The sudden departure of CalPERS' CIO has revealed to some board members that they might have been driving from the backseat — despite actions taken last year.
After an exchange of punches and counterpunches in the form of letters by board members about the timing of meetings — regularly scheduled or emergency — and type — open session or closed session — the board tried during marathon meetings held on Sept. 14 through Sept. 16 to turn the car around.
Using power many board members indicated during the meeting that they didn't realize they had, the board turned information items on the agendas into action items. The board also secured significant governance changes, including giving the board shared responsibility with the CEO for hiring, firing and re-evaluating the CIO and, reversing a decision it made late last year, turning the investment committee back into a committee of the entire board.
And there could be more to come as the board wrestles with the fallout from former CIO Yu "Ben" Meng's departure in August. Mr. Meng is now under investigation by the state Fair Political Practices Commission's enforcement division over potential financial conflicts of interest.
The $417.3 billion California Public Employees' Retirement System, Sacramento, isn't the only asset owner to struggle with governance issues as part of a move toward increasing in-house investment management and more direct investments in alternative investments. These moves can require boards to delegate more discretion to staff so that investment personnel can quickly make tactical decisions, such as co-investments and direct investments in alternative investments.
At CalPERS, Mr. Meng and other staff members argued for increasing the staff's investment delegation in March 2019 when the board approved a private equity investment model for making direct investments through an outside entity. That model has since been moved to the back burner.
Since 2018, the CIO has had delegated authority to commit up to $1 billion per private equity investment and up to $1.7 billion per private equity secondary commitment with no limit on the number of investments the CIO may make per year. Other investment staff were given additional investment discretion for private equity as well as real assets in September 2019.
At the heart of many governance dilemmas — including those at CalPERS — is how the board should monitor and oversee policy decisions that are being carried out by staff, but without micromanagement. There is also a question of trust, between the board and its committees and the board and staff hired to carry out day-to-day business.
The board is not there to manage; the board is to set the direction and make sure it is managed consistently with the board's vision, said Rick Funston, managing partner of governance and risk management advisory firm Funston Advisory Services LLC, Bloomfield Hills, Mich. Indeed, it could be a breach of the board's duty of prudence not to delegate duties to experts, he said.
Mr. Funston declined to speak specifically about CalPERS. He also appeared at CalPERS' governance committee meeting on Sept. 15 when he advised keeping the investment committee a smaller committee for the sake of stability since that change had been made less than a year ago.
"Imagine a sailing vessel in a race. Where is the board?" Mr. Funston said. "They are not on the boat."