CalPERS Endures Governance Growth Pains

Once upon a time, the mere mention of the California Public Employees Retirement System could make any executive break into a sweat and wonder: What does CalPERS want now?

Mention the $239 billion pension fund giant these days and you’re likely to hear a different question: What the heck is going on over there?

In less than six months, four top executives have left the mighty CalPERS, long regarded as the heaviest of heavyweights in shareholder activism. The fund actually lost money for the year ending June 30, the first time that’s happened in years. Granted, $239 billion still goes a long way, and without doubt CalPERS remains a potent force in corporate governance. But at least for the moment, the 800-pound gorilla is limping.

The first departure happened in mid-February: Christianna Wood, CalPERS’ senior investment officer for global equity, left to become CEO of the New York-based Capital Z Asset Management. Wood had worked at CalPERS for six years and at times managed assets worth $150 billion, including $7 billion in activist corporate governance funds.

Buenrostro

A double-whammy came in late April, when CEO Fred Buenrostro announced his retirement the same week that Chief Investment Officer Russell Read made known his own exit plans. Rumors swirled that the CalPERS board asked Buenrostro to retire; both parties denied such speculation, but not too convincingly. In an April 28 press release, CalPERS President Rob Feckner said: “Media reports that raise a specter of controversy between [Buenrostro] and the board are exaggerated.”

Just as those whispers had begun to die down, another blow came on July 2. Dennis Johnson, director of CalPERS’ 17-person corporate governance team since 2005, announced that he was leaving to be managing director of the Shamrock Activist Value Fund.

Departures from a fund like CalPERS aren’t particularly surprising, according to Rich Ferlauto, director of pension investment for the American Federation of State, County and Municipal Employees union. He notes that CalPERS has always “cycled through” people.

“What’s unusual now is the convergence with so many losses coming at once,” Ferlauto says. He is convinced that the departures won’t undermine CalPERS’ mission, but does suspect the behemoth will be “operating in temporary mode” until it replenishes its talent pool.

Rich Koppes, of counsel at the law firm Jones Day and a CalPERS general counsel from 1986 until 1996, agrees. “It’s a bit of a setback,” he says. “They'll suffer from a little lack of leadership in the next few months, but it isn’t too serious.”

Koppes believes that turnover is inevitable given the tremendous job offers that CalPERS’ executives attract. “People used to stay longer,” he says, “but who knows? Maybe the opportunities are better these days.”

Exiting Public Service

Ferlauto emphasizes that the departures of Johnson and others make sense when you consider the circumstances. “Dennis had a very extraordinary offer that matched his credentials so well that he took it,” he says. “There are better economic opportunities in other places.”

Johnson remained at CalPERS until late July. Eric Baggesen, senior investment officer of public equities, will head the corporate governance team until a permanent replacement is found.

More problematic is the departure of Buenrostro, who served at the CalPERS helm for six years. Tales abound of Buenrostro’s assertive management style, and rumors of strife between him and the CalPERS board—which historically has been packed with strong personalities and people with higher political ambitions than overseeing a pension fund—ring true to many.

McRitchie

James McRitchie, publisher of PERSWatch.net and CorpGov.net, believes that the CalPERS board has mellowed some in recent years. He cites the example of Phil Angelides, who served on CalPERS’ board earlier this decade when he was state treasurer of California and the Democratic nominee for governor in 2006. “He was trying to be governor and used his position at CalPERS to make headlines. The board doesn’t make as much noise as it used to,” McRitchie says.

CalPERS has begun attempts to plug its leadership holes. Ken Marzion, who’s spent 32 years at CalPERS, is serving as interim CEO. CalPERS also hired headhunting firm Ridgeway Partners to find a new chief investment officer. Ridgeway is interviewing board members this summer to identify the attributes that they desire in the new CIO, who will ultimately head a team of 220 investment professionals and support staff. Read served as chief investment officer at the fund for two years. (His new job is running a clean-technology investment fund called C Change Investments, based in Cambridge, Mass.)

“We're not focused so much on the timeline as getting it right,” says Pat Macht, a CalPERS spokeswoman. “The number-one priority right now is the CIO position.” Anne Stausboll is interim CIO.

The personnel changes also coincided with the announcement of annual losses at CalPERS. For the fiscal year ending June 30, CalPERS lost 2.4 percent; in contrast, the fund had enjoyed returns of 19 percent in 2007 and 12 percent in 2006.

“It’s a bit of a setback. They’ll suffer from a little lack of leadership in the next few months, but it isn’t too serious.”

— Rich Koppes

Former CalPERS official

Considering the market this year, CalPERS was hardly alone in reporting losses, and nobody suggests that disappointing investment results precipitated the resignations. In fact, says Tim Smith, a senior vice president at the activist Walden Asset Management fund, “the results are actually wonderful if you consider this market and how chaotic it is. Everyone is going to have negative numbers right now.”

Winds of Change?

When the 800-pound gorilla in governance suffers a setback, insiders speculate about whether some of the issues that the fund traditionally championed will suffer, too.

Smith

Smith says CalPERS assumed leadership on “virtually every corporate governance issue out there.” The fund rarely fights its battles in public, instead preferring to exert quiet pressure on topics such as majority election for boards, bloated CEO pay, and environmental disclosures. Smith notes that CalPERS has successfully filed several `say-on-pay' resolutions.

And now? “Their efforts might slow a touch,” Smith says, “but I can’t imagine it’s a question of whether their activism will continue.”

Charles Elson, director of the Center for Corporate Governance at the University of Delaware, reaches a similar conclusion. “There are so many actors in the governance world today that while CalPERS has been a stalwart player, the departures won’t be felt,” he says.

Regardless, the quartet of departures shines a spotlight on CalPERS at a time when such questioning could prove uncomfortable. Gary Lutin, an investment banker who runs a series of New York-based shareholder forums, believes that the personnel shakeup might lead to some soul-searching at America’s leading public pension fund.

“One of the questions that has been coming up in the current forum program is whether best practices for things like board structure and ‘say on pay' should be coming from the theories of governance professionals, or from more practical empirical evidence of what’s actually working in the marketplace,” Lutin says. “Maybe this will give CalPERS an opportunity to consider what kind of expertise they want as a foundation for their continuing leadership.”

McRitchie also sees room for improvement, accusing CalPERS of internal governance problems and citing “its long history of thinking itself exempt from California state laws because it has a mandate through the constitution to have plenary authority over monies.” The latest example, he says, is AB 2940, a bill supported by Gov. Arnold Schwarzenegger that would allow CalPERS to administer retirement accounts for private-sector employees. McRitchie criticizes CalPERS for requesting that the bill be amended to exempt the pension fund from the normal rule-making process.

But perhaps the most daunting problem confronting CalPERS is one it shares with a host of other public pension funds, non-profits, and government offices: Private-sector salaries have become so dazzling that they threaten the stability of world-class organizations that can’t compete pay wise.

“The frustrating thing is that CalPERS can’t seem to attract people who stay for a long time. And this seems to be accelerating. People come, get much better offers, and then they leave,” says McRitchie. In some sense, CalPERS is a victim of its own reputation and success—even a relatively short tenure at this legendary institution makes an employee highly desirable on the open market.

No matter how turnover problems are resolved, experts agree that CalPERS’ commitment to corporate governance will remain strong. “In the long run,” Ferlauto says, “none of this is very important. CalPERS has historically been an activist pension fund and they will be one well into the future.”