I read with interest Robert M. Brower's May 17 letter to the editor, regarding CalPERS. I concur in part and dissent in part.
With respect to corporate governance, I believe there are serious agency risk problems — as the academics call them — within most boards of directors. I will not elaborate on these problems as I am certain that your readers are aware of them. But, being that they exist, I believe that every investor —CalPERS or mom and pop — needs to become active in cleaning up board practices and oversight. Thus, to the extent that shareholder activism is oriented toward increasing corporate performance and shareholder value, I support it even from CalPERS.
However, I would agree with Mr. Brower that a public agency such as CalPERS should be prohibited from using its position as shareholder to advocate a political agenda. This is exactly of what Alan Greenspan has warned and why he has stated that Social Security Trust funds should not be invested in equities: the political temptation is just too great.
With respect to CalPERS' poor investment performance, Mr. Brower (and everyone else) has missed why. With the level of assets that CalPERS has, it is somewhat difficult to imagine how it might significantly outperform or underperform its customized benchmark. But, somehow during the go-go 1990s it outperformed, and somehow during the no-go 2000s it has underperformed.
The answer is clear: CalPERS employs leverage. Where is the proof? You won't find margin accounts anywhere. But, as a public agency, CalPERS can and does issue bonds, and it uses their issuance proceeds to lever its investments. Whether it is CalPERS or some other state's fund, the agency uses a euphemistic name for the issue, such as "benefit anticipation note" or the like. Can you imagine what would happen if the people of California knew that state employees' pension money uses leverage?
This fact goes to the heart of Mr. Brower's argument: the pot calling the kettle black. The board of directors at CalPERS poses just as significant an agency risk to the citizens of California as the company boards it criticizes do to their respective shareholders. Whether it is former Orange County Treasurer Robert Citron or former Tyco CEO Dennis Koslowski or current California State Treasurer Phil Angelides, agency risk is alive and well.
Todd C. Ganos
Doolittle & Ganos Investment Counsel LLC
Carmel, Calif.
