CalPERS grooming next generation

CalPERS trustees are developing contingency plans to find replacements for Chief Investment Officer Joseph Dear, CEO Anne Stausboll and other top staffers in the event they can no longer serve in their roles.

The succession planning began 18 months ago in closed sessions, before board members for the $282.8 billion California Public Employees' Retirement System, Sacramento, knew about Mr. Dear's illness, said Rob Feckner, board chairman in an interview with Pensions & Investments.

Mr. Dear, who is being treated for prostate cancer, began his second indefinite medical leave in less than a year on Jan. 6.

This is the first time officials at CalPERS, the nation's largest defined benefit plan, have discussed publicly their efforts to develop a succession plan.

Although most public pension funds have interim plans to replace top management, not all have done long-term succession planning, said one expert on pension administration, who asked not to be identified.

CalPERS' plan involves not only finding potential internal replacements for Ms. Stausboll, Mr. Dear and others, but also giving those candidates more training, if necessary, to enhance their skills to fill the positions.

Mr. Feckner said the idea is to “grow and nurture staff from within.”

He said an external recruiter would still do a national search were a permanent replacement needed, “but at the same time we'd have a better understanding of our internal candidates.”

The source with knowledge of pension administration said long-term succession planning, done at most corporations, runs counter to the open-recruitment concept — in which outsiders have an equal chance — advocated by officials at most U.S. public pension plans.

“Long-term succession planning is not part of their (public pension fund) culture,” he said.

A CalPERS source said officials prefer, when possible, to promote someone who knows the fund.

Mr. Feckner stressed the board is not conducting a formal search for a replacement for Mr. Dear, who intends to return to work.

“The CalPERS investment staff is the most professional and talented group of individuals of any pension system in the world. While I am focusing on my recovery, and not in the office on a daily basis, I have complete confidence that they will continue to perform in the manner that just produced a 16.2% return for California's public employees. I fully intend, and am looking forward to, resuming my full-time duties as soon as possible and rejoining my friends and associates in the office,” Mr. Dear said a statement emailed to Pensions & Investments on Jan. 16.

Mr. Feckner said both Mr. Dear and Ms. Stausboll were asked at the beginning of the process to identify potential internal replacements. He said the sole aim of the contingency planning is to ensure that CalPERS will be better prepared if it needs to replace key personnel.

An outside CalPERS consultant, Funston Advisory Services LLC, Bloomfield Hills, Mich., had recommended in 2011 that the CalPERS board begin long-term succession planning for the CEO's position. The board had hired Funston as part of an effort to improve board governance following a scandal that resulted in the California attorney general in 2010 bringing civil fraud case against CalPERS' former CEO Federico R. Buenrostro, and a former board member, Alfred J. Villalobos. Federal criminal fraud charges are also pending against the two men as well as a civil complaint by the Securities and Exchange Commission.

Ms. Stausboll, in a separate interview, said succession planning was an “ongoing process.” The goal is to “grow candidates” so the organization is ready for different scenarios, including unforeseen circumstances, she said.

Mr. Feckner said the contingency planning applies not only to the top executives at CalPERS, but also to senior portfolio officers and division chiefs.

Several CalPERS officials, who would speak only if they were not identified, said the succession planning for Mr. Dear has taken on some urgency because the chance exists that Mr. Dear will not be able to return to his job. Mr. Dear, despite being on medical leave, participated in a CalPERS retreat on Jan. 14.

Mr. Dear this month ceded his day-to-day responsibilities to Ted Eliopoulos, senior investment officer for real estate. Mr. Eliopoulos also took over for Mr. Dear last May when Mr. Dear took his first medical leave, from which he returned in October.

“We needed a day-to-day person I could pick up the phone and call if I needed to,” said Mr. Feckner. “We needed someone physically in the plant, that's why Ted got the call.”

Mr. Feckner said Mr. Eliopoulos is corresponding with Mr. Dear on key investment matters, so Mr. Dear is still in the loop and can offer his advice.

Mr. Dear, 62, joined CalPERS in March 2009, and has helped lead a recovery from the financial crisis that has boosted the pension plan's assets by almost $100 billion since his arrival. The pension plan has had positive returns every year since he took over. He also has implemented new investment risk controls, increased CalPERS' in-house management and supervised on-going restructuring of the real estate and private equity portfolios.

If Mr. Dear would need to be replaced, board members would need to determine whether they would want someone whose primary expertise is management experience as opposed to an individual with extensive investment experience.

Mr. Dear's predecessor, Russell Read, had expertise in investing. Mr. Dear was thought of more as a management expert, having served as executive director of the Washington State Investment Board and in other top management positions in state and federal government.

CalPERS sources say Mr. Eliopoulos was chosen for the acting role because of his investment experience at CalPERS in addition to his management experience and political savvy. He is a former deputy state treasurer and, as such, had sat on the CalPERS board on many occasions representing then-state Treasurer Phil Angelides.

Mr. Feckner would only say: “Ted seemed to be the one to have the best opportunity to bridge the gap.”