CalPERS Staff, Scandal-Ridden Fiduciary Counsel Argue to Weaken Board Oversight by Reducing Number of Board Meetings

In some of our recent posts, we have described how CalPERS’ staff has persuaded the board to cede its power, which is tantamount to reducing oversight. We’ve shown how dangerous a practice this is for the board and CalPERS overall through the example of the recent hiring of the scandal-ridden Robert Klausner as fiduciary counsel, arguably the most influential outside advisor to the pension fund.

Klausner’s conflicts of interest, of running “educational” programs for his clients on the pay-to-play model, where fund consultants and class action law firms pay to get face time with these prospects, of getting kickbacks from class action law firms that include his clients in their litigation, and of creating gold-plated special pension plans for the benefit of board members and senior employees, would seem to make him unsuitable for any organization that cared about its image and ethics. The fact that the board selected him is the direct consequence of the board having allowed staff to reduce the amount of information that they provided about the candidates for this sensitive role, rather than standing their ground and demanding that staff provide the board with the same level of detail as in the past.

We see another staff effort to curb the influence the board in the Governance Committee meeting in November, via reducing the number of board meetings.

What are the arguments for having the board meet less often? “Everyone is doing it,” staff is allegedly having to spend too much time preparing for board meetings, and the board members have better things to do. We’ll show why each of these arguments is bogus.

You can view the entire discussion here, starting at 31:00. If you watch the entire sequence, notice how little evidence the proponents provide for what would be a momentous change in procedure and reduction in board authority. And bear in mind, were this change to be made, you can guarantee it would never be reversed.

Here is the first of two key sections:

Robert Klausner, Klausner, Kaufman, Jensen & Levinson: I do realize that CalPERS is unique in terms of its size and its scope and the population that it serves. So I tried to limit my book to what other funds in the top 10 size-wise, in terms of population served. I happen to be in Austin, Texas at the moment. And I was with one of the folks from the Texas Teachers over the weekend at the executive board meeting for NASRA, and I asked him how often they meet. And they meet times a year for two days. And that covers their committee meetings as well.

They don’t do any….off-sites that they do are part of that meeting schedule. And, like California, they cover a large geographic area. And they serve a population…. a membership population of about a million and a half, which is not small. And they seem able to accomplish that. They have a smaller staff than you do.

My observation is that there’s no magic number. I will tell you that there are retirement boards that meet weekly, and which mind-boggling for me. And they manage the make it last all day, 52 times a year, and they manage to make it last all day, 52 times a year, and they are one of our clients. And I have recommended less frequent meetings.

But I don’t think to get the job done has anything to do with the meetings. I did watch quite a bit
of the last couple of days, because I wanted to be ready for yesterday, if needed on the Investment Committee. And a lot of what you got was informational. And the question is to what extent does the receipt of this information, in the absence of a specific action item, need to take place in the context of a Board meeting?

And that was my….that’s what led me to believe I think it is possible for you to meet less frequently.
The amount of staff time that must be taken to….I mean, you meet 36 days a year. You know, effectively cover three days including your off-sites, 12 times a year, means, you know, like nine percent of the year you’re in a meeting.

And that absorbs a tremendous amount of the time of your staff. Now, on the other side of that equation, I think it is important that the staff gets face time, for lack of a better term, with the Board, so that their efforts on behalf of the system and its members can be appreciated by the people to whom they report, and I think that’s, that is important.

But I think that’s, that’s an event which could be accelerated perhaps at the off-site meetings, whereas the business meetings could perhaps be shorter. I mean, all of you have other stuff to do.

Did you notice what is missing from this pitch? The quality of results. No where does Klausner even begin to make a case that fewer board meetings will result in better outcomes, in terms of decision-making and results for beneficiaries. Klausner’s argument is, effectively, “Other big public pension funds get by with less, so surely you can as well.” By his logic, it would also be desirable for someone who is trim to gain 50 pounds because most Americans are overweight or obese.

Even with all of its considerable flaws, CalPERS is still widely regarded as the best managed public pension fund in America. That means that any changes in procedures should be weighed, first and foremost, against the benchmark of “Will this make us function better, or at least no worse?” Mere bureaucratic convenience should be a tertiary consideration. Yet here, the cart is being allowed to drive the horse.

Nothing has changed in CalPERS environment that would say the board can afford to be less active. In fact, all the arguments go the other way. The revelations that something is wrong in the state of private equity, the growing evidence of governance lapses, the ongoing stress of serious underfunding which is being made only worse with the Fed keeping interest rates artificially low, all mean that CalPERS faces new pressures. If anything, the board and staff need to spend more time on long-term strategic thinking and organizational development while keeping up with the requirements of ongoing supervision.

Indeed, the degree of board oversight and involvement was what made CalPERS exceptional, in the positive sense of the word. CalPERS’ industry leadership is the direct result of an effort initiated by its board over the objections of staff: its campaign to promote good corporate governance by being an activist investor. But now CalPERS is unwilling to eat its own public policy cooking.

Another leg to Klausner’s argument is that much of what the board is presented in board meetings is “informational” and thus could be handled outside board meetings, meaning outside public scrutiny. But as anyone who has had any involvement in organizations knows, you can’t make good decisions without having context, and that means information.

Moreover, one of the purposes of California’s open meeting laws is to allow the public the opportunity to weigh in on agenda items before decisions are made. A big part of the value of that process is for public officials to hear information that bears on their decision, as well as to have their assumptions challenged. It’s a perversion to try to treat information as something that is extraneous to decision-making. But you can see why Klausner is nevertheless attempting to make this barmy argument. Decisions have to be put on the agenda, discussed in open board meetings, and are subject to public comment. In other words, what Klausner is proposing is either a yet another violation of California’s transparency laws or the sort of garbage in, garbage out decision-making process that allowed him to be hired.

Here’s the next important section:

Anne Stausboll, Chief Executive Officer: Thank you. First, you know, you’ve talked… some people have talked about the stress on the staff of the meeting schedule. I mean, that is a factor. I don’t know. It’s hard to quantify, but I’m guessing we spend 50… your senior leadership probably spends 50, 60, 70 percent of our time meeting, getting ready for the next meeting, reviewing the materials. So by having us, by having your leadership spend that much time, you’re detracting significantly from the time spent on business planning, strategic thinking for a very big complicated organization. So that’s one loss.

And then another thing I was just thinking about is that often the Board has asked that we try to streamline the materials. And we almost don’t have time. The churn is so fast that we don’t even really have time to think about that. So I really think that if we met less frequently, and we’re not talking about anything drastic, that you’d probably see a pretty substantial improvement in the quality of the materials that you get and the thinking behind it. I really believe that.

If we are to take Stausboll at face value, she’s just admitted that she is an incompetent CEO.

CalPERS has had monthly board meetings for decades; in the past, they included even more information, such as a monthly transaction report. She’s been CEO for six years, and at this juncture, claims she and her senior staff are having difficulty managing an established procedure. And her remedy is to fit the board meeting to the Procrustean bed of her failings as a manager.*

Other financial services industry executives and management experts have taken a dim view of Stausboll’s special pleading. For instance, as Doug Smith, a former McKinsey partner and a widely respected leadership, strategy and innovation practitioner said via e-mail:

There’s no way to defend the position taken by CalPERS’ CEO and her employees, that it’s just too hard for them to provide the board with information that it’s always received and therefore the board should agree to be less well informed. She works for the board and not vice versa.

It is her job as CEO to solve problems, and this one is not difficult to solve if she were to put her mind to it. Her options include hiring more staff or finding a consultant to streamline the internal procedures and processes around information collection and report production.

It’s even harder to be sympathetic with Stausboll’s “Oh, these board meetings chew up precious senior officer time,” now that we’ve exposed that CalPERS engages extensively in a violation of California open meeting laws called “serial meetings.”

CalPERS employees brief board members one-on-one before the open sessions, in a divide-and-conquer strategy which has proven to be very effective. Readers have regularly said how bothered they are by the passivity of the board.

These one-on-one briefings are indeed time consuming, particularly of senior level time. Yet Stausboll uses the time cost of these illegal briefings to rationalize keeping the board on a shorter leash by giving them even fewer opportunities to intervene.

And one of the reasons that Stausboll has found it hard to streamline or standardize her staff’s presentations may be that the cagier among them draft their slides in a non-committal way where possible (the written materials are posted on the Internet before board meetings) and tailor their verbal presentation based on what they learn in their pre-meeting briefings. Developing a preliminary game plan and revising it on the fly takes more work than drafting a presentation and delivering it.

Richard Costigan, who is with the state personnel board, argued it should be possible based on his experience of how much case volume the board could handle in a meeting there. But with all due respect to Costigan’s legal and political acumen, his remarks at board meetings have shown he’s really behind the curve as far as investment management is concerned.** Personnel disputes are routine; there are a number of well-established categories into which they fall. The repetitiveness makes them ideal for categorization and rapid review.

By contrast, there are underlying flaws in the established methodologies for measuring the risk of financial markets, all of which lead naive practitioners to take more risk than they realize they are assuming. Investing large amounts of money in uncertain and evolving markets is far more complex than managing large amounts of personnel matters (who would have predicted ZIRP, QE, deflation, or the present role of HFT back in 2006?) and hence only certain parts of periodic reviews lend themselves to routinization.

Another reason to regard Stausboll’s claims is she says that the time devoted to board meetings prevents her staff from doing other important work like strategic planning. This is disingenuous.

CalPERS’ institutional framework forces major decisions to be made through the setting of board meetings. The work that needs to be done to make those decisions properly does not go away. Moreover, Stausboll clearly assigns no value to having the board and the public test the staff’s choices. The disastrous recommendation of Klausner as fiduciary counsel shows what happens when CalPERS staff succeeds in giving the board so little information that they feel they have no choice other than to rubber-stamp staff’s recommendation.

Finally, some board members, most notably Henry Jones, argued that board meetings were keeping board members from meeting with their “constituencies.” So Jones is telling us that he regards self-promotion as more important than his fiduciary duty? Remember, CalPERS has beneficiary hot lines, a large public relations office, and a website with tons of information on it, so CalPERS as an institution is already doing a great deal in the way of outreach. And if you look at the travel logs, Jones shows virtually no meetings with retirees (his constituency) and during the last board meeting, was particularly unwilling to entertain discussion with the current and prospective CalPERS beneficiaries who made public comments.

Given that CalPERS board meetings and prep are estimated to take 180 to 190 days out of a typical 250 working day year, it’s hard to take the claim seriously that the elected board members need more than 70 days a year to do meet and greet when no one now is even coming close to spending that much time on that task.

As Doug Smith sums up:

You can see a pattern emerge from the way CalPERS has dealt with the questions raised about whether private equity really is suitable for them. Their position is that there is no alternative to private equity, that it’s difficult and complicated so only experts can understand it, which means the board should defer to staff, and that the board is a nuisance.

But the question of whether it makes sense for CalPERS to be involved in private equity does not seem to have been examined in good faith. And the issues involved in private equity are not too difficult to understand; they can be explained to intelligent laypeople. But the most troubling aspect of the implicit position of CalPERS’ CEO and her team is the view that the board is a nuisance. In my over 30 years of counseling leadership teams and boards of major corporations and not-for-profits, nothing good has ever come from that attitude.

The most disturbing part of this episode is that no one on the board stood up for its role. The board has been successfully indoctrinated by staff to view board activities as a burden rather than necessary and desirable to make sure that the organization is asking the right questions and is keeping its priorities straight. The fact that the Governance Committee seems willing to embrace staff’s plan to slowly euthanize the board is a yet more proof of how dysfunctional CalPERS has become under Anne Stausboll’s misrule.

So if you have not done so already, I strongly urge you to tell to the state Treasurer and Controller, both of whom sit on CalPERS’ board, that they need to fire the scandal-ridden fiduciary counsel, Robert Klausner, who never would have gotten the job had they insisted that staff give them an honest overview of his record, and demand that they not compound this error by acquiescing to the staff power-grab of fewer board meetings. Their contact details:

Mr. John Chiang
California State Treasurer
Post Office Box 942809
Sacramento, CA 94209-0001
(916) 653-2995

Ms. Betty Yee
California State Controller
P.O. Box 942850
Sacramento, California 94250-5872
(916) 445-2636

In addition, if you are a California citizen, please alert your state Assemblyman and Senator, and demand that they look into these serious lapses of governance. You can find you Senate and Assembly representatives here.

Please also contact your local newspaper and television station, as well as the Sacramento Bee. Tell them you think this story is important for all California taxpayers and urge them to take it up. You can find the form for sending a letter to the editor here.

We will continue our discussion of the Governance Committee meeting next week, focusing on how many members of the board are in the process of colluding, aided and abetted by Klausner, to violate the California Public Records Act in order to stymie the efforts of board members to get answers to basic questions about how CalPERS is managing its private equity program.


* I am particularly skeptical of Stausboll’s claims regarding the difficulty of assembling, analyzing, and presenting CalPERS’ financial and operational information based on my experience as a consultant of performing precisely this sort of analytical work on very daunting timetables, and seeing the product of other consulting firms. Not only does this sort for work entail a great deal of data-gathering, analysis, and documentation, but consultants face additional obstacles: not knowing their way around an organization and having an inherently highly politicized role.

** In fairness, Costigan is at a considerable disadvantage by virtue of having a full-time job in addition to serving on CalPERS board. But it is still troubling to see that he does not know what he does not know.

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  1. flora

    Last year, 2014, former CalPERS CEO Buenrostro agreed to plead guilty in connection to influence peddling.
    From the LATimes:

    CalPERS board passed a series of reforms designed to reduce potential conflicts of interest between the investment officers and top managers. Now a year later the staff wants to reduce board information and input and shove board over site off to the side?

    Thanks for these great posts.

  2. washunate

    This series continues to be awesome. Mismanagement is the common theme across so many different kinds of public problems.

  3. calsa

    ‘I don’t know. It’s hard to quantify, but I’m guessing we spend 50… your senior leadership probably spends 50, 60, 70 percent of our time meeting, getting ready for the next meeting, reviewing the materials.’

    It’s hard to quantify? I thought CEOs were worth the big bucks because of genetic superiority over the rest of us. It almost sounds like she hasn’t made an attempt to quantify it, even though it’s the primary basis for her argument. I also like the way even though it’s hard to quantify it jumps from 50 to 70% in a matter of seconds! Glad she stopped counting at 70. Now 70% preparing for meetings really is a burden. I’m starting to agree with this lady.

  4. Sluggeaux

    Please let me direct readers to this somewhat old news. If youaren’t up to date on the CalPERS bribery scandal you should read this delightfully salacious piece that ran in the Sacramento Bee newspaper just this past February after former GOP politician, CalPERS Board member, and super-star Private Equity placement agent Al Villalobos took a limo from his “comp-ed” rooms at Reno’s Silver Legacy casino to a pistol range and blew his brains out with a 9mm Glock Model 19. Former CalPERS Board member and CEO Fred Buenrostro was preparing to testify after pleading guilty to one count of conspiracy. Buenrostro is currently awaiting sentencing while continuing to cooperate with the U.S. Department of Justice.

    The current CalPERS staff leadership nearly all worked under Buenrostro — it is troubling that they are spending so much energy and fund assets advocating for less public process. During the period in which Buenrostro and Villalobos were active, CalPERS exposure to Private Equity nearly quadrupled — to the level it remains at today. These deals will take a decade to reach their final accounting, while General Partners hold CalPERS hostage on deals from which the GP’s have often already taken their fees and profits and are free to run into the ground.

    1. flora

      One of the more troubling (to me) aspects of the scandal was that it was used as an example in support of the “efficient wages” theory. The idea being that if you don’t pay people what they consider enough money you should expect them to engage in personally beneficial side deals. (Instead of, say, expect them to find better paid employment.) See Forbes article:
      I don’t buy the argument, especially when it comes to public service jobs. I wonder if the current CalPERS CEO, staff and board does buy that argument.

      1. tegnost

        Holy cow that s quite the whitewashing there…
        from article
        “Hedge fund management and pension fund management are not exactly the same thing, this is true, although they are close neighbours”
        that strikes me particularly
        Hedge funds are gambling with other peoples money while pensions are protecting peoples money. Not very neighborly…
        Also, these people weren’t drafted to these jobs, they applied and aware of the pay scale accepted the job. It goes back to Prof Black, need to make it cost for breaking the law- decertifications at least and jail time. Clearly a deterrent for Villalobos who the article states is innocent, I’m guessing because he can’t be proven guilty? Also it seems to be one of those deals like ceo pay where it just never goes down these bast*rds pay, and every new person has to get paid more than the last one. Talk about entitlement. the way the author glibly states that if you don’t pay them TOO MUCH they might steal something and It also seems the author doesn’t have a problem with that.
        Hmmm…maybe they’ll all over paid…

      2. washunate

        Yep, one of the major problems with CalPERS (a problem that is pervasive across public institutions) is the extreme inequality between the compensation of top employees and the general public.

        We know the Board and senior staff buy into the nonsense because they are prime purveyors of it. Senior staff at CalPERS are some of the most highly paid workers in the nation. Multiple staff are in the top 1% of all wage earners.

  5. Brooklin Bridge

    I love how CalPERS is one of the “better” investment firms. Are not some groups of clients (unions, etc.) taking notice and trying to protect themselves and their members? I know NC has had considerable success at shining a light on this, but it is still surprising that the issue has not gotten more coverage.

  6. dk

    I’d ask: why does board meeting prep take so much of staff’s time? CEO Staussboll tells us: “… meeting, getting ready for the next meeting, reviewing the materials.”

    Aren’t the staffs presentations to the board supposed to be informational? Why do they need to be separately reviewed? It sounds as if staff is choosing what to tell the board, and what not to tell the board. Sure, figuring that out that could take a while… why are they even doing it?

    Transparency is not an inefficient process, unless redaction is involved. This may be a problem in some scenarios, but redaction should not be occurring in this case, staff should have nothing to hide. Staussboll’s (fuzzy!) time estimates for this process suggests micromanagement of output information: “go back and rewrite that, leaving out the parts about… and then we’ll go over it again”.

    Staff may need to summarize their current work items for board presentations. The summarization process should be part of their daily or at least periodic workflow; the best time to summarize is when you just finished doing something, even if it’s only partially complete. It’s Executive Management 101… collect daily notes in a Word doc, 10 minutes a day (if that). Before a meeting, copy and edit out the redundancies (or copy/paste to new, whatever works for you), 20 minutes. This stuff is not rocket science, but it may have to be mandated if people don’t do it for themselves.

    And of course, meeting thrash also impacts other production rates, due to stop-restart and schedule rounding.

  7. Assolonius

    Of course they want less public exposure of the program and the board, Henry Jones is barely literate and Harry Eliopoulos knows nothing about investing or capital markets

    if they had fewer board meetings theyd have to reassign the 110 people in “investments” who do nothing but assign the right font and colors to the powerpoints, weave the investment beliefs into each topic, etc

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