The California Public Employees Retirement System, CalPERS, is set for a root and branch reform of its governance structure that could cut the number of investment committee meetings to six from today’s 13, and reduce the size of the investment committee from 13 to a smaller, sub-team of nine.
The proposed changes, which also include reducing the annual number of offsites from two to one, were discussed at length during the pension fund’s August governance committee meeting and follows the completion of the $350 billion pension fund’s biannual governance review.
“CalPERS needs to innovate to keep pace with the challenges we face. That’s not easy, but it’s necessary. Our board is united by our fiduciary duty to our members. They deserve the best from us, and that includes governing in the most efficient and effective way possible. I’m proud that we have taken up the challenge of improving our governance – raising the bar for ourselves – so we can perform to the very best of our ability on behalf of the nearly two million members we serve,” said board president Henry Jones in a written comment to Top1000funds.com.
The year-long review found much to praise in CalPERS current governance, singling out board members unwavering commitment, diversity and the organisation’s transparency. Yet the process, which drew on expertise from the National Association of Corporate Directors, NACD, for insight and best practice on current governance thinking, and was also informed by CalPERS’ own 13-member full board via frank conversations and confidential surveys, also revealed gaps and areas to focus.
Better clarification of board members different roles and a richer program of board education, plus a need to re-draft policies and documents in plain English to make them accessible to all and prioritise agenda items, are all suggested areas for change. The review also stressed the importance of introducing new technology and building a code of conduct and culture of respect and trust among board members to preserve the confidentiality of their deliberations.
Most crucially, however, the review highlighted the meeting and reporting burden the current system places on CalPERS already stretched investment staff.
“If we make the governance better, we expect this is going to help CalPERS improve its performance,” said Anne Simpson, director board governance and strategy at the fund, who has overseen the review process and relayed its key recommendations to the gathered board members.
“The investment office currently has a cycle of meeting reports which is distracting from their day job of focusing on performance. There is such concern to get the focus on performance when we are underfunded,” she said. The pension fund is around 70 per cent funded.
Fewer meeting would give investment staff more time in between meetings, and the investment committee more time for oversight.
“For every minute we spend here, there are hours spent by staff preparing for the work we are going to be presented with,” said board member Lisa Middleton. Every board meeting requires “time away from the regular work for Ben (Meng) and his team. None of those documents come to us without a review chain with loops and refinenment and revisions. It’s a massive amount of time and effort. I want Ben and his term focused like lasers on making that 7 per cent target or better,” she said. CalPERS posted a 6.7 per cent return in the fiscal year ending June 30, missing its 7 per cent assumed rate of return.
An argument seconded by new board member Stacie Olivares, who said in her experience most investment committee meetings are quarterly – even public boards.
“Providing information that the board needs, especially in times of economic uncertainty is challenging,” she said. “I do think it’s very critical to the performance of the CalPERS fund that the investment team be able to focus.” She noted how under the current system, three out of a typical month of 20 working days are currently spent attending board meetings. Add the prep and follow-up and it could take out an entire week, she said.
In another key change, the review findings suggest paring down the investment committee so that it is no longer a “committee of the whole” (as in the whole 13-member board) but a smaller, more expert group. The investment committee is the only CalPERS committee that all board members sit on; most other committees, such as the governance committee, have seven members.
This reduced, expert sub-committee would scrutinise investment issues in depth which would then go on for approval and discussion at full board level, strengthening due diligence in a two-step process that measured twice, and cut once.
“The concept of committees came about as a way of decentralising. Committees of the whole is almost like an oxymoron,” explained NACD’s governance consultant Cari Dominguez. “Most boards committees meet four to five times a year and I am not aware of any board having a committee of the whole as a leading practice.”
One of the challenges of a committee of the whole board is that there might be a tendency to defer to those with expertise, she said.
“Investment is the most important committee in many respects but in practical terms we don’t have an investment committee,” echoed board member David Miller, a proponent for the change. “We have a board. We need a sub-committee for all the reasons you have a sub-committee.”
Miller also suggested a different forum could lead to more constructive dialogue. CalPERS board sit on a raised crescent-shaped platform from where they scrutinize the pension fund’s staff.
However, for some board members, the prospect of fewer investment committee meetings, and a smaller committee at the fund which manages just under half its portfolio internally, was a cause for alarm.
Under the proposed new structure, reducing the investment committee of the whole to nine would result in four observers, leaving some current investment board members “second class citizens for the most important role,” said Margaret Brown, in a passionate response.
“This is a terrible idea. There is real work to be done. This board has an obligation to provide oversight. We delegate work to the staff, but we keep the authority and we have the responsibility, financial responsibility, personally, for what happens. As an observer you have no motions and no vote.”
Brown also argued that monthly investment committee meetings had served CalPERS well and that the biggest challenge for the pension fund is low staff numbers, and high staff, and asset manager, turnover.
“You’ve got the cause and effect wrong,” she told colleagues. “Monthly meetings for the investment committee have been going for ever and have never impacted our returns.”
Reducing the size of the investment committee sat uneasily with others too. Flagging that the transition could be hard, board member Betty Yee suggested that those not serving on the investment committee wouldn’t be so engaged, diminishing the “bread and butter” role of CalPERS board.
“I want to give the investment staff as much breathing room as possible, but I don’t want to be taken for granted,” she said. “Our expertise leads to richer decisions.”
Elsewhere, board member Jason Perez also argued to keep the current set up lest it “erode the authority and responsibility” the board have to its members.”
The discussions closed with the governance committee approving fewer meetings and a smaller committee.