Pulitzer Prize winner Mike Hiltzik, the most prominent business commentator in California, roused himself to engage in an extended spanking of the CalPERS board for “acting like a group of kindergarteners” in harassing board member Margaret Brown. But the bigger sins in Hiltzik’s eyes are that the board is devoting energy to petty antics like this while the fund is in trouble, and even worse, expressly denying their legal and fiduciary duty to oversee staff.
As regular readers know, the latest contretemps is that pro-accountability board member Margaret Brown filed suit against board president Henry Jones to challenge the process that CalPERS has adopted for sanctioning board members. The targeted board member is denied the opportunity to rebut charges and appeal the decision and the legality of the action taken against them. Having one person act as prosecutor, judge, jury, and executioner is at best out of Alice Through the Looking Glass, and at worst out of gangland. It’s even more questionable given that Brown was the only board member to oppose Jones’ successful campaign for re-election. As Hiltzik also details, the substantive claims that Jones and CalPERS have made against Brown don’t hold up to scrutiny.
Over the years, Hiltzik has called out CalPERS’ many governance lapses, from demanding that long-standing board president Rob Feckner and his short-lived successor, Priya Mathur, resign over their negligent oversight during a bribery scandal, to the board’s harassment of JJ Jelincic, to its unseemly defense of resume fabricators Chief Financial Officer Charles Asubonten and CEO Marcie Frost (Asubonten was turfed out; the board continues to doggedly defend the visibly-her-head Frost and bestow lavish pay raises on her).1 So this latest sorry episode is all too familiar.
Hiltzik backs Brown’s claims that Jones’ actions against her amount to retaliation. Hiltzik describes recent incidents where Brown has bucked the cozy, staff-toadying majority, including opposing repeated raises for CEO Marcie Frost’s pay, which has nearly doubled since she arrived in 2016,2 Brown calling out Chief Investment Officer Ben Meng for lying to the board and beneficiaries about having exited tail risk hedges right before they would have produced a $1 billion payoff, and opposing Meng’s plans to load up on risk, despite widespread commentary by top pros about pervasive nosebleed valuations, in a desperate effort to hit unrealistic return targets.
Hiltzik further points out that the claim that Brown’s use the Twitter handle @calpersmargaret was illegal is flat out false:
CalPERS says the board took action only after it warned Brown several times that her use of the fund’s name in her social media handles violated the law and its rules. Brown says she changed her handles in response to the board “cease and desist” warnings, but apparently it was never enough….
…the board seems to be taking a rather crabbed view of the sanctity of the CalPERS name. It’s true that state law prohibits individuals or companies from using the name or insignia of a government agency without authorization, but the law applies to misuse for the purposes of implying an endorsement of a “product or service,” which is not what Brown was doing.
The law also carves out an exception for anyone with an “expressed connection” with the government agency — such as, say, membership on the CalPERS board of administration?
This refutation is more than sufficient. But recall in our post, we provided more evidence that CalPERS is engaged in what Hiltzik called a “witch hunt” by only going after Brown and giving other current and former board members a free pass for conduct that is somehow uniquely heinous when Brown engages in it:
On top of that (and I have to confess I am kicking myself for not having mentioned it), CalPERS’ other basis for going after Brown was that she violated their trademark and supposedly their copyright (when single words cannot be copyrighted. Clive pointed out in comments that CalPERS’ characteristic laziness and favoritism means that is a non-starter:
I was speaking with a colleague in my TBTF’s legal department…So I asked about — what I already knew a little of — trademark infringement and copyrights….
My legal friend advised that, in order to have any solid grounds for litigation, it would need to have on an absolute basis, tackle any and every copyright infringement everywhere. It must do so both systematically (it can’t have one rule for some and another rule for others) and it must do it pro-actively (it has to show that it goes looking for transgressions). Even if it does that, there are some terms which, even though their intellectual property rights “owners” might wish otherwise, are so demonstrably part of the common vocabulary and everyday natural usage — or familiarity — that no court will rule that enforcement is possible or proportionate
Hiltzik also criticized CalPERS’ board for fiddling while its portfolio burns. He cited their sub-par performance in public and private equity, the latter a mere 1.6% in the second half of calendar 2019 versus an unduly forgiving benchmark, which still clocked in at 4.4%, and that over time, CalPERS has only been a middle of the road performer compared to its peers, even though CalPERS has unparalleled staffing and access to experts. While Hiltzik said that might be a function of CalPERS’ size, its almost-as-big Sacramento sister CalSTRS consistently bests CalPERS’ returns.
Hiltzik also gave us a generous shout-out, supporting our regular lambasting of the fund’s lapses and in particular, its appalling refusal to focus solely on beneficiary interests:
Instead of scrutinizing Meng’s omission of clearly relevant information at the March 18 meeting, board members subsequently piled on Brown. At the April 20 meeting of the board’s investment committee, members excoriated Brown by name for allegedly taking her criticism to the public — having “coerced and helped other people get with… misinformation,” in the words of investment Committee Chair Theresa Taylor.
“I think it’s incumbent on us to call on bad behavior when we see it,” Taylor said.
Taylor’s complaint implicitly referred to the financial blog nakedcapitalism, whose proprietor Susan Webber has expertly dogged CalPERS investment and administrative failings for years. Webber, a financial analyst who writes under the name Yves Smith, says Brown wasn’t the source of her reporting on Meng’s management of the hedge.
What the blowup underscored was the board’s weird misconception of its own responsibilities. At the April 20 meeting, Taylor remarked that “the board and staff… works as a team.”
As Webber observes, that’s absurd. The board exists to oversee the staff’s work, not to play footsie with its employees. “In fact,” Webber correctly states, “the board’s sole legal duty is to the beneficiaries.” Sometimes that will involve calling out bad behavior by the staff when it sees it — such as obscuring the truth about a hedging strategy.
Need we also point out that Taylor lied when she tried to smear Brown for peddling misinformation? It wan’t simply that Brown wasn’t the source, but even if she had been, the story on the botched hedge was true (and first reported by Bloomberg).
As much as it is important to CalPERS beneficiaries and California taxpayers for Hiltzik to call out CalPERS’ continuing governance atrocities, it was still unfortunate to see him feel compelled to concede a CalPERS whinge about Brown, that she’s “brash” or as McKinsey would say of every woman up for partner in my day, that she has a style problem.
To revert to Hiltzik’s kindergarten metaphor, depicting Brown as the one behaviorally out of line is like coming on the scene after a child has been repeatedly bullied to see the victim finally stand up, and ignore the preceding pummeling.
For instance, in her second board meeting, Brown attempted to raise a point of order. Roberts Rules of Order says a point of order is always in order and must be considered immediately. Instead, Henry Jones cut Brown off and Theresa Taylor turned off her microphone! This is banana republic level antics. Shortly after that, CalPERS staff illegally locked Brown out of her office, yet Brown was somehow the bad guy for publicizing that abuse in order to get it remedied.
Brown’s conduct in public meetings, as one can see in board videos, is inoffensive and professional. What has the board steamed up is her delivering on her promise, that if she can’t get problems and abuses cleared up through internal channels, she’ll go to the press. This started even before she joined the board, when she unearthed misconduct in the election process.
In the course of investigating some of the issues Brown has tried to remedy, she has sent her correspondence, where she’s set forth her case clearly. She’s inevitably either completely ignored or given what Erin Brockovich would call a “lame assed” response. This is completely improper from a governance standpoint…yet we are to believe that Brown is out of line?
The reason the board and staff can’t abide Brown is she is a classic Fat Tony of Nassim Nicholas Taleb’s The Black Swan, street-smart with a finely-tuned bullshit and fraud detector. It must drive them nuts that she so quickly sees through the nonsense they’ve bought into. The board and staff reactions are uncomfortably like cult members clinging desperately to their false but emotionally comforting beliefs and viewing anything other than rigid conformity as a threat.
In keeping with the California/Los Angeles theme, this clip from the popular crime show, NCIS Los Angles, seemed apposite. Forgive the image quality. The tow-headed agent, Marty Deeks, has gone undercover to investigate the cult, the Church of the Unlocked Mind, for having gotten members to sell military secrets.
If you’ve watched CalPERS board meetings with any frequency, it isn’t a stretch to put the board’s regular self-humiliation, in the form of saying things that are nonsensical or reveal stunning ignorance, on a par with the self-slapping in the segment above. (And for those who want to see the bad guys get their come-uppance, the denouement for that segment is here).
Needless to say, no wonder Taleb has become an ally of Brown. She’s the only sane person in the board room.
1 Hiltzik’s concern is well founded. We’ve learned that then Chief Investment Officer Mark Anson warned Feckner at least twice about the way Buenrostro was pressing Anson’s investment staff to prefer particular deals; that’s the sort of thing that should send alarm bells ringing in a well-functioning agency. Feckner instead told Anson off. Insiders believe that Anson left CalPERS for the UK fund manager Hermes due to the failure to investigate signs of high-level misconduct.
2 Recall that search firm Heidrick & Struggles handled the search and almost certainly also would have conducted a comp survey to determine what to offer candidates for the post. So there’s no justification for these egregious pay increases, particularly in light of CalPERS’ mediocre investment performance and Frost’s numerous failures as CEO. Hiltzik mentions her embarrassing support of fabulist Charles Asubonten; there’s also the protracted embarrassment of CalPERS’ incoherent, shape-shifting, and corruption-friendly “private equity new business model” which has hopefully died under its own weight. And there are other ticking time bombs set to blow on her watch, such the likely success of litigation opposing CalPERS’ aggressive and discriminatory rate increases on its long-term care policies, and “legacy assets” as an item on the closed session agenda, which suggest CalPERS has been lying about its valuations of some holdings and is trying to figure out how to get its way out of fraudulent reporting.