CalPERS staff, board members lock horns over external manager selection

The annual changes to the investment committee's delegation changed or eliminated several clauses which board members and stakeholders saw as transferring power from the board to staff.

California Public Employees’ Retirement System backed off proposed changes to its investment committee’s duties, including the committee’s role in external manager selection, after blowback from board members and stakeholders.

Critics saw the changes as relinquishing too much authority from the board to investment staff on setting the fund’s asset allocation, choosing external managers and building its portfolio.

“I just think that the board needs to not abandon its fiduciary duty and not cede more of its authority to the staff,” board member Margaret Brown told Buyouts Monday.

The investment committee considered the change Monday. When Director of Board Governance and Strategy Anne Simpson presented the item, she stressed it would not change the board’s “delegated power.”

“The whole purpose of this new draft is to bring clarity about roles and responsibilities,” she said, according to a rush transcript of the meeting. “It reflects current practice.”

Nevertheless, the proposed changes sparked concern from some committee members about an actual or at least perceived shifting of power from the board to staff.

Substantial changes

Critics say the changes would prevent the committee from performing its traditional role of establishing the fund’s strategic asset allocation process, asset class strategic plans and portfolio construction, and choosing external managers.

CalPERS staff say the document had been edited to more accurately reflect how the work of the staff and the committee, respectively, is actually done.

One line saying the committee should “conduct” the strategic asset allocation was edited to say it should simply “approve” it. Two other lines, one saying the committee should directly “approve and oversee” strategic plans and portfolio construction and another saying it should “oversee” the selection of external managers, were deleted outright.

In comments during the meeting, Brown brought up 2017 news reports that CalPERS had been considering outsourcing its private equity program to BlackRock as a reason why deleting the last clause would be problematic.

“We don’t get the option of selecting or looking at the process that management used to bring us these investment partners and management,” she said. “And this could be with respect to private equity, real estate or anything else.”

Last year, the board decided to drop four members, including Brown, from the investment committee. But current members also had concerns.

California State Controller Betty Yee said it was likely stakeholders “would think that we are essentially reducing our oversight responsibility with some of the deletions. True/not true, whatever, but that’s the appearance.” Committee member Stacie Olivares said a market downturn was “probably not the best time” to make these kinds of changes.

Board President Henry Jones then suggested pulling the proposal and working on it more with staff and then approving the new draft at a later meeting, which was approved.

Balance of power

In an interview with Buyouts Tuesday, Simpson re-iterated that the changes were intended to describe how processes actually work in practice.

“The board has plenary authority granted under the California constitution and all of the delegations, policies and processes are there to make sure the board can give the proper oversight,” she said. “They’re the fiduciary. So whatever is drafted to help is intended to make the different roles and responsibilities within the governance structure more clear to understand.”

JJ Jelincic, a former CalPERS board member and longtime investment officer, strongly disagreed. “Read that [proposal] and tell me it doesn’t change anything,” he told Buyouts.

Jelincic is a longtime critic of board policy and last year challenged Jones for his seat, as Buyouts reported, but he was not alone in voicing his concerns.

“A plain reading of the changes to the delegation policy does give to the staff authority and duties that currently and should reside with the board,” Brown told Buyouts via email.

Others expressed disapproval of the proposal in emails read at the meeting, which was conducted via teleconference due to the coronavirus crisis. The emails were overwhelmingly against the measure.

Simpson said the potential changes would be “front of mind” as she, Jones and Yee worked on the new draft.

The issue has come up as CalPERS’s private equity program appears to be at an impasse. A long-promised plan to create two house-owned funds run by external managers has seen no movement in over a year, as Buyouts reported.

Private equity returns in calendar 2019 were the slowest in 10 years despite the fund committing its most capital since 2008.

Action Item: Read agenda item 7b here, the proposed changes to the committee delegation here, and a letter in support from investment consultant Wilshire Associates here.