Jack Ehnes, chief executive of the California State Teachers' Retirement System, has helped take the pension fund out from behind the shadow of CalPERS to flex some significant muscle of its own.
For years, officials at the California State Teachers' Retirement System were happy to cede the spotlight to their crosstown Sacramento rival, the California Public Employees' Retirement System. But since Jack Ehnes was named chief executive officer of the $123.5 billion fund in December 2001, CalSTRS has become a waking tiger.
In the corporate governance arena, the fund sued WorldCom Inc. and Homestore.com over their accounting practices, raised the environmental liability flag at Exxon Mobil Corp. and intervened in the governance of the New York Stock Exchange. The fund has also urged Ingersoll-Rand Co. to reincorporate in the United States and supported a move to give shareholders proxy access.
In April, Mr. Ehnes was elected chairman of the Council of Institutional Investors, Washington, a body that represents pension funds with a total of more than $3 trillion in assets.
Since you became CEO, CalSTRS has become far more active in corporate governance. What led to this change in direction, and what have you accomplished in that time? In part, we've had a very effective board situation. And we're blessed with an active membership. When I go out and make speeches throughout the state, they aren't saying, "Jack. What are you doing?" They say, "Jack, are you going to do more?"
We think activism is part and parcel of meeting our responsibilities as fiduciaries. Now, there's responsible activism and irresponsible activism. Anytime when you want to be bold, sometimes you make mistakes, and you tackle issues or say things or do things that could be fine-tuned in a different direction. But, for the most part, we've been on the mark.
Were you given a mandate for changing CalSTRS' profile? There were other areas that (the board) wanted to see us strengthening. We have gotten so large and so influential that the demands are on us to perform like a commercial financial services company. We have to have benchmarks, and we have to work hard to surpass those benchmarks. We expect our external managers to do so. So the dilemma facing us is how do you do run a business that's just like a financial-services company, but under a public-sector umbrella?
Like many businesses, we had a very difficult transition to our core computer systems that run CalSTRS' benefit system. And we had very significant fallout in our customer services operations. Our customers, or members, expect the same level of customer service that they would get from a Fidelity or a Vanguard.
Do you think corporations are being more responsive to their shareholders? By raising the flag and saying: "Stop. We've got to change some of these ways that we interact with each other." there's no doubt about it that we have their attention. There are a couple of forks in the road there. Certainly, litigation remains a tool that pension funds use at times. Compounding that, when we do litigation, no longer are we just doing that with the company that was involved in the market scandal, but we're often engaged with the auditors or banks or business partners. In fact, many of these same companies are our business partners, so the world has gotten much more complicated on the litigation front. And, if we're not careful, that will exacerbate our ability to work well with companies.
On the non-litigation front, I do think the first step is making sure that we have people's attention, that we're picking through our issues carefully, that we're not just shooting missives at every issue or scandal that might be before us.
Do you expect the Council of Institutional Investors to narrow its focus? I do. We've been building up to working on executive pay as a focus, and now that we have hired some staff with expertise in that area, I think we have the horsepower as an organization to effect a plan.
We remain concerned that people may get cold feet at some of the changes that have taken place in Congress and may try to push back some of the reforms. Part of that strategy is holding the ground, and making sure we don't take two steps back. Sarbanes (-Oxley Act of 2002) represents a bold step forward, and we want to make sure that we're not stepping back on such an important change.
A number of pension funds now favor requiring that directors be approved by a majority of the vote. The latest report is that the Business Roundtable is opposing this effort. How do see this issue moving forward? I have to think that beneath that cloud of smoke from these lobbying organizations there are strategic thinkers who recognize that this is common sense.
I cannot picture a band of law firms coming together that can artfully disparage this concept, like was done in the case of access to proxy. Setting aside the political smoke, in the end, thoughtful, forward-thinking business leaders will emerge on this issue and recognize that it's time to find something that we can work together with shareholders on. Short of that, business leaders are going to start to isolate themselves in the dialogue.
California Gov. Arnold Schwarzenegger has proposed freezing CalSTRS and other public plans to new members and requiring them to join a new defined contribution plan. He also has proposed shifting the state's pension contribution to local school districts. And when the gubernatorial nominees to CalSTRS board disagreed with him, he fired them. What are your views on the governor's proposal for pension reform?
I think that's a lesson for all of us across the country right now — critics of defined benefit plans basically want to take the same brush and paint all of us as having a system that is no longer fashionable or economically feasible.
In our case at CalSTRS, we're dealing with an occupational group that has very long tenure periods. The average number of service credit when somebody retires from us is 27 years. That's unusually long when compared to other professions.
It's still too early to tell whether there will be changes that will come from this. Clearly, the governor's office is still highly committed to seeing some level of change for the major systems.
Part of it is pushing back the smoke around the issue, making sure we understand the fundamental concern. Are we trying to find a system where employees control their investments, personal accountability and management of the assets? That doesn't seem to be the primary driver of discussion. As I hear the question being asked, it's on the employer side, in terms of stabilizing the risk.
I've had very good meetings with the administration. It is not about politics for them. They sincerely believe it's a financial need that has to be addressed.
The initial part of the discussion was based more on principle and theories than on grounded, thrashed-out analysis. Now that our actuaries have looked at very carefully and issued public opinions on what the impact is, now people are starting to reel back a little bit and are saying: "Wait a minute. If you're saying that it will result in liquidity issues, that it might result in changes in investment assumptions that might exacerbate the unfunded liability, and if that could result in billions of dollars in additional liabilities, we need to understand that."
A pending bill would define what information about private equity investments must be disclosed by California public funds. What's your view? We have to measure to what extent we are pushing the envelope and are starting to hurt ourselves by limiting our opportunities. We hear the concerns from the managers. But I can't honestly tell you that it has resulted in any lost opportunities at this point for our fund, other than hearing concern about it. …
I think the elements that are in this bill of disclosure represent valid points of information for the public. On our website, we already provide active disclosure of much of the information that would be provided in this bill. Again, doing business as a financial institution in the public sector places higher demands on us than any other business would have.
To stick your head in the sand and say "we're not going to do it; we're not going to tell anybody what's going on" — it just doesn't fly. We've got to find the middle ground where we can find appropriate disclosure where we don't jeopardize proprietary information or ideas.