The more we’ve seen how CalPERS operates, the more it’s clear that the California agency has become a governance train wreck. The latest example is of CalPERS’ general counsel, Matt Jacobs, repeatedly making verifiably false statements to the board over its plan to curb the time speakers have to give comments in public board meetings. What makes this incident disturbing is that it shows that Jacobs routinely misleads the board so that staff gets what it wants.
Why Matt Jacob’s Lies Are Proof of Deficient Governance at CalPERS
In any well run organization, a culture of casual lying is dangerous because it fosters bad decision-making and facilitates cover ups. Yet this behavior is on display regularly from CalPERS’ general counsel, both one of its most senior offices and aside from the CEO, the one most responsible for acting as a check on misconduct and improprieties. As we’ve stated: It is destructive to have an employee, and worse, the head of a critical control function, lie casually and flagrantly to his bosses and not be called out or otherwise sanctioned for it.
A big reason that Jacobs can get away with this sort of thing is that the overwhelming majority of board members at CalPERS are derelict in the performance of their duties. They treat their seats as a sinecure rather than an oversight role that among other things requires them to monitor staff conduct.
Yet despite a scandal that resulted in former CEO Fred Buenrostro going to prison over a pay-to-play scandal that including him taking paper bags filled with cash, CalPERS’ response has been for the board to cede even more authority to staff, even though staff misconduct that was the source of that very crisis. For instance, CalPERS’ board had four staff members as its direct reports, meaning among other things, it could fire them. The board voted to reduce its oversight by reducing its direct reports to one, the CEO.
One of the consequences of less staff accountability to the board is staff members who see fit to give the board inaccurate and incomplete information in the interest of advancing the agendas of staff. Matt Jacobs is thus a case study of the bad effect of the CalPERS’ board’s lax attitude and choice to throw away tools for exerting influence, since the general counsel historically reported to the board as well as the CEO.
How Jacobs Has Lied Repeatedly to the Board on One Matter, Imposing Time Limits on Speakers
In recent years, CalPERS imposed a three minute limit on speakers in public comments in board meetings However, CalPERS never took the steps to do so legally, as we discussed last month after we were cut off during a statement to CalPERS board.
As we pointed out then, Jacobs lied to the board. Shortly after I told the board in August that it lacked the authority to impose time limits on statements from the public, Jacobs falsely told the board that a “draft regulation” was “already in the works” to be brought before the board next month. However, it was not in the board agenda for September, which was released the next day.
Jacobs also tried the finesse of claiming that there was no obligation under the applicable law, the Bagley-Keene Open Meeting Act, for CalPERS to go through the process of creating a regulation. Karl Olson, a top California attorney who has sued CalPERS twice, successfully, disagreed:
If CalPERS wants to set time limits on public comments, the law is clear: it may do so via regulation, which is a formal process. Assertions about “policy” don’t satisfy this requirement.
Yet CalPERS proceeded to do just that at the last board meeting by continuing to curb speakers’ time. And it should be no surprise that the giant public pension fund wants to gag members of the public when they point out that the general counsel is continuing to con the board about whether it is acting properly or not
If you can’t play the clip below, you can watch the relevant segment here, starting at 19:55:
Bill Slaton, Chairman, Governance Committee: First, Mr. Flaherman and the fact that we don’t have a regulation, still, the limit is three minutes and there is a red, green and yellow light up here that you will be able to see.
Michael Flaherman, Visiting Scholar, UC Berkeley: Good afternoon. I’m Michael Flaherman. I’m a visiting scholar at UC Berkeley. I was a member of this board from 1995 to 2003. Mr. Chairman, respectfully I would ask for you to waive the three minute limit.
Slaton: Uh, we have…It’s eight minutes to 3:00, we have three speakers here, we have another meeting following this.
Flaherman: I don’t intend to speak for an extended period of time. The issue is that the Board has never taken any action whatsoever to enshrine the three minute limit in policy. We are not even talking about regulation…in policy…
Slaton: That’s part of your argument. I understand that. I tell you what, I’m going to do. We have three speakers and unless there’s serious objection I’m gonna allow four minutes each. Without objection that’s what we will do so you now have, we will reset the clock, you have four minutes.
Flaherman: I’m sorry, to be so procedurally a stickler here. I would ask as a courtesy that you would have the minutes note my objection to the imposition of a limit.
Slaton: We’re recording the meeting.
Flaherman: Could the minutes note that?
Slaton: We have a recorder, so the recorder is…
Flaherman: You won’t order the minutes to reflect that.
Slaton: The minutes are gonna be as they’re spoken.
Flarerman: No, that’s not true, that’s not how they are composed and you and I both know that.
Look, look, here’s the issue, here’s the issue, which is that [background conversation] page two of the agenda item says that there is a three-minute policy and that in the past there was a two-minute policy.
There is no three-minute policy. This board has never acted – and I’ve not talking about regulation but even just even as internal matter of policy the Board has never acted to impose any kind of policy.
What happened was that in May of 2012, your staff started printing on the agendas that there was a three minute time limit. That just happened.
Now I thought you guys were in charge. I thought you guys were in charge, but I hear Mr. Jacobs talking about this as a decision that we made and when he’s using the royal “we,” it’s not really clear whether he is talking about we the staff or you. Does anybody here want to raise their hands and say they were involved in the decision to impose a three minute time limit?
[Board President Robert Feckner raises his hand].
Flaherman: OK. So was made by the board president and you. OK, well, that’s very helpful. But again there was no action of the Board. Right? So yet this is held out as a policy.
Now even further still we have a statement from your legal staff that previously there was a two-minute time limit. Now I have the circular letters going back to 2004. I have one from every year and I would like to have this conveyed to the chair….could I have this conveyed to the chair? I’ll walk over.
So you will see that on these circular letters that there was never any note of any of any kind before May of 2012. So the statement that you guys are being generous by giving a three-minute time limit because you used to me much tougher and enforce a two-minute time limit that simply not true. It’s not true.
So here’s the bottom line. We all read the New York Times on Sunday and you guys are getting raked across the coals, a very unfair article written by Mary Walsh, a woman who has been generous over a period of decades. I knew her 1997 or something, right, in her coverage of this pension system and she’s not your friend anymore. And who appears in the article? Bill Sharpe, a man who I thought was your friend. He was your consultant for decades and he is ripping you over the coals.
You guys need friends and you’re losing them day by day. The system is dying day by day because the people who are your friends are not standing up for them.
And when you cut them off with glee, I mean the fire in the eye that I have seen in some of you in cutting people off at the stroke of three minutes is really just sad. It’s just sad. And your staff, you know, your staff has left out a lot of things. I found an attorney general opinion 92-2-12 where the Attorney General is opining with respect to the Brown Act, but Mr. Jacob acknowledges it’s the basically the same thing [as the Bagley-Keene Act], that inherently under the law, the chair of a meeting has the ability to cut off anyone who’s repetitious or vexatious…
Slaton: Please complete your thought because your time has expired.
Flaherman: So really that was how the system operated for decades and for decades there was no time limit, people that were your trusted friends came and gave your thoughts and you have the authority to do whatever you want to people who really caused trouble and I would urge you to reject this entire idea. Thank you.
Understand what happened here. Matt Jacobs through his documents and statements told the board that:
CalPERS had always had time limits on speakers when it had no limits whatsoever before 2012
The time limit had once been two minutes when that had never been the case
The time limits were board policy when they had never been a policy; staff had foisted then on the board by simply informing the board president
Jacobs and the board have taken the position that limiting comments is necessary and desirable, yet during the entire time this issue has been in play, no one has been able to cite a single instance where CalPERS’ board has been burdened by overly long comments
The board has ample authority under the law, without needing to impose a formal limit, to curb speakers who filibuster or otherwise become troublesome
Jacobs has given no consideration to the fact that many of the issues that CalPERS deals with are complex, and an adequate presentation may take more than three minutes. That was the case when I attempted to explain to the board in the private equity workshop last fall how a presentation on private equity returns gamed the numbers so as to make private equity appear far less risky that it was. I could tell from the glazed looks in most audience members’ eyes that they were not able to absorb the information. Tt needed to be unpacked further, but that would have taken more than the allotted time. This limit can therefore have the effect of depriving the board of crucial information useful or even necessary to execute its fiduciary duty.
Here is how the board voted the next day on whether to move forward with the regulatory process so as to impose a three-minute time limit:
So much the notion enshrined in Bagley-Keene that, as Karl Olson put it, “that government bodies serve the public and not vice versa.” Here you see that three important state officials, Treasurer John Chiang, Controller Betty Yee, and Richard Gillihan, who is governor Jerry Brown’s cabinet secretary, all voted in favor of less public input and a less well informed board. Only Theresa Taylor joined JJ Jelincic in seeking to have the board use the latitude it had before staff sought to gag public commentors, when it’s a certainty that critics, not cheerleaders, would benefit from more time.
What makes this situation more disturbing is that when I contacted Flaherman for any further comment, he said he’d told Jacobs about the fact that CalPERS had deficient procedures in November 2015. After Jacobs ignored the issue, Flaherman then e-mailed all board members in May, setting forth not only why a regulation was required if the board was to limit comment length, but also observing: “It troubles me that this has not occurred, and I hope that each of you recognize a duty to discover why it hasn’t.”
In other words, upon receiving Flaherman’s missive, board members should have asked why Jacobs why he had not acted or at least informed them as to why he thought it was reasonable to punt. Yet the board, in typical form, failed to do its job, leading to my protest in August and Flaherman’s remarks above.
This isn’t the first time that Jacobs has served the board and CalPERS poorly. The legal department recommended the choice of the scandal-ridden Robert Klausner as fiduciary counsel, a move that raised eyebrows among journalists and pension funds all over the US. Klausner recently resigned after the board apparently recognized that he was becoming a liability. Jacobs greased the skids for Klaunser’s selection by withholding information in the public domain, such as news article spanning decades exposing his dubious conduct in considerable detail, most important, his running pay-to-play conferences. The legal department also deprived the board of details about the finalists that it had provided in the past. While several board members objected to the thin briefings on the candidates, no one stood up for the board’s right to be properly informed by demanding more detail. And that’s far from the extent of questionable conduct that is taking place on Jacobs’ watch. For instance, board member Michael Bilbrey outed the fact that staff briefs board members extensively before board meetings. This is a classic “hub and spoke” serial meeting, which is a violation of Bagley-Keene described by the California Attorney General. 1
CalPERS is still under the shadow of its 2009 pay-to-play scandal, which severely diminished it as an institution. It is now under fierce scrutiny, both for its serious underfunding and its refusal to lower its return assumptions, despite the fact that we are now eight years into a “new normal” of flagging growth and central banks around the world pushing interest rates lower and lower. CalPERS can’t afford even a mid-sized scandal now, given its hostile environment. The last thing it can afford is a “make it up as you go along” general counsel like Matt Jacobs.
1 From the Attorney General’s guide to Bagley-Keene:
The Act expressly prohibits the use of direct communication, personal intermediaries, or technological devices that are employed by a majority of the members of the state body to develop a collective concurrence as to action to be taken on an item by the members of the state body outside of an open meeting. (§ 11122.5(b).) Typically, a serial meeting is a series of communications, each of which involves less than a quorum of the legislative body, but which taken as a whole involves a majority of the body’s members. For example, a chain of communications involving contact from member A to member B who then communicates with member C would constitute a serial meeting in the case of a five-person body. Similarly, when a person acts as the hub of a wheel (member A) and communicates individually with the various spokes (members B and C), a serial meeting has occurred. In addition, a serial meeting occurs when intermediaries for board members have a meeting to discuss issues. For example, when a representative of member A meets with representatives of members B and C to discuss an agenda item, the members have conducted a serial meeting through their representatives acting as intermediaries.