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.