NORTH DAKOTA

STATE INVESTMENT
BOARD MEETING
FRIDAY, APRIL 23, 2010, 8:30 AM
PEACE GARDEN ROOM, STATE CAPITOL

I. CALL TO ORDER.

II. APPROVAL OF AGENDA.

III. APPROVAL OF MINUTES (MARCH 26, 2010)

IV. GOVERNANCE.

A. Administration
1. RIO Organizational Overview - Ms. Fay Kopp and Ms. Connie Flanagan
2. Investment Program Status Report - Ms. Flanagan
3. Transition Considerations - Paul Erlendson, Callan Associates
4. Discussion on Interim Executive Director/CIO - Board
5. Discussion on Process for Selecting New Executive Director/CIO - Board
6. Discussion on Possibility of Special Audit - Board

B. Investments
1. Report on Estimated Fiscal Year-to-Date Investment Returns - Ms. Flanagan
2. Broker Commission Recapture Revisited - Ms. Flanagan (enclosed)
3. Status Report on Overlay Program - The Clifton Group (enclosed/questions only)

VI. MONITORING QTR ENDING 3/31/10 (BOARD APPROVAL - QUESTIONS ONLY)

A. Budget and Financial Conditions - Ms. Flanagan (enclosed)

VII. OTHER.

SIB meeting - May 21, 2010, 8:30 a.m. - Peace Garden Room, State Capitol.
SIB Audit Committee meeting - May 21, 2010, 1:00 p.m. - Peace Garden Room, State
Capitol.

VIII. ADJOURNMENT.

Any individual requiring an auxiliary aid or service must contact the Executive Director of the Retirement and Investment Office
(701) 328-9885 at least three (3) days prior to the scheduled meeting.
 MEMORANDUM
To: North Dakota State Investment Board
From: Paul Erlendson
Date: April 19, 2010
SAN FRANCISCO
Subject: Transitional recommendations in absence of CIO
NEW JERSEY

CHICAGO This memorandum outlines six suggestions from Callan Associates (“Callan”) to the North
Dakota State Investment Board (“SIB”). Senior Callan managers and professionals
ATLANTA
participated in a conference call on Tuesday, April 13, 2010. The purpose of the call was
DENVER
to identify important issues in the SIB’s response to the untimely death of your Chief
Investment Officer and Executive Director.

1—Inform incumbent service providers. In her capacity as Deputy Executive Director of

the Retirement & Investment Office (“RIO”), Fay Kopp quickly informed the SIB’s
investment managers about Steve’s death. Her email told them whom to contact regarding
administrative issues, investment operations, and miscellaneous investment issues.

Fay’s email clearly communicated the vitally important message that RIO’s administrative
and investment functions continued with no interruption following the untimely death of
the Executive Director/Chief Investment Officer. Callan applauds this decisive action that
conveyed organizational stability and operational continuity during a time of uncertainty.

2—Consider naming an Acting Chief Investment Officer. Until a permanent

replacement is hired, the SIB should consider naming an experienced and credible “Acting
Chief Investment Officer.” There are two reasons to have a recognizable name with a high
profile within the industry assume the interim position: to demonstrate that the SIB’s asset
management is in capable hands, and to vouch for the integrity of the investment program.

3—Create an interim Executive Committee. Until a permanent Chief Investment Officer

is in place, there may be issues that require (relatively) immediate action by the SIB. Good
governance practice would provide an effective means by which timely action can be taken
between regularly scheduled Board meetings. An interim Executive Committee (“EC”)
could review an acting CIO’s recommendations on time-sensitive matters that arise and
might also be authorized to act on behalf of the SIB between Board meetings.

While the “Carver Model” eschews the use of committees, the extraordinary circumstances
facing the SIB may merit creation of an interim EC if only on a temporary basis. For
example, an interim committee’s authorizing documentation might describe its authority;
list its members; specify the means by which the Committee will be informed about any
issue or question that needs be addressed; identify the medium by which meetings will be
conducted; and describe how decisions will be reached and enacted.

1660 Wynkoop Street, Suite 950, Denver, CO 80202 TELEPHONE 303.861.1900 FACSIMILE 303.861.1900
North Dakota State Investment Board
April 19, 2010
Page 2 of 2

4—Manage the public relations response. While local and national press as well as the
blogosphere have reported on Steve’s death, there may be more inquiries to come. Callan
suggests that RIO designate a single spokesperson and refer any and all inquiries to that
individual. As of last week, Nancy Malinowski—a public relations specialist and Callan
employee—had been in contact with SIB staff and offered her professional guidance on
possible inquiries from the press and suggested responses. The RIO website (as of April
19, 2010) still lists Steve as a contact person; it may be useful to substitute the names of
interim personnel in all places where Steve is listed as the current RIO point of contact.

5—Verify the SIB’s financial statements. Given the unexpected and untimely nature of
the Chief Investment Officer’s death, the SIB might consider having a qualified
independent auditor attest to the veracity of SIB’s current financial statements. A timely
independent audit will beneficially provide all interested outside parties—including
potential candidates for the Chief Investment Officer position—with a clear picture of the
SIB’s current financial statements. This is a useful and conventional exercise whenever
there is a change in an organization’s senior management structure.

6—Search for a new Chief Investment Officer. While known to the outside world for
his investment role, Steve Cochrane served two distinct senior management functions:
Chief Investment Officer to the State Investment Board, and Executive Director to the
Retirement & Investment Office. Should both sets of duties be performed by one person,
or does it make sense to allocate the functional responsibilities to different professionals?

From an investment perspective, the new CIO will oversee pools of assets for pension and
insurance liabilities which each call for different investment solutions. Both the pension
and insurance trusts currently contain a variety of complex investment strategies. The CIO
has represented SIB before various public venues including legislative committees. Should
the existing investment structures and approaches be maintained, or might they be revised?
What are the SIB’s preferred skill sets and investment philosophy for your new CIO?

It may be helpful to use a qualified third-party headhunting firm to help establish search
criteria that are relevant to the SIB’s investment program needs and other requirements. A
good search firm should expedite the identification and screening of qualified candidates.
Initially, the SIB will need to define the skills and experience a new CIO should possess.
Importantly from a governance perspective, it will be necessary to decide if the full Board
or a committee is best suited to manage and engage in the time-intensive search process.

Final Thoughts
For a sad reason, the SIB finds itself in a unique position to take out a clean sheet of paper
and chart the future. You can reevaluate your organizational management structure; revisit
the tenets of your investment philosophy; restate or reaffirm your investment structure
preferences; and define the professional and experiential attributes you seek in the one who
takes the reins of this complex investment program. These are key and enduring decisions
that will build upon the legacy of our dear friend and colleague, Stephen L. Cochrane.

# # #