Much as in Washington, there are big changes at the top of the California Public Employees' Retirement System (CalPERS). In the past two weeks, the nation's largest pension fund announced the hiring of a new chief investment officer and a new chief of its influential corporate governance program.

Joseph A. Dear, the new chief investment officer, used to run the federal Occupational Safety & Health Administration (OSHA) under President Bill Clinton. He later served as chief of staff to former Washington State Governor Gary Locke and most recently headed the state's $67 billion investment board. The new senior portfolio manager for corporate governance, Anne Simpson, is a familiar name in investment advocacy circles, having run the London-based International Corporate Governance Network (ICGN). The ICGN represents the interests of institutional investors managing some $10 trillion in assets and advocates for such things as curbs on executive pay.

Both will assume their new jobs at a challenging time, to say the least. CalPERS, which provides health and retirement benefits to 1.6 million state workers, has taken a beating in the market, watching its assets fall 26%, to $176 billion, in the past six months. The fund has had some embarrassing missteps, such as a nearly $1 billion loss on a land investment. The fund has said it may have to seek additional contributions from local governments.

BusinessWeek Senior Correspondent Christopher Palmeri chatted with Dear and Simpson by telephone. Below are excerpts from the conversations.

BW: Am I ever going to have as much money in my 401(k) as I did in 1999?

Dear: I'm not a short-term forecaster. Long term, you have to be optimistic in the system we invest.

What lessons have you learned in the past year?

Dear: Risk management must improve. There are a set of well-known quantifiable tools that are useful but not sufficient. We need to have an assessment of the knowledge in the organization. In Washington State, we are about to launch a data warehouse. We're adding to our research staff and to our risk analysts.

How are you holding up personally during this crisis? Are you losing a lot of sleep?

Dear: I'm not losing sleep. I wasn't getting enough of it anyway. We spend more time on issues that used to be automatic. Portfolio rebalancing. Liquidity requirements. Risk management. I'm spending far more time meeting with beneficiaries, policymakers. Expressing confidence that we can withstand the difficulties.

Washington State was a pioneer among state pension plans investing in private equity. You're still a big believer in private equity?

Dear: Washington State first invested in private equity in 1981. In November of 2007, we increased our target allocation from 17% to 25% of the fund. The values lag the public market, so we have yet to see the full impact in our portfolios. If a private equity firm is in the top quartile, you will receive a premium above the public market return, because of their skill. Unlike most asset classes, there is strong empirical evidence of above-average returns in private equity. Our target is 4% above public markets. I've had long conversations with brilliant [private equity] investors including [KKR's] George Roberts, [Oaktree Capital's] Howard Marks, [TPG's] James Coulter and David Bonderman.

A lot of people have lost their jobs in the past few months. As someone who has changed careers several times, what advice do you have for them?

Dear: I'm not sure I'm qualified to give career advice. Investment advice is hard enough. You need to find employment you can put your head and heart into. I like challenge. I like to be tested. I like to experience growth.

What are you doing with your personal portfolio?

Dear: As a public official, my personal investments are in mutual funds, index funds, tilted toward international. I don't buy individual stocks. My son is a little concerned his college savings is overweighted in equities. But my long-range allocation, I've stayed with that. I'm intending to stay the course.

Anne, how does one get a job as corporate governance czar at CalPERS?

Simpson: You don't apply through the small ads. They called me.

What issues are you going to focus on in the next year?

Simpson: The big question in the midst of the financial meltdown is: Where were the owners? CalPERS has got an important role at the table in the reform effort. In the U.S. it is punitively expensive and fiendishly difficult to propose directors to the board. You couldn't even vote no on the election. CalPERS wants to split the chairman and CEO roles. Right now shareholder votes are advisory. For a board to be allowed to ignore the shareholders, that's a lack of accountability.

Would shareholders being able to nominate their own directors have made a difference?

Simpson: Robert Rubin, brilliant man, said, "I didn't understand the mortgage securities at Citigroup (C)." We got into a world of smoke and mirrors. Shareholders need tools. Disclosure of off-balance sheet accounting, derivatives, hedge fund positions. If nobody is telling you what's going on, how can you improve things? We have to have a road map for international reporting standards.

What other areas will you be targeting for reform?

Simpson: The role of intermediaries, credit rating agencies. It's very heartening to see the new Administration discussing that. To paraphrase Dickens, even though this is the worst of times, [these are] the best opportunities.

Did you grow up thinking much about stocks and investing?

Simpson: I was educated in a convent. The highest achievement was to have been a nun, eschew worldly possessions. I was too fascinated with the real world to think about the hereafter.

You don't think the nuns would be proud of you now?

Simpson: The nuns would be horrified. There was that Parable of the Tenants, about the kid who got into trouble in the vineyard. I'm thinking about how we need to feed people and pay pensions. I can't think of a job that gives me more satisfaction.

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