CalPERS Needs Reform

By Thomas J. Donohue

CalPERS, the nation's largest public pension fund, has branched out from the retirement investment business and has appointed itself the arbiter of good corporate governance. Its call to withhold votes on the corporate board of directors at 2,700 companies in CalPERS' investment portfolio is a smokescreen to hide its political objectives. The California pension fund's newfound shareholder activism has backfired, revealing a tangled web of conflicts of interest, special interest agendas and a lack of disclosure and transparency within its own ranks.

Should CalPERS fail to recognize its own shortcomings and reform its own practices, state officials should intervene to protect CalPERS' 1.4 million members and the fund's main sponsors, California taxpayers.

Over the past few years, publicly traded companies have implemented — either voluntarily or by law — major corporate governance and accounting reforms. As a result, corporate boards are more independent, they meet more often and they have improved communications with shareholders. The financial systems of public companies are more transparent, making it much harder for wrongdoers to keep others in the dark.

Unfortunately, CalPERS has not been held to the same standard. Eleven of CalPERS' 13 board members are union members, union officials or government officials who received or solicited contributions from unions. Ironically, CalPERS, through its vote-withholding strategy, has been a leading proponent for more independent directors on corporate boards.

CalPERS' predominantly union board puts on a united face to cover its own substantial conflicts of interest. The board chairman, Sean Harrigan, is international vice president and executive director of the Food and Commercial Workers International Union Region 8 States Council. Harrigan is one of organized labor's top political operatives in California, and he personally organized and hosted rallies against Safeway during the supermarket chain's recent labor dispute. Harrigan and CalPERS' board took a leading role in a very public attack, through proxy ballots, against Safeway's board. After public criticism of this clear conflict of interest surfaced, CalPERS claimed Harrigan had recused himself from the debate, but he continues to lead the charge against Safeway and 2,700 other companies. Another board member, state Treasurer Phil Angelides, appears to be exploiting the Safeway issue as a platform for his expected gubernatorial bid.

The CalPERS board also oversees $166 billion in public assets with little or no accountability. Its power stems from a 1992 decision by voters to give the CalPERS board absolute and exclusive authority over the administration and investment of pension funds. Though perhaps the decision of voters made sense back then, CalPERS' recent performance illustrates the need for outside oversight. In the upcoming fiscal year, taxpayers will be forced to spend $2.6 billion to cover previous losses from CalPERS' investments as well as the lavish expansion of pension benefits.

Finally, CalPERS has historically operated under a shroud of secrecy with regard to its private equity investments. It hid from state employees and taxpayers that it invested in Enron's off-book dealings, which led to the infamous company's collapse and the loss of millions of dollars in retirement money for Enron employees. Only recently has CalPERS taken steps to more fully disclose its investments and returns — and this only after it first fought, then settled a lawsuit demanding more investment details.

Public employees and taxpayers deserve a pension fund that is accountable, transparent and singularly focused on their fiduciary interests — not beholden to the agendas of special interests and ambitious politicians. It is time to strengthen and improve the corporate governance of CalPERS. Gov. Arnold Schwarzenegger will get an opportunity to start that process by appointing a new CalPERS board member next year. Also, the state Legislature should conduct a review of CalPERS' dealings and consider reforms that will bring CalPERS in line with the exacting standards now applied to publicly traded companies. It's the fair and right thing to do.

Thomas J. Donohue is President and CEO of the U.S. Chamber of Commerce.

As published in the San Francisco Examiner on June 24, 2004.