The CalPERS board would do well to heed two folk sayings as CalPERS staff is scrambling to put itself in charge of a board campaign, led by State Controller Betty Yee, to reassert the board’s authority over staff. One is “A politician is someone who tries to get in front of a mob and call it a parade.” In this case, CalPERS staff is trying to vitiate this board initiative by putting itself in charge of not just the agenda for discussion, but even the content of proposals.
Since when does it make any sense to put the problem, which in this case is CalPERS executives who have operated for years as if they are accountable to no one, in charge of coming up with solutions? And CalPERS staff is still insubordinate. As we’ll see below, the staff agendized fundamental governance issues, that Controller Betty Yee asked to be scheduled for the whole board to discuss on September 16 in the Board of Administration meeting. Staff instead has put Yee’s items on the agenda for September 15, for a board committee that Yee does not sit on.
As we recounted, CalPERS CEO Marcie Frost was so brazen as to claim at a “retiree roundtable” that the concerns that Controller Betty had stated in the press and at the start of the August 17 special board meeting had been addressed in that closed session.
Putting aside the problem that Frost’s statement was tantamount to saying that CalPERS had yet again violated the Bagley-Keene Open Meeting Act,1 it would have been impossible to have satisfied Yee in the August 17 secret meeting. In her attempt to intervene then, before Board President Henry Jones cut her off and ended the open part of the meeting, Yee had asked when her items would be put on the agenda for a public discussion.
It should have been no surprise that Yee fired back, the very same day, with a letter to Jones requesting that the board have “an open discussion about the governance and oversight of CalPERS” at its September 16 meeting including:
…the delegation of the CEO, reporting structure of the CIO to the Board, and an expanded meeting calendar and composition of the Investment Committee to ensure appropriate Board oversight.
Board member Margaret Brown sent in her own letter to Jones the next day, reiterating Yee’s requests and adding one more: “Delegation of Investment Authority.”
We’ve been pointing out for years that the board has put itself in a dangerous position by ceding authority to staff and not engaging in even basic oversight.2 Let us not forget that important beneficiary groups are also in revolt. One of the biggest retiree groups, Retired Public Employees’ Association of California, has called for Henry Jones resignation. We’ll discuss the gauntlet thrown by the influential California State University Emeritus and Retired Faculty and Staff Association tomorrow.
So what has CalPERS done? Rather than risk Yee going into an Elizabeth Warren level “plenty of blood and teeth left on the floor” response at the September board meeting, CalPERS has rapidly backtracked from Marcie Frost’s attempt at “Nothing to see here, move along.”
CalPERS told Pension & Investments on Friday September 5 that “…the items requested by Ms. Yee will be added to the open session agenda sometime next week.” Since the board agenda and supporting materials are normally uploaded to the CalPERS site ten days before a board session, and made available to the board a day or so before that, CalPERS admitted it was improvising.
But even the rougher than usual agenda shows that CalPERS staff intends to retain control by presenting documents at the meeting. As anyone who has been in a transactional business knows, “He who controls the documents controls the deal.”
From the agenda for the Board Governance Committee for September 15 (and recall that Henry Jones has chosen not to make Yee a member of that committee):
Notice that the CalPERS staff does have its ducks in a row on the first item, “Reporting Investigations to the Board”. That’s an admission that the board impermissibly discussed this topic in the August closed session and that Frost believed that giving the board this bone would placate Yee. Whoops.
However, as we indicated at the top, unless the board firmly asserts its authority, the staff is certain to maneuver the deliberations towards cosmetic changes. You can see that already with the one document they do have ready, on reporting investigations to the board. Staff believes there is no reason to notify the board if the Managing Investment Director of Private Equity were being under review for misconduct.
And with two of Frost’s Three Stooges, Henry Jones and Rob Feckner, on the seven-member Board Governance Committee, the staff already has a leg up.
At a minimum, the board needs to take control of the policy reforms, even if it would take more time to gather information, such as looking at the governance regimes of better functioning public pension funds, like CalSTRS and the better Canadian public pensions.
CalPERS board members should know better by now than to trust staff. The other fitting folk story is the fable of the frog and the scorpion:
A scorpion asks a frog to ferry him across a river. The frog fears that the scorpion will sting him. The scorpion reasons that if it did so, both would drown. The frog decides to carry the scorpion. Partway across the river, the scorpion stings the frog, insuring that both of them die.
The frog cries out, “Why did you sting me?”
The scorpion replies, “Because it is my nature.”
The history of troubled organizations is that turnaround efforts usually fail until enough new key executives take the helm to steer a new course. The odds that CalPERS’ top staffers are willing to, let alone capable of, making fundamental changes in how they operate is vanishingly small.
1 First, CalPERS had not agendized the issues that Yee wanted discussed. Second, even if CalPERS had, these topics could not legally be relegated to a secret deliberation.
2 Recall that not only are CalPERS board members jointly and severally liable, but CalPERS liability self-insurance for them established a criminal conflict of interest. As reader David in Santa Cruz explained:
The key here is that the California Government Code recognizes the “moral hazard” inherent in allowing fiduciaries to be insured against breaching their duties. CalPERS as an organization can insure itself against breaches of fiduciary duty by members of the board, but only if the insurer has recourse against the fiduciaries themselves.
Of course, nothing is stopping the individual board members from the purchase of such insurance on their own account — but as you can imagine it would be prohibitively expensive due to the inherent “moral hazard” that would have to be underwritten and reserved. Not. Gonna. Happen.
California Government Code 7511(a) A public retirement system may purchase insurance for its fiduciaries or for itself to cover liability or losses occurring by reason of the act or omission of a fiduciary, if the insurance permits recourse by the insurer against the fiduciary in the case of a breach of a fiduciary obligation by the fiduciary.
It appears to finally be dawning on some of the board members that they are personally the sole fiduciaries for the trust, and that delegating to obviously unqualified, conflicted, and incompetent staff is not going to be a viable defense to a lawsuit alleging breach of fiduciary duty and loss of trust assets.