CalPERS undertakes large-scale board reforms

CalPERS is undertaking sweeping changes to the way its board operates as part of a package of governance reforms to be rolled out in the coming year.

The comprehensive governance project, led by board president Rob Feckner (pictured), includes a clearer delineation between the role of executive staff and the board in day-to-day management; an overhaul of reporting to the board; and a closer link between performance and compensation.

The reforms were instigated in August and the fund has been working with Funston Advisory Services, which conducted a detailed study this year on the fund’s governance practices.

The report was completed in September and contains several initiatives already agreed to by the CalPERS board designed to: “further strengthen the accountability, efficiency, transparency and ethics at the nation’s largest public pension fund”.

The changes strengthens the position of the chief executive and chief investment officer, with the number of senior staff reporting directly to the board halved to just these two executives.

The chief investment officer retains investment autonomy and authority to hire, fire and decide the compensation of investment staff.

Staff compensation processes will be streamlined, with the board focusing on the whether staff are meeting agreed benchmarks and objectives of the fund.

“The board will evaluate direct report performance and compensation based on the agreed-upon strategy, performance outcomes and metrics, not just activities,” the Funston report says.

In addition, executives to the level of senior portfolio managers will be required to certify annually in writing that they have been free from undue influence from “individual board member, executive or third party”.

The governance reforms will also see some crucial investment decisions made behind closed doors.

The board and/or its committees will establish closed sessions where it will meet selected executives who report regularly to the board, or to make significant investment decisions.

The board will develop a “confidentiality policy” that applies to what the report describes as “personnel matters, contract negotiations and sensitive investment information”.

Disciplinary action will be taken against staff, board members or external parties who breach the policy.

Along with these changes, the CalPERS board will also undergo a more rigorous assessment of its performance. This will include self-assessment and assessment by an independent third party. The assessment will also take into account evaluation from staff.

The reform process has also formalised the different roles of the executive team and the board.

“The board will continue to further improve the effectiveness and efficiency of its governance processes by increasing their focus on important strategic issues and reducing the number and length of committee meetings and the amount of time devoted to board matters,” the report says.

“This would help minimize unnecessary board involvement in operational matters.”

The committee structure of the board has been changed, with a specific governance committee charged with managing the ongoing reform process.

The fund has also consolidated the various responsibilities of the benefits and program administration committee into other committees, cutting the number of committees by one.

The new committee structure will take effect at the beginning of 2012.

The board will also undertake an annual report into its effectiveness and performance, as well as undertake a more focused self-development program.

The program has also laid out a number of processes outlined to improve the formulation and direction of the agenda items for committees and the board.

This will cover how the board is kept appraised of escalating issues, as well as streamline how committees and the board interact.