By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives
CalPERS was once the crown jewel of institutional investors, known for combining competence, integrity, and care. It invests funds and pays the pensions of California State workers. Over a decade ago, however, CalPERS’ senior managers and board became a cesspool that stood for the opposite. CalPERS’ corrupt culture is deeply rooted. Various California Treasurers have tried to clean up the mess, but the reforms have failed because few senior officers and board members have been willing to take on the rot with the forcefulness required.
I worked closely with board members in my role as the general counsel of Federal Home Loan Bank of San Francisco. It takes enormous courage to confront senior corporate officers or fellow-directors when they are maintaining a solid front. We had a good board, officers, and institution. In an institution with a deeply rooted, sick culture like CalPERS, everything works against forceful directors trying to cure the rot. They have to confront a phalanx of directors and officers who are genuinely horrified that someone would disturb the highly prized decorum of the boardroom. The officials maintaining that the sick culture is not sick become enraged at anyone that blows the whistle on their unwillingness to act aggressively to cure the sick culture.
CalPERS has had the great fortune of having a board member willing to take on its board and officers to insist on rooting out its culture of corruption. In doing so, JJ Jelincic discovered the great truth – no good deed goes unpunished. His fellow board members, with the clear connivance of the senior officers, are ginning up an effort to destroy his ability to continue to try to root out the rot at CalPERS. Neither Jelincic, who has among the greatest expertise of any board member in finance, nor the directors as a whole, knows what Jelincic is supposed to have done wrong.
Here is the kangaroo nature of the proceedings at CalPERS, revealed in an excerpt from the transcript of a public board meeting. It is typical of a broken organization. Bill Slaton is a CalPERS board member.
Bill Slaton: Mr. Jelincic, I’m going to address you in this – that as I’ve observed, you’ve taken unilateral actions that to me are clear violations of fiduciary duty, and by implication placed our fiduciary duty as a board at risk, and the common theme is the disrespect for the governing rules of the organization.
To be more specific, I’m talking about the disregard for confidentiality of materials or decisions reviewed or made by this board…. [T]here are in my view only two possible solutions to protect the fund from the risk of continued fiduciary violations. The first would be for Mr. Jelincic to voluntarily resign his board position.
If he chooses to remain on the board, I ask the board president to place on the board agenda as soon as possible an action item regarding a sanction or sanctions to be imposed by this board, and one sanction I ask to be considered would prohibit Mr. Jelincic from attending any closed sessions conducted by any committee or the full board while he remains a member of this board due to his repeated unauthorized disclosure of confidential material.
At this point in the transcript, we have Slaton attacking Jelincic in a manner one virtually never witnesses in a boardroom. What we do not know is what “confidential” information Jelincic supposedly “disregarded.” Jelincic’s reputation is for pushing boards to act aggressively to fulfill their fiduciary duties, so it is bizarre for Slaton to be seeking to muzzle Jelincic’s efforts to improve the board’s performance of its fiduciary duties on the grounds that (in some unstated fashion) doing so will improve the board’s fiduciary performance.
Jelincic, as one would expect, asked what specific “confidentiality” he was “disregarding” so that he could respond to Slaton’s attacks. Slaton provided no specific charges, making it impossible for Jelincic to respond with any specific denials.
The transcript reveals other important facts. First, while Slaton provided zero evidence of any wrongdoing by Jelincic, he demanded that that the board act “as soon as possible” to consider Slaton’s demand that the removal of Jelincic from the board. (A director that cannot take part in the closed board meetings cannot function as a director.) Without any showing by Slaton of anything remotely approaching an emergency, the board appears to be expediting its effort to muzzle Jelincic.
As a general counsel, I would have responded immediately to Slaton at the board meeting. First, I would have emphasized that Slaton had presented nothing to warrant the board considering such a drastic sanction against another director. Second, I would have stressed that Jelincic’s request that Slaton notify Jelincic’s of the specific charges was an absolute necessity before the board should even consider holding a meeting to sanction a director. Third, I would have called attention to Slaton’s refusal to provide any facts supporting his conclusory claims of misconduct when Jelincic requested that he do so. The fourth point I would have made is described below.
We know is that CalPERS’ general counsel responded in a very different manner – a manner that reveals the terrible culture at CalPERS that Jelincic has labored to fix. The transcript reveals that the Rob Feckner, President of CalPERS board and his general counsel are reinforcing rather than fixing CalPERS’ failed culture.
Matt Jacobs, the General Counsel did speak up, but solely to implicitly support throwing Jelincic under the bus. His statement ignored the three points I would have made, and then merely read the board of directors’ sanctioning powers. Jacobs failed to note that the board did not have the power under the powers he had just read, to impose Slaton’s proposed sanction. That is the fourth point I would have made to the board.
The transcript then records Feckner’s response to his General Counsel’s legalese. He too failed to point out that the board had no power to impose Slaton’s proposed sanction. He told the board that “Matt and I have had many discussions about” Slaton’s desire to sanction Jelincic. Jelincic knew about Slaton’s desire as well and in conversation with Feckner requested that the board meeting where Slaton was going to request that the board hold a “trial” and sanction Jelincic be public and on the record.
Feckner’s revelation proves that Slaton had zero excuse for not providing Jelincic with the specific charges so that he could respond and refute any pretext for the board holding a “trial.” Slaton’s attack on Jelincic was planned, not impromptu. It was a serious charge that Slaton knew could do grave damage to Jelincic and CalPERS’ reputations. If Slaton had not done his homework and determined the specific charges he intended to make against Jelincic, all Slaton had to do was wait until he had done so, put Jelincic on written notice of the specific charges so that he could respond, and then the board could decide whether to consider the charges and the defense.
The transcript indicates that Slaton claimed to have done his homework. He asserted that he had his specific charges developed – but refused to give Jelincic notice of those specific charges so that he could mount an effective defense. Slaton then compounded the unfairness by requesting an expedited “trial” of his specific charges by the board. That combination of actions indicates that Slaton had two purposes in making his unsubstantiated, conclusory charges at the board of directors meeting. First, it denies Jelincic the time and ability to prepare an effective defense of Slaton’s specific charges while allowing Slaton to plan and prepare his attack. Second, it allowed Slaton to smear Jelincic and prejudice the board (the “judges” in the future “trial”) against Jelincic by allowing Slaton to make a facially slanderous attack on Jelinic that I quoted from in a manner that made it impossible for Jelincic to respond because there were zero specifics.
Feckner’s revelation also means that Feckner and Jacobs have zero excuse for not insisting that Slaton provide Jelincic and them with the specific charges before Slaton made the facially slanderous charges at the board meeting that I quoted. It is a breach of their and Slaton’s fiduciary duties to CalPERS to knowingly allow one board member to accuse another board member of committing a crime under California law without having vetted the claim to demonstrate that it was well-founded. Jacobs’ actions go against every normal reflex of a corporate general counsel.
The general counsel is supposed to play a leadership role in rehabilitating a corporate culture like CalPERS that has lost its integrity. Jacobs has failed this test.
This excerpt from another board member’s comments is symptomatic of CalPERS’ sick culture.
Priya Mathur: That is our job – to protect this organization and to protect our members by protecting this organization, so those are my comments.
No, your “job” is not “protecting this organization” from those trying to fix what every independent expert agrees became a corrupt culture. Your job is not protecting officers and board members from criticism by Jelincic when they fail to work aggressively to fix that toxic culture. CalPERS’ culture became toxic over a decade ago precisely because there was no one like Jelincic on the board who was willing to criticize and willing to ask the officers the demanding questions that a real fiduciary asks when serving on a board. The long practice of CalPERS board members “protecting this organization” has been causing devastating harm to CalPERS’ members for over a decade. To fix CalPERS, California should appoint more people like Jelincic.