The Sacramento Bee appears to have broken the story that CalPERS CEO Anne Stausboll announced she is leaving as of June 30. From its article:
Anne Stausboll announced her retirement Thursday as chief executive of CalPERS, ending a tenure during which she guided the nation’s largest public pension fund through a bribery scandal and the financial markets crash.
Stausboll, 59, said she will leave June 30, when the fiscal year ends.
“I’m really ready to explore the next chapter of my life,” she said in an interview. After taking some time off, she said she’ll be “looking for new opportunities to serve the public.”…
“It was definitely a time of turmoil,” Stausboll said, referring to the early years of her tenure. “It was a challenge. I think we’ve really landed in a good place.”
The few people I’ve spoken to about this who know CalPERS and do not have inside knowledge were surprised, as I was, and perplexed. Stausboll is retiring only from CalPERS, not from professional life. In fact, her “looking for new opportunities to serve the public” says that she’s putting herself on the market, but wants a good long holiday before she takes a new post. And at 59, having secured her position well by neutering the board, there’s not obvious reason for her to be leaving….or is there?
It came to me a few hours later, and former North Carolina chief investment office flagged the probable cause in a December post. CalPERS is underfunded, albeit not severely so. However, the Fed tightening, even if it has worked out as the Fed had planned, with an attenuated rise that Mr. Market would hopefully digest well, would still hurt investors that responded as the central bank wanted them to and piled into risky assets. CalPERS is overweight equities and other comparatively high-risk investments like private equity.
Silton fingered management, meaning Stausboll above all, for trying to evade CalPERS’ thorny investment issues. His dim view of CalPERS’s recent behavior means he would almost certainly disagree with Stausboll’s PR that she is leaving CalPERS in fine fettle. From his post, From “Leading the Way” to “Losing its Way”: CalPERS. I’m taking the liberty of quoting Silton at length because the nuance of his observations is important:
I’ve been listening to recent committee meetings conducted at CalPERS. I suppose it’s a way of connecting my former professional life with my art. I’m listening to these sessions and perusing some of meeting materials because the nation’s largest pension plan is completing a sad transformation from “leading the way” to “losing its way.”
As I’ve written before, I frequently called upon the senior staff at CalPERS when I ran the North Carolina pension plan in the early 2000s. They were the leaders in formulating investment policies, hiring capable staff, and exploring new investment opportunities. As they shared their experience and expertise, more than one investment professional warned me not to go too far in borrowing from the CalPERS’ model. They cautioned that a portfolio could become too complicated, the range policies and procedures could become too detailed and cumbersome, and the staff and consulting relations could become too numerous…
Meanwhile the finance and administration committee has tacitly acknowledged that the pension’s investment assumption is unrealistic by adopting a formula to lower the assumption in years when the capital markets are ebullient. For example, if the CalPERS portfolio earns 4% more than its 7.5% assumption in any given year, the future assumption would be reduced by .05%. If the portfolio beats its assumption by 7%, the assumption would drop by 0.10%. The idea is to use some of the “surplus” to fund a move toward a more realistic investment assumption. Unfortunately, excess performance in a given year isn’t a surplus; it’s just a random result that will be followed at some point by performance that falls short of the assumption. CalPERS is adopting this policy because they know that their portfolio (even with its unwavering commitment to private equity) can’t earn 7.5%, and because they know that state and local government are either unwilling or unable to increase the contribution required to meet the obligation to the beneficiaries.
To be clear, CalPERS faces a daunting challenge. When a pension plan becomes underfunded, the way forward is intimidating. The current board and professional staff didn’t create the central problem (liabilities significantly greater than assets). This problem has been building for more than a decade. However, they’re doing a poor job of confronting and addressing the problem.
Within the hours and hours of committee meeting videos, I’ve seen all sorts of troubling signs. For example, the governance committee is grappling with potential new policies to limit inquiries by board members and prevent board members from using the public records law to obtain documents when they aren’t furnished in the normal course of business. When I was CIO I didn’t particularly like pointed questions and public records requests. No one enjoys having their recommendations questioned or producing reams of documents. However, I recognized that tough questions and inquiries were a necessary part of the process. Instead of stifling inquiries, the professional staff at CalPERS needs to grow a thicker skin.
At the governance committee meeting, the members also considered reducing the number of board meetings. I think this is a sensible step, except for one big problem: the professional staff hasn’t earned the trust requisite to reducing the frequency of meetings..
At the most recent governance committee and investment committee meetings, the trustees heard from CalPERS’s outside fiduciary counsel. Naked Capitalism and others have documented that the pension plan’s fiduciary counsel, Robert Klausner, has a history that does not inspire confidence in his opinions. I am also troubled by the fact that the fiduciary counsel doesn’t report directly and exclusively to the trustees. Instead Mr. Klausner’s practice appears to be yet another consultancy constructed on conflicts of interest, spending too much time mediating potential rifts between the staff and board.
When pension plans, or for that matter any organization, face big challenges its board needs to be very active. At CalPERS, we have a lot of video evidence that only one trustee is asking probing questions and that the staff and governance committee would like to limit his inquiries. In my view, all of the trustees should be asking tough and probing questions. The board and committee meetings should be interactive and at times even raucous. After all they’re facing tough problems. Moreover, the trustees should have an independent and unbiased fiduciary counsel who exclusively advises them on their role as fiduciaries.
I doubt CalPERS will change because they’ve lost their way.
While Stausboll stabilized CalPERS after its pay to play scandal and was at the helm during the crisis, that falls far short of dealing with underlying problems and striving to adapt to a changing environment.
Not only has Stausboll created a culture hostile to open discussion, she does not appear to have done an adequate job of succession planning. That raises the question whether she had planned to stay on longer and recently changed her mind.
Stausboll is leaving with a top team with far too many recent hires and promotions for it to be likely to be stable or cohesive. The Chief Operating Investment Office, Wylie Tollette, has been at CalPERS less than two years. Ted Eliopoulos, the Chief Investment Officer, has a much longer tenure, having joined CalPERS in 2007, but he’s a protege of former state treasurer and CalPERS board member Phil Angelides (as was Stausboll). He’s a lawyer with limited investment experience prior to becoming the head of real estate investing at CalPERS who got a battlefield promotion in September 2014 when the former CIO, Joe Dear, died unexpectedly. The general counsel, Matt Jacobs, joined less than a year ago. I’m not familiar with the track records of the other investment strategy heads, but Réal Desrochers, who has been at CalPERS since 2011, is at least 67, and therefore can’t be assumed to stay in his post much longer.
In other words, Stausboll is leaving with insufficient seasoning among her leadership team. The person in the spot that would normally be the best position to replace her, the Chief Operating Investment Officer Wylie Tollette, doesn’t look like he would be ready to take the reins, although given Stausboll’s unexpected retirement, he may be included in the race. But that also assumes he wants the job. Tollette is already rich, with a net worth rumored to be $20 million. And the CEO job is very political, requiring lots of face time with the legislature, unions, and other constituencies. He might not like the job description.
As much as we and other close observers have been critical of Stausboll’s tenure, it is difficult to find good public pension fund executives. While CalPERS has the opportunity to, and in fact would very much benefit from getting someone willing to confront the issues that Stausboll has found more convenient to finesse, the odds are not trivial that CalPERS could wind up in worse hands and continue its decline as an institution. The flip side is an energetic candidate might relish the challenge of reinvigorating the organization.
But what is most troubling about the timing of Stausboll’s departure is that it looks like a market trade. Leaving when the going is about to get tough is not a sign of leadership. It’s opportunism.