Crooked Conflict of Interest: CalPERS Board Member Lisa Middleton Pushed Radical Changes to Board Schedule to Solve Her Personal Schedule Conflict

CalPERS board member Lisa Middleton engaged in blatant violation of ethics by devising and actively promoting radical changes in the board’s meeting schedule and voting for them in a Tuesday Board Governance Committee meeting when she should have recused herself due to a clear conflict of interest.

The entire process of pushing through the schedule change, which was approved in the Board Governance Committee on Tuesday and is set for a vote of the full Board of Administration, was corrupt to the core. Lisa Middleton was one of an only two member of the Board Governance subcommittee (in CalPERS’ bafflegab, “Workstream #3”) along with David Miller, that recommended the radical board schedule changes to the Board Governance Committee.

As we’ll detail below, Middleton also sits on the Palm Springs City Council, and its normal meeting schedule conflicts with the regular CalPERS Wednesday half-day meetings. It should come as no surprise that the changes that Middleton’s subcommittee recommended and that Middleton again pushed for and voted for in the full committee on Tuesday made her schedule conflict go poof.

Middleton never should have sat on this subcommittee. She should have declined the invitation to serve on it and should also have recused herself from any discussion of the schedule change and the vote, since she had a clear vested interest.

As we’ll discuss shortly, Middleton not only dishonestly failed to disclose her conflict and recuse herself from any decision that would benefit her personally, but she doubled down with a lie of omission, failed to answer a direct question from a fellow board member about scheduling conflicts. Middleton’s brazenness is astonishing, since a simple web search makes her scheduling dilemma obvious.

As a result of Middleton’s dishonesty, the subcommittee recommendation and the Board Governance vote in favor of it are procedurally illegitimate and need to be voided. If CalPERS still wants to try to push for schedule changes, it need to designate a new subcommittee that is free of personal conflicts and can properly represent beneficiary interests.

Middleton failed to disclose a conflict which insiders believe drove her support of the far-reaching and damaging changes to CalPERS’ board schedule. That included reducing the number of meetings of the critically important Investment Committee from nine to six a year as well as reducing its size and turning it into a subcommittee.

Middleton has an obvious and easily verifiable scheduling conflict, which makes the brazenness of her conduct even more striking. In addition to sitting on the CalPERS board, Middleton is also a member of the Palm Springs City Council. Its normal mid-month meeting conflicts with the Wednesday CalPERS half-day meeting of the critically important Board of Administration.

As a result, Middleton has missed Wednesday half-day meetings of the CalPERS board when they conflict with the Palm Spring City Council meeting schedule. She’s only been on the board starting in May, yet she’s missed Wednesday sessions from half the board meeting since she joined.1 Keep in mind that Middleton was appointed in the local government representative seat; she could not resign from the Palm Springs City Council even if she wanted to and properly retain the CalPERS board seat.

It was odd to see Middleton advocate aggressively at the July offsite and at the Tuesday Board Governance Committee for reduced board meetings when she ought to know better.

Palm Springs is a city of 48,000 with a city budget of $128 million. The CalPERS operating budget is $1.7 billion, more than ten times large, and that does not allow for the cost of outside managers, particularly private equity managers, which would easily double the cost of managing CalPERS’ funds. The board remains ultimately accountable for staff’s choice of managers.2 It is preposterous to think that the much larger and more complex CalPERS needs less oversight than Palm Springs, particularly in light of CalPERS underfunding and its spate of scandals under CEO Marcie Frost.

But this all makes sense if you’d listened carefully and looked at the Palm Springs City Council calendar. Middleton was specifically pushing for a two day meeting schedule, which would solve her schedule problem.

What makes Middleton’s deviousness even more appalling is, as you can see, that the Palm Springs City Council regularly skips some monthly meetings and not infrequently pushes its mid-month meetings back a week.

But Middleton apparently sees fit to run roughshod over 1.9 million CalPERS beneficiaries and the California taxpayers that backstop them out of her sense of personal importance.

And “deviousness” is no exaggeration. On Tuesday, board member Margaret Brown specifically asked if any members of the Board Governance Committee had a Wednesday scheduling conflict. Rather than be truthful, Middleton said nothing.

The idea that CalPERS needs less rather than more supervision is patently false, as we explained long form yesterday. One of the reasons that public bodies need to meet more frequently than private boards is that they are required to deliberate in public to allow for interested parties to have input and provide for transparency and accountability. As we wrote:

CalPERS is not a corporate board, which makes comparisons to corporate board meeting schedules misguided. Over the years, numerous supposed “governance experts” have told the CalPERS board that they should model their behavior on that of large company corporate boards.

The irony of this advice, of course, is that CalPERS first made a name for itself as a financial actor in corporate America by criticizing many corporate boards for being asleep at the switch. The CalPERS board long pushed back at this advice, based on clear distinctions between corporate boards and itself, but is now acquiescing.

The most significant difference lies in the fact that, as a government body, CalPERS is prohibited by law from making decisions that involve the board in any kind of “offline” fashion. In other words, in a corporate setting, the CEO might send out an email to the board saying, “I’m planning to make a small acquisition. Unless anyone raises a concern, I’m going to proceed.” In the private sector, this is a completely kosher governance approach. However, for purposes of a public body, California law recognizes it as a “serial meeting,” which is illegal. This is why city councils and school boards meet often as frequently as weekly. They understand that they must, by law, convene as a body in order to even discuss or deliberate about issues, even if they take no action.

Middleton’s dishonesty is appalling but no surprise. She fits right in with the CalPERS culture of casual lying, even if she can rationalize a lie of omission as a lesser sin.

Middleton should have turned down the subcommittee invitation and recused herself from the Board Governance vote on Tuesday. CalPERS staff, which has its own well-established anti-transparency agenda, has leveraged the pet personal needs of a single board member to push through the board ceding yet more oversight and therefore power to staff.

As a result of Middleton’s self-interested action, CalPERS needs to void the Tuesday vote and reboot the process of reconsidering the board’s schedule.

If Middleton does not admit to her conflict and at a bare minimum rescue herself from the full Board of Administration vote tomorrow, I call on all California readers to write Gavin Newsom to demand that he ask Middleton to resign. Even though Middleton has a four-year appointment, no one who wants to have a future in the Democratic Party in California would defy a request of a governor.


1 Middleton was “excused” from the Wednesday meeting for May board meetings, on May 15, and from the supposedly very important closed session on June 19 when Lily Becker of Orrick presented the findings of her media investigation.

2 CalPERS has roughly $350 billion under management. Its current private equity allocation is 8%. CalPERS has confirmed Oxford professor Ludovic Phalippou’s estimate that the annual cost of investing in private equity funds is 7%. That takes you to an additional $2 billion in investment cost even before allowing for the fees and expenses of other outside managers.

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  1. PlutoniumKun

    Its a long time ago now I thought ‘surely this is the last straw, no organisation can be allowed to get away with this’. I thought Yves revelations about Frosts dishonesty must surely blow the whole thing up. But it seems to go from bad to worse, and yet still this isn’t a huge story in California? I can well understand how a major organisation can turn so rotten – I just can’t understand how it can go so rotten in public while faced with such apparent disinterest from the major media and political establishment (after all, they have to pick up the pieces if it all falls apart).

    1. German Guy

      To amplify on your puzzlement, the incumbents have lost the last two elections for seats elected from the beneficiaries. The third incumbent election is ongoing now, and Henry Jones, the incumbent, is heavily favored to lose after 10 years on the board.

      Conventional theories of political science say this shouldn’t happen—elected officials are supposed to prioritize their own survival. But that is clearly not happening. The elected board members seem to be in denial about the idea that the beneficiaries, the people with the biggest stake in CalPERS, who are therefore paying the closest attention, are really unhappy with what they see.

      We’ll see if Henry Jones’ defeat, which I pray happens, starts to shake up the surviving members. They live so deeply in an alternate reality that I doubt it.

      David Miller will be next—he’s a first term incumbent who is up for re-election in 2021. He was openly critical of CalPERS and the board for many years before joining it, but fell in line within a couple of months. He voted yesterday to reduce the number of board meetings and to exclude some of his colleagues from the investment committee. Recent history suggests that almost any serious challenger will defeat him. But, again, he seems indifferent to that likelihood.

    2. Lambert Strether

      > I just can’t understand how it can go so rotten in public

      California does not, contrary to its image, have clean government and the oligarchy that rules it does not care about the rule of law (CalPERS, Uber regulatory arbitrage, Facebook fraud, PG&E, sanctuary cities — a form of nullification a la John C. Calhoun — etc.)

      Think of it this way. California is the fifth largest economy in the world and this is how its pension system is run. Neoliberalism is bad, but can you imagine that a civil service department being run by such clueless and malevolent/indifferent mediocrities in the UK, France, or Germany? Even the Tories are better!

      1. Inode_buddha

        “… can you imagine that a civil service department being run by such clueless and malevolent/indifferent mediocrities in the UK, France, or Germany? Even the Tories are better!”

        Yes, I can quite easily imagine it. It ha happened in living memory. Humans are not magically more pure, or whatever, just because they are in the EU. Every man-made system is susceptible to abuse of power, with more or less success. And that is exactly what happens — the only real difference is the scale and the openness that we practice it on.

        1. Anon

          Well, it’s not the “culture” of California. It’s a personal culture of impunity that a certain amount of power brings to different people (many of them attracted to “government”). California state, county, and municipal government is a “huge” agglomeration of people; some skilled, some not-so-much (Marcie). I would imagine the many beneficiaries of CalPERS who are working don’t give it any more of their time than they do their local government; even when their retirement depends on it.

          Yves, is doing Californians an enormous favor. Now, go send those emails to Governor Newsom!

    3. notabanker

      It’s not just California, it’s everywhere. The US is a monster banana republic. The blatant disregard for law, the constitution and any sense of morals is completely gone. It’s all about how to squeeze another dollar out of the next guy, and if you can get away with it, go for it.

  2. RalphR

    Lisa Middleton needs to wake up and smell the coffee. She may be naive enough to think she will hold up well under a letter writing campaign and other scrutiny from NC. The former Treasurer John Chiang sponsored a private equity bill to tamp down the criticism he was getting from NC readers in California while he was on the CalPERS board.

  3. inode_buddha

    Crap like this is the reason why I will never trust government, or big business. Cali is *not* an exception in its crookedness.

    1. Yves Smith Post author

      I beg to differ. Organizations are organizations. The financial services would be vastly more crooked if it weren’t for regulations.

      I have dealt with some very competent and very helpful agencies, such as the New York Department of Financial Services, which among other things, beats up on health insures. Australia had many excellent government bodies, at least when I was there (2002-2004), such as its Therapeutic Goods Administration and CSIRO. And Sydney had great public transportation. Of course, with the march of neoliberalism, I am sure many things have become crapified.

      1. inode_buddha

        Very likely my views are colored by the fact that I was born and raised in NY, and I am well into my 50’s now. I have a feeling we’re just going to have to differ on that one, based on my own lived experience. The sole exception maybe the board of the local library.

  4. vlade

    Two salient points here:
    – Middleton, if accepting the board duty at CalPERS accepted WIDER responsitilites than she has at City Council. She now has responsibility not to ~50k citizens of Palm Springs, but to >1m beneficiaries. So, if there is a preference to be made, it’d be CalPERS, if she’s serious about her duties there (now, here’s an arguement how can someone busy with some duties do a good job at super-large institution like CalPERS, but that’s a different story). PS has to wait.
    – CalPERS board, as Yves says, is NOT a corporate board. It is really a government oversight agency for a public function. Any and all attempts to corporatise it should be resisted

    1. tegnost

      Serial cynic here…The roughly 50k citizens of palm springs likely have more dollars that the million beneficiaries, so if a dollar is a vote then she’s serious about her duty to fleece the beneficiaries (after all they are just workers and everyone knows how lazy workers are…) for the benefit of the citizens of palm springs…

      1. vlade

        If CalPers defaults on its pension benefits, the 50k Palm Springs citizens will be on the hook via their state taxes. Surely, a good reason to spend a bit time to make sure it’s not going to happen?

  5. The Rev Kev

    If Lisa Middleton does not want to be bothered making the 500 mile trip between Sacramento and Palm Springs then maybe she should not have taken the job in the first place. If you can’t do the job, then you shouldn’t be doing it.

  6. Chris Tobe

    As a former Trustee I am trying to figure who really is running this show. In my experience, Most trustees are puppets of someone ie Governor, Treasurer, Speaker of House or Senate or a union. Who the Chair of the Board strings connect to is the key.

    For example if the Governor controls the Chair of the pension board, he will designate his chief of staff or key fundraising aide to not only run the chair but perhaps go directly to the Ex.Dir or CIO

    With Citizens United the private equity firms and hedge funds have almost unlimited ways to shuffle secret $$$ to California based super pacs

  7. Synoia

    There was a crooked board, and had crooked rules,
    It hired crocked people all the crocked time;
    Buying crooked investments, by a crocked CEO,
    And they all met together in a very crooked board.

  8. EoH

    Turning the Investment “Committee” into a subcomittee and cutting its meetings by a third would suggest the board wants to hide something. It seems slightly questionable for an organization whose purpose evolves around large-scale longterm investing.

    It’s almost as if this board is trying to perform a Sgt. Schultz. It wants to know nussink, or little, about its investments. It thinks it does its job by simply trusting that staff will do theirs. All evidence to the contrary, it thinks that will keep board members out of the hoosegow. Good luck with that.

  9. Kirby shiggs

    Damn! It’s so insane that people care more about their own issues then that of the people who they are supposed to be working for! It’s shameful and sad

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