CalPERS makes major governance shift

CalPERS in August became one of the latest institutional investors to alter its governance model when its board instituted sweeping changes, including reducing the number of committee and board meetings, and stripping its investment committee's decision-making power.

The move by the $376.3 billion California Public Employees' Retirement System, Sacramento, comes at a time when the pension plan is making a number of other changes to improve its returns, funded status and resilience in an economic downturn. Indeed, Boston College research released in August found pension plans with the most effective boards — in terms of structure, composition, size and member tenure — had higher returns than less effective boards.

CalPERS board members who favored the changes said the revamp would give investment staff more time to do their day jobs by removing the need to prepare for multiple board and committee meetings. The new schedule reduces the number of annual board meetings to six from nine; an off-site meeting to one from two; and committee meetings to four from a current schedule that varies widely, ranging from nine times a year for the investment committee to about four times annually for the risk and audit committee.

What's more, changing the investment committee from a committee of the whole to a smaller board committee without the power to make final decisions would give CalPERS an extra screening of investment decisions, supporters said.

CalPERS is not alone. The largest retirement fund in the world also has been tackling its own governance issues.

Speaking before the CalPERS board at a workshop during its series of board and committee meetings in August, Hiromichi Mizuno, executive managing director and chief investment officer of Japan's ¥159.2 trillion ($1.5 trillion) Government Pension Investment Fund, said his fund, as part of an enhanced governance model approved by Japan's Legislature, formed its first 10-member board of governors almost two years ago.

Before then, the Tokyo-based pension fund was criticized for operating under political pressure, he said, adding that wasn't really the case. "I never felt political pressure when I made an investment decision," Mr. Mizuno said.

The new board of governors makes all strategic and high-level decisions, such as the asset allocation policy, he said. The board also must approve new investment styles and asset classes.

"We have a clear … separation of governance and execution," Mr. Mizuno said.

Among other funds changing their governance to assume more control are funds in Oregon and New Mexico.

Past and current members of the Oregon Investment Council, which oversees the $75 billion Oregon Public Employees Retirement Fund, Tigard, support giving the council control over the operating budget and personnel of the state Treasury's investment division, which comprises the council's investment staff. Currently, the Legislature is in charge of personnel management and budget.

Past and current council members, including Chairwoman Rukaiyah Adams, have said such a move would improve governance and enhance long-term investment performance. Such a move would require a change in state law.

But over the past few years, Oregon's Legislature has made other changes to improve the council's governance structure and investment returns. As a result of legislation passed in 2017 and 2015, the council is phasing in a modernization of the state Treasury's investment division. It has added technology and staff, improving its compliance and legal capacity, risk mitigation resources and data integrity systems. It also brought in-house more operations functions, such as trading and investment management. This year, the investment division brought in-house foreign exchange management and management of stock distributions. It also is managing more assets internally: As of March 31, 32% or $32.3 billion of all of the assets managed by the investment division are internally managed.

The New Mexico State Investment Council, Santa Fe, which oversees $25.8 billion in endowment assets, has been making tweaks to its processes since a major governance overhaul in 2010, said Charles Wollmann, spokesman. Then, New Mexico made major changes to the composition of the council as a result of a pay-to-play scandal involving money managers and council executives.

Before the changes, the council had an overconcentration of power and influence, he said. "Unfortunately, it crept into how the council operated and the investment decisions that were made," Mr. Wollmann said. The council now has been restructured so that no one entity — the Legislature or executive branch — can direct investments.

Over the years, the council has expanded the number of committees to include an audit committee and a governance committee. It also has added working groups, which have proved more effective in providing multiple layers of vetting and review, Mr. Wollmann said.

And, like CalPERS' new structure, the committees act in an advisory role. The ultimate decisions are left to the full council.

As with CalPERS, the New Mexico council has been decreasing the number of times it meets, Mr. Wollmann added. Council officials have changed their meeting frequency twice since 2010, and now meet 10 times a year, down from 12.

"A lot of our peers meet quarterly," Mr. Wollmann said. "From an investment viewpoint with permanent funds, you could make the argument that quarterly meetings would suffice … You could also argue that 10 years out of a scandal, extra oversight is a good thing."

He declined to comment on other changes the council could be considering. In past meetings, members discussed greater hiring authority and budget autonomy.

CalPERS' governance changes grew out of a self-evaluation study launched close to 13 months earlier. The study's findings were presented at the board's January off-site meeting by Anne Simpson, CalPERS director of board governance and strategy, and Cari Dominguez, a member of the board of board of directors of the National Association of Corporate Directors, who assisted with the self-evaluation process. Based on those findings, CalPERS Board President Henry Jones created five projects: board curriculum, role and responsibilities, meeting materials, code of conduct and insight tool prototype.

The governance initiatives were first unveiled at the board's July off-site meeting. Other changes enacted by the board in August include a new education program for new board members and board members designees, and a switch to Rosenberg's Rules of Order from Robert's Rules of Order.