Jason Perez’s Ouster of CalPERS Board President Priya Mathur Sends Shockwaves Among Private Equity, Environmental, Social & Governance (ESG) Boosters

As we pointed out before, even though Margaret Brown’s 2017 election defeat of CalPERS board member Michael Bilbrey rattled insiders because Bilbrey had firm union backing and a big warchest, they could still rationalize it because Bilbery had said virtually nothing at board meetings for years. But it’s much harder to brush off Jason Perez’s decisive defeat of board president Priya Mathur. Because Mathur is well spoken and has made herself the face of CalPERS’ ESG (Environmental, Social & Governance), some stories are painting Perez’s victory as a blow to CalPERS’ ESG efforts. Although I didn’t work with Perez on his campaign and spoke to him only briefly, when we were both at the same CalPERS board meeting in July, the press seems to have misread Perez’s stance, likely based on Mathur’s caricature of his views. Similarly, the fact that Mathur was a spokesperson for CalPERS’ half-baked private equity scheme means her defeat is being depicted as a setback to that as well.

We’ll look at two stories, one in Funds1000, the other in Responsible Investor. They are both stunned at the fact that Perez won, which suggests that they haven’t been following Mathur’s checkered career closely enough. The last time she was up for election. Mathur’s challenger was an open pension “reformer,” as in backer of restricting benefits, which is usually a prescription for an extremely meager vote. If you knew the positions of Mathur’s opponent, the fact that she got 44% was uncomfortably high. The fact that Mathur’s opponent got over 40% despite being a not-very-coded advocate for pension-cutting says beneficiaries have a lot of antipathy for Mathur’s long record of scandals. That was compounded by bad press Mathur created for herself in her short tenure as board president, such as failing to clean up the illegal practice of having board members pre-sign blank travel expenses forms until it was called out on this blog, intercepting board member mail, and staunchly defending resume fabricator and now departed Chief Financial Officer Charles Asubonten.

What was important about Perez’s win was that it was decisive, 57% to 43%, and took place despite Mathur having the support of the biggest unions. That points to broad-based unhappiness among beneficiaries, not just with Mathur’s marquee cause, ESG.

We’ll first turn to a story in Fund1000: CalPERS shake-up may delay PE plans. The author covered a presentation Mathur gave the night before election results were due in, apparently expecting it to be a puff piece about a victor, and had to rethink it in light of Mathur’s loss. From the piece:

The far-reaching changes the $365.5 billion California Public Employees’ Retirement System plans for its private equity program still need final board approval. Yet one of the new model’s most important advocates, Priya Mathur, has just lost her seat on the 13-member CalPERS Board of Administration…

“I really believe this is essential for us and I hope to see the board endorse it in coming months,” she said.

Mathur’s sudden departure after losing to first-time candidate police officer Jason Perez means CalPERS needs to elect a new president, heralding a board shake-up that could delay the urgent plans.

Help me. There is absolutely nothing urgent about what CalPERS is trying to do. And the article takes swipes at Perez via “first time” and omitting to mention that he’s actually the head of his union.

The story quickly descends into incoherence and disinformation:

CalPERS is in the final stages of approving a separate entity that would make direct private equity investments and would be governed by a separate, independent board.

It’s not direct if you are having outside operators make the investment. It’s indirect. And then the author repeats some of what Mathur said without exhibiting well-deserved skepticism:

“We are a maturing system, paying a lot in benefits and don’t want to sell assets to pay benefits,” Mathur told delegates. “As truly patient capital, we are not just looking to sell after five to seven years.”

She said the pension fund needed to invest over the longer term to better match its liabilities and tap private opportunities as the number of public companies declines.

First, trees do not grow to the sky. Even companies showing higher-than-normal growth revert to the mean or worse. One can argue that the normal three to six year time horizon for private equity firms may be too short in some cases and lead investors to sell out before a run of outperformance is over does not mean that holding companies longer will produce better returns. This is sheer magical thinking.

Moreover, equities are not a “better match” for fund liabilities. Equities are an extremely uncertain promise and companies fall by the wayside due to changes in regulations, disasters, management scandals, and other reasons.

This is also false and Mathur should know better:

Discussions among investment staff and the board have referenced creating a separate corporation with its own investment staff and board. This would allow CalPERS to compensate and reward private equity professionals differently with more than what is possible in a public pension fund, to help recruit the talent required.

CalPERS in fact can pay investment professionals market rates. And private equity expert Ashby Monk recently told the board that private equity professionals who decide to work for public pension funds are willing to take somewhat lower pay to be in a less aggressive environment.

Mathur also ignores what ought to be a deal killer: any board of a new entity will be responsible under the law to that entity, not to CalPERS.

A much better, but still somewhat problematic story is an op ed by Jay Youngdahl at Responsible Investor, CalPERS election earthquake should shake up responsible investment narrative. Youngdahl argued that there were two theories as to why Perez won. One is that it represented a beneficiary backlash against ESG in the person of Mathur, a high profile advocate:

Mathur has also served three terms on the Board of the Principles for Responsible Investment and is the highest profile PRI official in the U.S. Her defeat is a clear repudiation of the PRI strategy in the US.

Youngdahl also describes a second point of view, that CalPERS has governance problems such as a weak board that does an inadequate job of supervising staff, and graciously credited Naked Capitalism for making that case.

Youngdahl proceeds to make a very important case about the problems with EGS as practiced in the US, and I recommend reading his article in full. However, in doing so, he misses what Perez’s main objections were, and instead fixates on the how the conservative press in California’s straw man.

First, Perez is opposed to how the board spends huge amounts of time on ESG to the detriment of serious consideration of other investment issues. For instance, CalPERS staff has presented almost nothing except a very few, cringe-worthy, childish slides with hardly any text on them describing CalPERS newfangled private equity scheme. CalPERS staff almost certainly wrote the Mathur presentation described above and prepped her for questions, and it’s clear Mathur has no understanding of what she is saying. This is consistent with her lack of any questions about the PE plans except as they relate to her pet ESG agenda. For instance, last November, the sole concern she had about turning over private equity to hired guns it would be even harder to divorce than now was, “Do they share our values?”

ESG is an easy way out for the low-competence CalPERS board because they can look like they are Doing Something in a realm where CalPERS gets positive PR. As far as Perez is concerned, it takes time and energy away from confronting the tough issue of what to do about CalPERS underfunding, and what risks look sensible when so many assets are richly priced?

Second, CalPERS has not been honest with itself that ESG can result in lower returns, despite its own costly decision to dump tobacco stocks at the worst possible time, right before the Federal-state settlement. That example underscored that CalPERS also has a bad habit of jumping onto fads at the worst possible time. Perez does not want CalPERS to stop considering ESG issues, but he wants the board to consider the possible costs to returns….which they should have been doing all along, as fiduciaries.

Recall that when CalPERS started becoming an activist investor, in the 1990s, it focused on governance, and that was a win/win. Focusing on well run companies and forcing reforms in ones that weren’t was a profitable approach and also boosted CalPERS’ influence and image.

There is also evidence that boards and senior managements that are more diverse deliver better investment performance. That may be due to the fact that they are less subject to groupthink, and that more representative leaderships can help avoid product and marketing gaffes.

However, as Youngdahl raises a different set of issues, that ESG represents the top 1%, and that isn’t a good image:

Two crucial errors have been made in the U.S. The first is that the ESG community has made a conscious decision to ally, not with beneficiaries or those seeking to change greedy Wall Street practices, but with mainstream financial entities who are reviled by the American electorate at large – including the electorate at CalPERS.

Recently, for example, PRI staff have appeared arm in arm and coast to coast, avoiding the “fly-over” states in between of course, with the portion of Goldman Sachs that is a PRI signatory.

Goldman Sachs is reviled by the American electorate as an example of those responsible for the 2008 financial crisis, and a major part of the D.C. “swamp.” Those who follow pensions even a bit, know that the US government bailed out financial institutions in that crisis but gave no help to pension funds. The resulting pension underfunding is being used as a tool to increase precarity among workers in the US.

ESG is increasingly seen as the “nice” arm of American financial capital, which is not an attractive look to the American population. ESG conferences, signatories and organizations laud practices such as “activist investing” which leads to major job losses, “alternative investments” with ridiculous fees which diminish returns, and “impact investing” which ignores the “S” and whose only impact is often upon service providers’ bottom line. Workers are not stupid and they can instinctively feel a disdain for this stance.

Youngdahl then gets to issues that Perez might well agree with, that ESG oriented investors have tried making the claim that ESG is a win/win, when that isn’t necessarily so, and relying on that notion makes it easy to go after ESG on its exaggerated claims of merit:

…when “values” are sacrificed for “value,” ESG is just an investing style like any other. Then, ESG becomes only a marketing moniker and the PRI membership becomes a “Good Housekeeping Seal of Approval.”

The “business case” argument, which dominates today, is a very slender reed on which to support ESG activity. Frankly, as much as we would like, the evidence is not that strong. The result is that ESG does not provide enough intellectual support on which to consider and analyze hard issues that exist in ethical investing today, for investors large and small. For example, given rising oil prices and the extraordinary prevalence of fracking, neither divestment nor engagement in the oil and gas sectors is helpful to fund returns today.

Maybe in 40 years this activity will look good, but most present pensioners will be dead by then. Without giving workers and beneficiaries a coherent narrative as to why investors should not fund planet killing activities, not just the report from another swanky conference at a $1,000-a- night New York hotel, they are ripe to fall for the propaganda of the worst forms of investing.

ESG has a story to tell. It is a story of the holistic support and care of retirees. It is a story that takes the community and workers into account, not just the shareholder value. It is a story of investments that provide a decent return without producing inequality or killing jobs. It is a story of the use of savings to combat environmental problems, not exacerbate them.

And, it is a story of not investing in a way that funds the coffers of the 1% who electorally launder their profits through the American political system.

In fact, the number of junkets that board members take, particularly overseas ones, stuck in both Brown’s and Perez’s craw as unjustified given CalPERS’s underfunding. The fact that some of those are ESG related, when flying, particularly business class, has a big carbon footprint, screams hypocrisy.

Youngdahl argued ESG needs to reform itself, but the movement may be too late:

Workers and beneficiaries can become the main advocates for ESG. But unless a major change comes in how today’s ESG is conceived and practiced it is quite possible that we have seen its high water mark. Without such change, it will take a long time to recover.

Yes, an ESG movement that never considered preserving jobs or protecting worker rights looks an awful lot like one that defines “social” interest along conveniently narrow lines. If Perez’s win causes some long-overdue soul searching about whose interests are really served by ESG investing, that would be an unexpected plus.

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  1. Tom Stone

    “Sole Searching” is such a lovely straight line.
    I will be good, I will be good, I will be good…

    1. chewitup

      Checking the bottom of their shoes would be a great idea considering all the BS over at CALPERS.

  2. JTMcPhee

    “Recall that when CalPERS started becoming an activist investor, in the 1990s, it focused on governance, and that was a win/win. Focusing on well run companies and forcing reforms in ones that weren’t was a profitable approach and also boosted CalPERS’ influence and image.”

    Is that not the heart of what is totally screwed up about “finance” and neoliberal so-called “capitalism?” Why are the CalPERS rulers to be congratulated and praised for “boosting their influence and image” by driving short-term corporate “governance” that leads to stuff like offshoring and asset stripping and ballooning of executive pay and participation in regulatory capture and other tricks to externalize public damages and other looting scams?

    Let alone using the pension contributions of millions to let the staff and board and their playmates play the games that have been so assiduously documented by the championship team of reporters here at NC… Great to point out who has been doing what, in violation of their own rules and enabling laws (which they can always “legally” change to serve their looting interests.) But to offer “credit,” even with a little snippet like the above, that implies that using the pile of wealth that these poseurs squat upon to allegedly act to force “good governance” in the form of “profitability” and presumably “continued [unsustainable] growth” on the corps whose stock prices (with all that implies and entails, including the value of executive options)? Seems a little inconsistent with other important messaging…

    I’m sure I am missing something important to a correct understanding of all of this. Must be my Old Liberal understanding of the word “governance,” and the foolish personal assumption of the assumed adjective “good” in front of a totally neutral noun…

    1. Yves Smith Post author

      “Governance” is not about offshoring. That is corporate strategy which is not part of ESG. And “governance” is not short term.

      “Governance” is about opposing things like the CEO having cronies on his board, a corporate art collection that is really the CEO’s personal collection, paying himself too much, buying stupid companies to hide bad performance (like Carly Fiorina buying DEC to extend her sell-by date as CEO by 2 years).

      I hate boxing you about the ears on this, since you normally make good comments. Please don’t go off on rants when you haven’t done your homework. Even crapified Google is pretty good on topics like this.

        1. Yves Smith Post author

          First, as we have regularly written, the idea that companies exist to maximize shareholder value is an idea made up by economists and you can trace it to an 1970 op ed by Milton Friedman. It is not a legal duty (and governance is about the formal obligations of managers and the board). See this as one of many debunkings you can find:


          Second, as we have also written, companies that focus on maximizing shareholder value perform less well than those who pursue lofter, broader goals.

        1. Yves Smith Post author

          Aiee, you are correct. I wrote in haste. As I recheck, DEC was seen as a big issue in the acquisition, due to the high overlap of its products with both companies. As least one story suggests that phasing out DEC products was a bad approach to this problem.

  3. Another Scott

    Doesn’t the standard PE business model, particularly the part about cutting labor costs, preclude them from being included in an ESG investment?

    1. Yves Smith Post author

      Yes, I didn’t mention that and should have, that it is pretty hypocritical to pretend you are an ESG good guy when you invest in PE and have no control over what the managers do with your money. CalSTRS divested the gun stocks it owned and made a huge stink and got itself out of its holdings in Remington via a Cerberus fund. The latter was a good move, as Remington later went bankrupt (https://www.sacbee.com/opinion/opn-columns-blogs/dan-morain/article200813194.html). But that sort of thing is so exceptional as to prove the rule.

      And of course, on top of the governance of portfolio companies being completely opaque, PE cuts headcount more aggressively than public companies do, and PE funds have been significant investors in all sorts of fossil fuel plays, for starters.

  4. SD

    Ironic, perhaps, that CalPERS’ foregrounding of the ESG benefits of its PE investments overlaps so neatly with its own terrible governance. Institutional neurosis and projection.

  5. flora

    “Mathur also ignores what ought to be a deal killer: any board of a new entity will be responsible under the law to that entity, not to CalPERS. ”

    Does that mean CalPERS is outsourcing its fiduciary responsibility? Or eliminating its fiduciary responsibility for investments of CalPERS funds made by said entity?

    Thanks for your continued reporting on CalPERS, pensions, and PE.

    1. David in Santa Cruz

      This lazy illusion of “outsourcing fiduciary responsibilities” being foisted by staff on their useful idiots on the CalPERS Board is precisely what many members and beneficiaries are concerned about.

      This is absolutely illegal, and potentially subjects Board members to personal liability for losses — and the proposed outside contractors to personal liability for fraud. Article XVI sec 17 of the California constitution holds Board members responsible as fiduciaries, a duty which may not be delegated.

      Current Board members appear to like perks such as Business Class travel, but they want to shirk the personal accountability that comes with them.

  6. The Rev Kev

    Does anybody else detect a shift in CaLPERS? What I mean is that they no longer seem have the initiative anymore but are more and more reacting to events as they occur. If anything, I am starting to read a hesitancy into their actions which I think that the surprise victory of Perez has intensified. Remember, this was after a string of bad news events for CaLPERS such as getting busted for stealing & publishing copyrighted material, the ejection of Charles Asubonten, the humiliation of Marie Frost for lying her way into the job and others.
    As an example, they were willing to go full bore with that asinine private equity scheme and ignore any protests or calls for accountability but now with more and more people and agencies watching their actions, this may possibly be deep-sixed now. The trouble is that once you lose the initiate, it is damned hard to get it back again and I do not think that the present board are up to the job. I wonder if the problems that CaLPERS has could possibly become part of the dialogue in the mid-terms in California or not? The clock is ticking on that one.

  7. Poguetry

    I have a feeling that the demographics of the electorate played a large part in Perez’s victory as well. Turnout was extremely low among public agency members, and Perez enjoyed near universal support of law enforcement groups. I speculate that CalPERS members in law enforcement are much more motivated to vote than their civilian counterparts. There seems to be growing consternation among LEOs with the direction the state has taken in terms of criminal justice reform, which many feel has made their jobs more difficult.

    1. Yves Smith Post author

      The turnout in fact was almost identical to the last time Mathur ran.

      Perez did get a ton of endorsements from local police unions, but the statewide (parent) didn’t endorse him, and only one firefighters locals endorsed Perez. The state fighters org endorsed Mathur. So it was more complicated than you suggest.

  8. Retired

    You’re right, there is nothing urgent about the PE outsourcing program, IMO it should be scrapped.

    Regarding ESG, Priya took that as a personal rally cry and staff is spending way too much time on it. It should be scaled back as Mr. Perez proposed during his campaign.

  9. ChrisPacific

    In my opinion, the opportunity for CalPERS in the ESG space is to become a champion of responsible corporate governance, ideally by kicking PE to the kerb, taking direct governance roles in targeted companies, and building value the old fashioned way by steering companies to be healthy, growing and profitable and then watching that flow through to the stock price.

    My sense is that this is a badly needed function in the market right now, with the general perception of skilled investing as being a superior player of the Stock Market Slots game and the rise of dumb money through index funds and other passively (or at least not actively) managed intermediaries. CalPERS is sufficiently influential, and has sufficient money under management, that it has the resources to do this well if it made a strategic choice to do so (albeit it would be a significant change from what they do now and probably require a pretty major shake-up). It would also give them the opportunity to create positive feedback loops that indirectly help their beneficiaries. Because of its geographical focus and connections, companies based in California or with a strong presence there would make a natural area of specialty, and my fictional version of CalPERS would be in a strong position to add value. That in turn would create economic growth and employment opportunities in the areas where their beneficiaries live and work. It would certainly have a much more beneficial impact in the long term than turning the whole thing over to big financial companies and hoping they will deign to share enough of a cut of the resultant looting to make it worthwhile.

    That would be my strategy if I were the CEO, although I won’t be any time soon, as I am poorly connected and I actually completed all the degrees that are on my resume.

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