he California Public Employees' Retirement System, perhaps the nation's most prominent champion of shareholder rights, has never suffered from an ill that plagues corporate America: a supine board, unable to thwart managers' worst instincts.Posted on 10/12/2002 11:52:55 PM PDT by JohnHuang2
he California Public Employees' Retirement System, perhaps the nation's most prominent champion of shareholder rights, has never suffered from an ill that plagues corporate America: a supine board, unable to thwart managers' worst instincts.
In fact, Calpers, as it is known, is showing signs of the opposite problem, some critics say: a board so activist, so eager to promote social change through investing, that its effectiveness as a corporate watchdog and its ability to provide for the 1.3 million public employees whose pensions it guarantees are in question.
Calpers, at $136 billion the nation's largest public pension fund, is throwing its weight behind new goals: creating jobs, rejuvenating inner cities, providing affordable housing and putting pressure on developing countries to give citizens basic freedoms.
Calpers officials say that the top priority continues to be seeking maximum returns, that the fund has not abandoned its mission of pressuring companies on behalf of investors. But outsiders say these assertions mask an important shift.
"The flavor of the board is changing," said James McRitchie, a state auditor who has run unsuccessfully several times for a seat on the Calpers board. "You're going to see a board that's increasingly tied to labor."
Driving the change is a new alignment in the fund's boardroom. Calpers trustees have far more power than directors have over companies, and now, for the first time in memory, all 13 represent either labor or the Democratic Party.
This situation, in an election year, has prompted some critics to level accusations that the fund has become politicized and is using its capital to promote like-minded entrepreneurs and to reward Democratic donors. Calpers denies that. And San Francisco's mayor, Willie Brown Jr., has caused consternation in some circles by saying he is thinking about running for board president.
There are also concerns that the board's new tilt may have prompted at least some of a recent series of high-level resignations.
Not everyone in the Calpers boardroom wholeheartedly favors investing to bring about social change. But with Gov. Gray Davis expected to win a second term, and with union advocates vying for several seats on the board, the labor movement has a clear shot at a goal it has dreamed about for years: the ability to steer huge blocks of capital toward investments favorable to labor.
"The labor folks want to control Calpers's board because that's where the money is," Mr. McRitchie said. "Unions are realizing that pension funds are a stronger tool than collective bargaining."
The unions may well be right. When investors own a large-enough stake or forge a like-minded coalition of owners, they can influence corporate policy on many issues, like capital investment, social policy and even labor relations. Union strategists say retirement-plan assets have too often been used to finance projects that ultimately hurt workers; getting a say at pension funds, they contend, would help right the balance.
"These institutions set the tone for the capital markets," said William Patterson, director of the A.F.L.-C.I.O.'s office of investment. He said the public fund most badly burned by Enron was the Florida Retirement Fund, in which none of the three board members represent employees' interests.
"If the workers had had some kind of oversight, somebody would have said, `Wait a second,' " when Enron executives began dumping their stock, Mr. Patterson said.
Not everyone views labor's involvement in such a positive light. Corporations worry, for example, that the phenomenon of unions as heavyweight investors will inevitably strengthen labor's power in collective bargaining. Some union officials think their job is to seek better benefits, not broad social change.
Some California public employees view the new mood at Calpers with alarm, too, saying their retirement nest eggs are not a suitable tool for advancing a social cause, worthy or not. And some shareholder advocates fear that the gains for organized labor at Calpers will embolden unions to push the same agenda at other public pension funds.
Richard H. Koppes, a former Calpers general counsel who for 10 years ran the fund's corporate governance program, said plan participants sometimes spotted him around Sacramento, where Calpers is based, and asked whether their pensions were safe. They are: Calpers is legally bound to pay a specified level of benefits. If it falls short, California taxpayers must make up the difference.
But Mr. Koppes, a self-proclaimed "lifelong Democrat" who favors many goals now being espoused at Calpers, still doubts that those goals square with the fund's most fundamental obligation. "The bottom line for the board has to be their fiduciary duty to the members," said Mr. Koppes, now head of the corporate governance practice at the law firm Jones, Day, Reavis & Pogue.
"But there is a challenge," he added. "There is a pull to use some of these funds for purposes other than the bottom line."
FOR more than a decade, Calpers has put its muscle behind the idea that a well-governed corporation — one with a vigorous, independent board — will reward investors more richly than one with an insider board wielding a rubber stamp. Resistant but forced to listen, the boards of giants like General Motors, Eastman Kodak, Mattel and Tyco International have responded with basic reforms.
That background makes the situation in Calpers's boardroom all the more striking. Seven of its 13 trustees are either political appointees or elected state officials.
The other six are elected to staggered four-year terms by Calpers beneficiaries and, in practice, come from public-employee unions. With 6 of the 13 votes, labor has one of its biggest boardroom contingents anywhere.
This arrangement was intended to ensure that all interests are represented: employees and retirees on one side of the table, taxpayers and state fiscal authorities on the other.
When Republicans are in power in Sacramento, the interests of employees and the state — roughly the same as labor and management — are balanced and offset each other. But that dynamic has changed since Governor Davis took office in 1998 and began appointing Democrats, who have been more inclined to form alliances with the labor-backed trustees. The last Republican appointee left two years ago, when his term ended.
Also in 1998, a strong-minded Democrat, Phil Angelides, was elected state treasurer and, by law, became a Calpers trustee.
Mr. Angelides, 49, a former developer, is known in California for his participation in the New Urbanist movement, which seeks to fight urban sprawl and promote civil behavior through the use of town planning. His developments are not just developments, but attempts to promote walking, reduce reliance on cars and bring people onto front porches.
In much the same way, Mr. Angelides says California's vast pension fund capital offers an enviable chance to "mobilize the power of the capital markets for public purpose."
Specifically, he says investments by Calpers could do much "to close the chasm between the `two Californias' " — the rich and poor.
Early on, Mr. Angelides set a deadline: by the end of this year, Calpers should have 2 percent of its portfolio devoted to real estate and commercial investments in neglected communities. He also called for Calpers to begin buying California home mortgages made under a federal statute against redlining.
Asked in an interview whether investments aimed at poor communities were too risky, Mr. Angelides pointed to the enthusiasm with which Calpers and other institutional investors pumped billions into places like Indonesia and Thailand in the late 1990's — investments that in many cases soured. How, he asked, could anyone credibly say an investment in an "emerging" California community was too risky?
"Within America, and particularly in California," he said, "there is a whole set of `emerging markets' — Latino markets, Southeast Asian markets, African-American markets — where there are investment opportunities that have been untapped because of stereotypes on the part of investors." He cited research suggesting that some of the fastest income growth in Californa in recent years has been in just such markets.
Such locales can offer competitive advantages that institutional investors often overlook, he said.
SINCE Mr. Angelides began promoting these ideas, they have found favor among those union-backed trustees who agree that broader social change is an acceptable goal. Calpers has committed $3.5 billion to "underserved areas of California," including about $1.2 billion to abandoned urban neighborhoods. A venture capital fund intended to make relatively small investments in businesses in poor neighborhoods has received $475 million, programs to build housing for the elderly have received $200 million and Calpers has bought $447 million of low-income mortgages.
Calpers officials said it was too early to evaluate the success of these programs. The board, however, is considering expanding them.
At the urging of Mr. Angelides and Sean Harrigan, another trustee with a strong labor background, Calpers has also changed the way it evaluates foreign countries. In the past, it rated countries based on standard financial criteria like market regulation and trading liquidity. Now Calpers includes political factors: whether the country has basic democratic institutions, and the energy with which it has worked to eliminate torture, child labor and other human-rights abuses. Mr. Harrigan, who represents the State Personnel Board on the Calpers board, is also the international vice president and regional director of the Food and Commercial Workers Union.
These standards have caused unhappiness in countries where investments are now deemed unacceptable. Corporate governance experts have also criticized the standards, saying Calpers has a better chance of securing reforms when it remains engaged.
Another recent Calpers decision, to divest its holdings in tobacco shares, has also been controversial because the sales were completed in 2000, just before tobacco stocks began to rise.
In this election year, there have also been accusations that some of Calpers's innovations are not so much about promoting democracy as about promoting Democratic politicians.
Last spring, for example, there was a stir when Calpers made its first investment in agriculture: a $100 million commitment to Premier Pacific Vineyards, a real estate partnership that proposed to buy farmland outside California's traditional wine regions, convert it to vineyards and resell it to high-end wineries.
Calpers projected returns of at least 15 percent. But some saw a subplot: Premier Pacific's co-chief executive, Richard Wollack, also happens to be a generous donor to Governor Davis. State records show that Mr. Wollack and his company made two five-figure donations while the vineyard proposal was being evaluated by the Calpers investment staff.
The San Francisco Chronicle, which first reported Mr. Wollack's ties to Governor Davis, also reported that just a month after Calpers executed the $100 million contract, Mr. Wollack held a $2,500-a-person cocktail fund-raiser at his home, featuring Al Gore.
Was there a connection? Would Mr. Wollack's project have received the Calpers money if he had not contributed?
Mr. Wollack called the suggestions a "canard," and a Calpers spokeswoman said the vineyard investment was made strictly on its merits.
Similar questions have been raised about two larger investments, totaling $760 million, in projects proposed by Ron Burkle, a supermarket magnate and longtime Democratic activist who worked his way up from grocery clerk and has strong feelings about labor. Records show that Mr. Burkle has donated more than $600,000 to Governor Davis's campaigns, and more than $50,000 to Mr. Angelides, who is also running for re-election.
Most of the Calpers money went to Mr. Burkle's Yucaipa America Funds, which pool union pension-fund money for investments in industries and companies that "maintain strong corporate governance practices and are sensitive to the interests of their employees," according to a Calpers statement.
Mr. Angelides scoffed at suggestions that Calpers had made the investments because Mr. Burkle was a backer of the Democratic Party. He said Mr. Burkle's proposal was evaluated and selected by the Calpers investment staff before the board voted. "They did it in a professional way," he said.
But the denials have not stopped the California Republican Party from trying to use Calpers in its overall campaign strategy of attacking Governor Davis's fund-raising.
And Calpers has been somewhat vulnerable, because the questions about its new investment objectives come in the wake of several nonpartisan scandals involving board members. In 1998, for example, several trustees were revealed to be taking expense-paid trips and other gifts from people trying to do business with the fund. Even earlier, questions were raised about the practice of ex-officio trustees — who are also elected officials — soliciting campaign contributions from money managers and others who could benefit from their votes.
Attempts to tighten the fund's conflict-of-interest rules have failed in recent years, and in some cases provoked clashes, as when the state controller, Kathleen Connell, sued Calpers to strike down a set of rules limiting ex officio trustees' ability to raise campaign money. She also brought suit over Calpers's staff salaries.
These conflicts may at least partly explain some recent departures. Since 2000, Calpers has lost its chief executive, deputy executive officer, general counsel, two chief investment officers and various subordinates. "It's scary," said one staff member, who spoke on the condition of anonymity. "To the extent we get headhunter calls — and everybody who deals with investments gets them — we're more open to them."
A new chief executive, Fred R. Buenrostro Jr., now the chief deputy director of California's department of personnel administration, will take charge in December.
In addition, the president of the Calpers board, William Dale Crist, an economics professor who has served for 15 years, has chosen not to run again when his term expires at the end of the year. Michael Flaherman, a Harvard-educated transportation economist whom some in the shareholder-rights movement had hoped would succeed Dr. Crist, is also stepping down at year-end.
Dr. Crist said he was retiring because he is 64 and wants to pursue other interests. Mr. Flaherman said he was not leaving because of boardroom dynamics but to seek experience in the private sector.
"We all have significant frustrations about the fishbowl element," Mr. Flaherman said, referring to the trustees' tendency to air their differences in public. "But it's really not a reason why I'm leaving."
Mr. Koppes, the former general counsel, said it would be up to Mr. Buenrostro to decide whether to promote or resist the board's current efforts to expand Calpers's influence in the world. "This is an active, policy-making board, and the risk is that it becomes too active and tries to do management's job," Mr. Koppes said. "That's going to be the big challenge for Fred: to say, `No, you cannot micromanage.' "
This has an anology with the battle over the Senate in Washington. There the issue is appointees to the Courts, here the battle over the Governor position with his power to appoint to many boards including the Calpers.
If Davis wins expect to see Willie Brown show up on the Calpers board and start out handing candy to his cronies!
We have already seen some of that with the current board!
calgov2002:
 calgov2002: for old calgov2002 articles. calgov2002: for new calgov2002 articles. Other Bump Lists at: Free Republic Bump List Register |
...to see what bad, bad things Davis has done... - CLICK HERE
The Corporate Governance Program at CalPERS is, first and foremost, the product of CalPERS Board of Administration. Acting through its Investment Committee, the CalPERS' Board introduced the first "corporate governance" initiatives (concerning "greenmail" and Phillips Petroleum) to the System. In the nearly two decades since, the Board has continued to mold the program to address emerging governance issues. Through the Board’s leadership, CalPERS staff -- lead by Chief Executive Officer James E. Burton -- implement the System’s corporate governance initiatives and become the voice for the Board.
The members of the CalPERS Board are:
Welcome to the official David Miller for CalPERS Board website.
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Wednesday, October 2, 2002
Willie Brown pursues CalPERS presidency
Board veteran, appointee also running
Greg Lucas, Sacramento Bureau Chief
©2002 San Francisco Chronicle.
Sacramento -- San Francisco Mayor Willie Brown wants to add another job to his resume: president of the board of the powerful California Public Employees Retirement System, whose $130 billion in assets make it the nation's largest pension fund.
If he convinces six of the other 12 board members to back him, Brown would be the first African American president of the CalPERS board, which has major leverage on Wall Street and throughout corporate America.
"I'm certainly looking at it," Brown said in an interview. "I represent as good a member as any to help the new members coming on next year."
Brown's move comes as CalPERS faces major changes. The stock market's fall has driven assets down from $171 billion in February 2000, when Brown was appointed by Gov. Gray Davis. Spiraling health care costs are pushing up the price of premiums for the system's 1.3 million members.
"It comes down to money. The cost of health care. The size of the portfolio.
The board's influence, obviously, is tied directly to how much money they have and who the president is definitely impacts that," said Tom Branan, publisher of the Public Retirement Journal.
By Brown's count, the relatively stable board will have four new members next year. Two of the departing members include the board's president and the chair of the powerful investment committee that decides where CalPERS places its assets.
The system's longtime executive officer and his top deputy have left. So has the board's general counsel.
"It's a lot of change to occur at a very challenging time," said Sean Harrigan, another Davis appointee to the board who wants to be president.
Six of the board's 13 members are elected by the groups served by CalPERS: state workers, nonteaching school employees and retirees, among others.
Those members appear united behind Bob Carlson, a 31-year veteran of the board and its vice president.
"Bob and I can both count, and it's fair to say we're actively campaigning for that position," Harrigan said.
About Brown running, Harrigan said, "I've heard the rumor, but you hear a lot of rumors about the mayor."
As vice president, Carlson becomes acting president when Bill Crist leaves the board in January. Election of a new president occurs at the board's February meeting.
"As long as I've been on the board, the custom is an elected member serves as president," said Carlson, who was elected by retirees to represent their interests.
Asked how he plans to outmaneuver Carlson and Harrigan to win the presidency, Brown answers with his usual confidence:
"I would hope to get every board member's vote."
The job of president is a time-consuming one. Crist's employer, California State University, is reimbursed by CalPERS for 90 percent of his salary.
There is one potential problem in Brown's plan. His term on the board expires Jan. 15, 2003, although he can continue to serve until Davis replaces him. Davis can also reappoint him.
"Can you imagine the governor appointing anyone else to this position?" Brown said.
Brown insists he will stay a member of the board until his mayoral term expires in January 2004.
That means, at best, he could only serve as president for one year.
"I'd love to help the new board get its sea legs, help those persons who will be there for the long term," Brown said. "They can select their long-term leader before I exit in 2004."
Brown said his desire to be president of the CalPERS board in no way changes his stated plan to run for John Burton's Senate seat in 2004 when Burton is forced out by term limits.
Although he still talks about running for the Senate, Brown has become increasingly tepid about the prospect. He has expressed interest in being the Bay Area's roving goodwill ambassador, if it succeeds in landing the Olympics in 2012.
He also has said he would enjoy serving as a University of California regent.
Ironically, Brown represents local government employees -- about one-third of CalPERS members -- but presides over a city that has its own retirement system. Only about 2,000 of the city's employees are members of CalPERS.
E-mail the writer at glucas@sfchronicle.com.
©2002 San Francisco Chronicle.
Business people used to support conservatives and Republicans but now have abandoned the free enterprise system in favor of buying indulgences from Demonicrats.
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