of leadership excellence, yet on closer inspection it is a model of an organisation that has successfully combined the potentially opposing forces of compliance, long-term sustainability and entrepreneurship - all of which have combined to generate remarkable growth
It has gone from being run by the Ontario Government, with all assets of the plan invested solely in government bonds, to being the 34th largest asset manager in the world, growing from CA$20.1B (£3.1B) to Ca$249.8B (£144B) assets under management.
How has it done it?
The following exploration will use the seven Building Blocks of what we call the Cultural Footprint as a framework for analysis.
Borrowing from the metaphor of our carbon footprint, the Ceannas Cultural Footprint allow us to identify and isolate the wide range of internal influences that shape people’s behaviour, attitude, and approach to their work, i.e., the organisation's culture. The Footprint has seven Building Blocks, Leadership; Management; Warmth; Edge; Learning; Entrepreneurship; and Teamwork. Great organisational cultures are strong across all Building Blocks.
MANAGEMENT - doing things right
Management can often be overlooked in any cultural analysis but we have come to appreciate that organisations without structures, policies, regulations, processes, and other practical considerations run the risk of undermining their culture through chaos and confusion. In this regard the foundations of OTTP are very much a consequence of some early fundamental decisions that laid down the template for future success.
OTPP’s success can be tracked back to the 1980s when the Canadian Government initiated intensive reforms to modernise the administration and investment of public pension plans.
OTPP was born on the 1st January 1990 with the opportunity to engage in a richer and more diversified approach to investment.
The seeds of success were sown in those early years through some critical management decisions.
The first of these was to set it up to be managed at arm’s length from the Government. This, together with clarity about the role of the government and the teachers' union provided the necessary space and autonomy for OTPP to break free from its previous way of operating.
The second management decision was to appoint professionals, in the form of a Former Governor of the Bank of Canada, a CEO to run it as a ‘business’, and an experienced team of investment professionals.
The third management decision was to remunerate the team at a competitive rate in the global marketplace to ensure they recruited the best people.
Having established the right team there are some key management features which have contributed to its long-term success.
One of the most important of these features is that related to liquidity, i.e. the capacity to be able to have access to cash rather than always tied up in long-term investments.
The structures that they have put in place have enabled them to own 100+ portfolio companies, employ 400+ global investment professionals, and enjoy growth of 9.5% per year.
LEADERSHIP – taking the lead
Leadership has been a fundamental feature of OTPP’s success. Starting from the decision to appoint professionals rather than retired politicians or civil servants.
At the heart of its growth has been an explicit purpose, mission, and vision that has informed behaviour over the last 34 years, with the need to build their assets to pay future pensions of members being front and centre.
They identify the following elements of their strategic intent:
Purpose
Invest to Shape a Better Future – performance and purpose go hand-in-hand
Mission:
Deliver outstanding service and retirement security for our members
Vision:
A multi-year vision that focuses on harnessing our trailblazing roots to deliver a bold, ambitious plan – that will set us apart from our peers.
Combined with these drivers the leaders have identified three core strategies:
Culture – experimentation and entrepreneurship
Growth – focused on delivering long-term growth to remain fully funded
Impact – to make a lasting and positive impact upon the world
Finally, their Values permeate everything they do:
Inclusive
We celebrate our differences and bring our whole selves to work.
Agile
We move quickly and constantly evolve.
Performance-driven
We pursue excellence and work with a shared purpose.
Courageous
We take risks and challenge the status quo.
Curious
We love to learn and explore the unknown.
Unlike many other companies these leadership principles actively influence everything OTPP does. The CEO Jo Taylor uses these as his score and in interview after interview links everything back to these principles in a manner that undoubtedly shapes and influences behaviour throughout the business.
A final feature of the leadership of OTPP is the genuine desire to ‘make a mark’, to help businesses become more profitable and more sustainable.
There is an integrity behind their commitment to invest in companies not only to serve their members and the businesses they back, but to improve the world we live in – far beyond empty rhetoric.
TEAMWORK – achieve things together
OTPP seeks to build one team which they describe as being inclusive, agile, performance driven, curious and courageous.
Their Total Fund approach seeks to bind people together and see them working together rather than in competition.
It recognises that some parts of the business will be successful simply due to good luck and timing, but that what matters is the overall return for members. This strong team focus enables them to leverage the breadth and depth of their professional insights and networks to the benefit of the Plan.
ENTREPRENEURSHIP – translate ideas into success
From the very outset of OTPP’s existence they have prided themselves on being ‘Trailblazers’. They were disrupters and contrarians, who broke free from the status quo.
In a world so dominated by regulation and compliance, they have managed to combine an entrepreneurial spirit that would be more recognisable in a tech start-up.
Yet combined with that spirit, is a long-term, responsible, ethical and people-centred approach which many would think lies at the opposite end of the spectrum from entrepreneurship.
OTPP have proven that these aspects can co-habit and benefit each other.
Part of that comes down to careful governance and management process and structures, but as Jo Taylor, CEO, suggested, “Innovation is in our blood”.
They are willing to back disruptive businesses such as SpaceX with its ultimate goal of enabling people to live on other planets.
Yet their approach is thoughtful and methodical. Innovation doesn’t have to be mercurial and slap dash.
They use risk boundaries to get comfortable yet are always testing these boundaries to ensure they are getting the best return for their members
They also establish what they describe as control areas, which set out the levels and amounts they are willing to expose themselves to risk.
However, as Jo Taylor emphasised during an interview - “We are in the risk business”.
OTPP have a clear, ambitious plan to grow globally and make bigger, bolder bets in private markets around the world.
LEARNING – learning and improving
OTPP does make mistakes. For example, it lost $95m in an investment in FTX, the failed digital currency exchange.
Yet, as has been apparent through Entrepreneurship they pride themselves on being bold and courageous. Part of the safety net, both for people and the Plan, is the high level of delegated responsibility within controlled environment. In such an environment people can learn and grow without breaking the business.
OTPP seeks to train analysts to become investors, and they look for people who have a long-term learning perspective rather than those who want to cash in on one big deal and head off for early retirement, as is common in the world of hedge funds.
Jo Taylor, the CEO, suggests that people get to learn so much because they get to work on transactions early in their career, rather than waiting until they have proven themselves.
Core to this learning culture is their concept of long-term remuneration which ties people into their purpose and underpins the learning process.
WARMTH – caring, nurturing, supporting people
The centrality of the long-term needs of members and pensioners, and the importance of this to the mission and purpose of OTPP reinforces a focus on people that sometimes can be missing elsewhere.
“We all remember that teacher who guided us. The one who took an interest in our interests. The one who believed in us more than we believed in ourselves. They did more than teach us. They paved the path for our future and we’re doing our part to protect theirs.”
The centrality of the person seems to be recurring theme throughout many of their strategies, whether that be an inclusive workplace, or creating a better world to live in.
Warmth in all its subtle hues seems to permeate the business through this focus.
EDGE – focus on performance, impact and success
OTPP are what are known as ‘active’ investors, in that 80% of their assets are managed in-house allowing them to play a central role in companies over the long term.
While many other similar organisations are ‘passive’ OTPP have adopted this approach with a strong emphasis on ‘making a mark’.
As CEO Jo Taylor explained, “If they don’t fit in with our impact programme we’ll tell them”.
Their active mindset allows them to improve and influence companies from the inside rather than just ‘hold and sell’ as others might do.
Taylor suggested that they can have an ‘edge’ with partners, and always starts with the question “are they doing it as well as we would do on our own?”
Their commitment to making a mark occasionally requires them to demonstrate courage and resilience in the face of objection and pressure from stakeholders. For example, OTPP, as part of their ‘High Carbon Transmission Assets’ strategy, target companies that have a very high carbon emission footprint, such as coal power stations, chemical, or methane producing businesses.
They reckon that by investing in such companies over the long term they can help them successfully transition and have invested CA$5B in other projects dedicated to demonstrating their impact to partners and stakeholders.
Such investments are dwarfed by their other commitments to decarbonisation through very significant investment in renewables and green assets, but it does demonstrate a willingness to make ‘tough’ decisions which don’t necessarily meet with widespread approval.
Finally, Edge is apparent through their own Governance processes by ensuring that the management always makes decisions in the best interest of the members. The Board’s independence and experience allows them to operate with significant ‘edge’ if required but the clarity of the operational strategy and the leadership principles would appear to guide much of their own, and the management’s practice.
Conclusion
There are many features of the Ontario Teachers’ Pension Plan that are worthy of imitation. But without any doubt it's their capacity to combine stewardship, the long-term ethical responsibility that relates to delivering for their members pensions, and their entrepreneurial spirit to, as they say, “make bigger and bolder bets in the future”.
In our experience these two features of business are often binary and mutually exclusive.
It's wonderful to see a business dedicated to the needs of people, our environment, and ‘making an impact’ that can marry the two.