CalPERS' special review of the “pay-to-play” scandal that involved placement agents, and some senior staff members, who allegedly pursued certain investments without regard to their financial merits, sheds light on an area fertile for corruption.
The protracted review, which lasted 18 months, exposed troubling faults within the organization and produced commendable recommendations for reform to safeguard the $230.1 billion California Public Employees' Retirement System.
Individuals will always face temptations that can damage a fund. CalPERS lacked the organizational structure and controls to identify and protect against improper actions that could endanger the fund — weaknesses that needed to be addressed.
All pension funds and other institutional investors can benefit by studying the review for potential reforms where their own policies, such as those dealing with investment management decisions and ethics, could be strengthened.
Some pension funds — whether targets of private placement corruption investigations, such as the New York State Common Retirement Fund, or acting without the catalysts of scandals — already have undertaken reforms to deal with pay-to-play and private placement abuses.
CalPERS trustees deserve praise for coming to grips with the dimensions of the problem, dealing with weaknesses, and strengthening structures.
The CalPERS board already has taken a number of steps to deal with placement agents and the harm caused to the fund from organizational failures, to help ensure such breakdowns don't recur.
In one important reform, CalPERS created the position of chief risk officer, a recommendation from the review. “Historically, no one at CalPERS has had exclusive responsibility for managing institutional risk or handling ethics concerns expressed by staff and board members,” the review's report said. Assigning responsibility will bring more accountability.
The review doesn't close the case or end the need for further reforms. The pending criminal cases, and investigations by the Securities and Exchange Commission and others, could produce revelations of more abuses that CalPERS trustees will have to address.
But this review helps CalPERS get on track to overseeing the investment of its assets with proper fiduciary care.
The firms CalPERS commissioned for the review, importantly, from the beginning kept the focus on fiduciary duty.
“Those duties impose a much higher standard of conduct than, for example, merely avoiding the commission of a crime,” the report said. “Instead, they require that those serving the pension fund always put the interests of its participants and beneficiaries ahead of personal gain or other interests.”
