Governance Doc, Heal Thyself
Each year, as February draws to a close, directors at certain companies--they know who they are--cringe. That's when the California Public Employees' Retirement System (CalPERS) publishes its list of unresponsive boards. But this year, as publicists for the $128 billion fund were blast-faxing the latest list, CalPERS found itself under scrutiny for the same kind of conflicts of interest that put corporations on its hit list.
After a recent series of Los Angeles Times stories alleging improprieties regarding CalPERS' $3.3 billion fund for alternative investments, and one day after a state senator introduced legislation to place restrictions on California's public pension funds, the 13-member CalPERS board passed some new rules. The Feb. 19 reforms prohibit board members from taking campaign contributions from companies with current or potential business with CalPERS. And directors, who now are prohibited from accepting gifts worth more than $290, must make a monthly report of gifts valued at more than $50.
OUTSIDE MOVES. This effort, however, may not be enough. According to Democratic State Senator Adam Schiff, the Securities & Exchange Commission is investigating whether to restrict campaign contributions to directors of public-pension boards. And the FBI has made inquiries at California's two big public-pension funds. The SEC and FBI won't comment. CalPERS President William D. Crist says the fund has given the FBI public documents but says no probe has been started.
The most vocal CalPERS critic has been Schiff, chairman of the California Senate's public employment and retirement committee. His concern was sparked by a $100 million investment in a Hicks, Muse, Tate & Furst Inc. leveraged-buyout fund that had hired a former CalPERS board member. The decision to invest in the fund was made despite strong objections over fees by CalPERS' staff. Hicks Muse CEO Tom Hicks disagrees with that judgment. Schiff also says the CalPERS board approved investing in a real estate venture partly owned by a board member's son-in-law. Crist says board members with conflicts abstain from voting.
Calpers also has in-house critics. State Controller and trustee Kathleen Connell questions the ethics of a 10-day trip to Asia taken in 1996 by several board members. The trip was paid for by a non-profit group financed by money-management firms that also sent representatives. A month before, CalPERS had approved a $225 million investment in a fund run by one of those firms, San Francisco-based Lombard Investments. Moreover, Lombard officers, associates, and their families have contributed more than $30,000 to the campaigns of GOP State Treasurer and board member Matt Fong, who organized the trip. Fong, now seeking a senate seat, says his contributors are on file at the Secretary of State's office and says he votes strictly on investment merits. And Crist defends the trip as educational. "I wasn't told who paid for anything, and I didn't ask," he says.
NOT THE FULL MONTY. Under the senate bill, any company trying to do business with California's big pension funds would have to disclose ties to board members or gifts or political contributions to them. The bill would also limit communication between trustees and companies while the board is mulling proposals. And it would make board meetings more open to the public and mandate release of meeting transcripts within a year. So far, the reforms most directly affect the two state elected officials on CalPERS board, Fong and Connell. Fumes Connell: "This doesn't go the full monty."
Both Connell and Fong, who call the recent measures "window-dressing," are pushing for greater disclosure. The CalPERS board plans to review its rules on trustee travel in March. Whatever the directors decide, it's clear that this corporate watchdog is likely to find itself on a shorter leash.