Controller Yee: ‘More work’ ahead for CalPERS board

Even though CalPERS is taking steps toward fixing its governance problem, officials at the $411.5 billion pension plan say the road ahead is long.

California Controller Betty T. Yee, who sits on the boards of both California Public Employees' Retirement System, Sacramento, and the second-largest U.S. public pension plan, the $262.5 billion California State Teachers' Retirement System, West Sacramento, is helping drive the changes.

Her duties on both boards give Ms. Yee an unobstructed view of the culture and practices at each plan, especially since she has served as chairwoman of CalSTRS' governance committee. Ms. Yee currently is vice chairwoman of that board committee.

There is a different culture at CalSTRS, Ms. Yee said.

"It's not a fair comparison," she said. "With respect to the proceedings of the board, there is a respect for the differing perspectives board members have at CalSTRS. No one on the board would ever say I wasn't heard."

At CalPERS, letters by Ms. Yee and fellow board member Margaret Brown helped spur the board to make governance changes in the wake of the sudden departure of former CIO Yu "Ben" Meng in August.

"I am not getting the sense that we (the CalPERS board) were operating as effectively as we could be," Ms. Yee said in a Sept. 21 interview. "I think there will be more work to be done. I think the board members are doing the best that they can and really do take their responsibility seriously."

She stressed that she was grateful that the president of the board, Henry Jones, scheduled items she wished to talk about in an open meeting, a month after the board discussed matters in closed session. An additional suggestion by Ms. Brown that the board also review its delegation of investment authority is scheduled for an investment committee discussion at its Nov. 16 meeting, Mr. Jones said in an email.

"I absolutely believe our governance allows for all points of view as evidenced by the number of meetings that we have throughout the year, including workshops and stakeholder meetings," Mr. Jones said. "And I believe that all of us should always be open to improvement."

During its September meeting, the board did make changes, including restoring the investment committee to a committee made up of the entire board. The investment committee of the whole will begin meeting in November, Mr. Jones said in another email.

Ms. Yee said she supported that move to an investment committee of the whole because she finds discussions of investment matters by all board members, who come from different disciplines, very constructive.

"It (the investment committee of the whole) can only result in a more robust outcome," Ms. Yee said. "If I'm on the losing side of a vote, I'm OK with it if I feel I've been heard and it has been discussed."

For instance, in 2019, CalPERS board voted to cut the number of meetings to reduce the time-consuming demands on investment staff of preparing and presenting at various meetings. The board lowered the number of board meetings to six from nine each year, curtailed off-site meetings to one from two and limited committee meetings, including investment meetings, to four.

Before the new schedule was put into place for 2020, the investment committee met nine times a year. The rationale given for the changes was in an Aug. 20, 2019, memo to CalPERS governance committee.

The staff memo said that reducing the number of committee meetings would allow CalPERS to have a "consistent structure for all committees," which would improve the board's due diligence "through a deeper level of review before recommendations are presented" to the full board. The memo said that all board members could continue to be allowed to attend committees meetings "as observers."

CalPERS in November is expected to consider additional investment committee meetings in 2021 and allow meetings to extend to the next day rather than continue late into the evening.

By comparison, Ms. Yee said the CalSTRS investment committee meets six times a year in addition to the full board's off-site multiday meeting, with one day reserved for investment matters.

"There's a feeling that we need to meet additionally on top of that" in light of the pandemic and the upcoming presidential election, which is expected to cause the markets to move again, Ms. Yee said. CalSTRS' added an additional closed session investment committee meeting on Oct. 9.

"It's a very difficult time, a very challenging time. It's so disturbing to me that the (CalPERS) investment committee is not meeting until November and then not again until next March (2021)," Ms. Yee said in the interview.

"In this time now where our oversight role is heightened given the pandemic, the recession ... it seems to me we should schedule more regular meetings."

The CalPERS board in September also brought back an earlier arrangement that gave the board and the CEO shared responsibility for hiring, evaluating and terminating the CIO. Since 2011, the CEO alone had held that power.

Ms. Yee stressed during the September governance committee meeting that she wanted to discuss whether the sole authority over the CIO should remain with the CEO or shared with the board before CalPERS hires a new CIO.

At the meeting, Ms. Yee also suggested that CalPERS adopt the same dual-reporting structure that she said has worked well at CalSTRS — where investment-related topics including investment performance are reported to the board and business items including staffing, budgeting and technology are reported to the CEO.

In November, CalPERS also is expected to decide whether to change its governance policy on investigations into misconduct allegations made against certain officials, including the CEO and CIO. CalPERS CEO Marcie Frost's current practice is to inform only the board president and chairs of any committees affected by an investigation. The full board is informed only after the investigation has been concluded.

Although Ms. Yee's designee on the board, Lynn Paquin, In September voted against Ms. Frost's fiscal year 2020 incentive award of $100,617, Ms. Yee said that she has not lost faith in Ms. Frost's leadership.

"Marcie is a talented leader. I supported her and want her to be successful," Ms. Yee said.

In these times,staff should be "more intentional in putting things before the board" rather than telling the board what staff thinks the board needs to know, she said.

"My feeling about her (Ms. Frost) is I think there is a tendency not to burden the board," Ms. Yee said.

There also needs to be more opportunities to bring issues to the board in a public process, Ms. Yee said.

One of the subjects the board does not discuss publicly is investment strategy, she said. "We really should be looking at the whole public process" as a benefit, she added.

Having a public discussion around investment strategy could help CalPERS educate the public, stakeholders, retirees and beneficiaries of what staff is seeing in the markets and what its peers are doing, Ms. Yee said. "It would engender more trust."

Discussions of general investment strategy, trends and direction should be held in public, Ms. Yee said. The aim is not to micromanage the investment office but to engender more robust board discussions, she said.

"It's not oversight if the board rubber stamps everything the staff does," Ms. Yee said.

She said she also would like to see the CalPERS board operate in a "culture of inclusion."

"I'm looking forward to working with my colleagues" in their shared responsibility to deliver benefits to retirees, she said.

"How we get there is we consider differing views respectfully and that each member's views should be taken into consideration and not ignored," Ms. Yee said.