I am a huge fan of the efforts of CalPERS to clean up corporate governance, and I even helped in the drafting of their emerging market activist equity screen a few years ago. And I argue with my law and economics colleagues that the unusual board structure at CalPERS is evidence that boards representing all stakeholders can function efficiently. 

But now it appears that CalPERS is itself embroiled in a governance problem.  They have recently lost (fired? quit? pushed out? had lured away?) three senior figures, including their two top executives just this past week.

The heart of the problem appears to be a perennial one for large public sector pension funds.  How do you create a culture in the professional staff that implements the board’s vision?  And how do you do that when the vision itself is subject to change as politics changes?  Six of the board members are elected by California public sector workers and retirees; four are ex officio appointments serving by virtue of their public office; two are appointed by the Governor and one by the state legislature.  

When a pro-labor Democrat is in office usually things can go smoothly, but not always (the last time the CalPERS board was headed up by a labor representative and there was a Democrat in power in Sacramento, the board went after Warren Buffett!)  But when you have a market oriented Governor and a labor influenced board, then you are in for some serious tensions.  

Most recently, the CalPERS investment strategy had begun shifting away from some of its commitments to human rights and labor rights including opening up to investments in China.  While that is problematic, in my view, that does not appear to be the source of the current problems.  Instead, it appears that a decision to invest in private sector based infrastructure projects (where the giant fund might earn above market returns) clashed with the natural tendency of the labor folks on the board to want to protect union jobs on those projects and existing civil service positions. 

It is also possible that the downturn in the economy is going to lead to some red ink in the fund’s returns.  Better for those top execs to get out while the getting is good.  No huge severance package like other failed CEO’s but at least they can land softly in the private sector.

But this is all speculation because CalPERS has as of yet not clearly explained what is going on. Since they have no SEC to worry about or shareholders they can say pretty much what they want. But it is disappointing and a bit hypocritical for the Board now to suggest that these executive departures are simply because the CIO and CEO could earn more in the private sector (that is the first line of defense, anyway).  That was always the case for both individuals.  The CEO, for example, has 20 years experience rising up the ranks of CalPERS.  And now he wants to leave?  CalPERS argues around the world that it values transparency. It should practice what it preaches.