CalPERS finds ‘governance’ begins at home

The giant CalPERS public pension system, a leader in pushing for better management of corporations, has its own problems with big fees paid for helping investment firms get pension fund money.

CalPERS pushes for diversity on corporate boards, pay for performance among executives, improvements in firms placed on an annual “focus” list, and has $4.4 billion invested in funds that try to boost shareholder value by improving management.

Now CalPERS, looking at its own management, has discovered that one of its former board members, Al Villalobos, has received $59.8 million in “placement agent” fees for helping investment firms obtain money from the pension fund.

A new round of disclosures by CalPERS last week, following an initial release in October, showed that a wide range of placement agents were paid more than $125 million by investment firms that received pension funds.

Some national stories continue to suggest that CalPERS, ironically or even hypocritically, may not have been heeding its own admonitions about improving performance through better management — in short, practicing what it preaches.

“The California Public Employees’ Retirement System, which invests the retirement money of public employees, is a preacher of good corporate-governance practices,” a Wall Street Journal story about the big fees said Friday (Jan. 15).

“A number of deals have opened CalPERS to criticism, as it preached the virtues of good corporate governance at the same time a former board member’s firm was reaping a bonanza by helping investment firms win business at the fund,” a Reuters news service story said last week.

Two of the newsworthy items in the more than 600 new disclosure forms released by CalPERS last week were fees paid by shareholder-activist investment funds that specialize in seeking higher returns by pushing for improved corporate management.

A former CalPERS president, William Crist, gets 15 percent of the management fee that CalPERS pays to Governance for Owners, a London-based fund “dedicated to adding long-term shareholder value for clients by exercising owners rights.”

Crist told the Wall Street Journal he has received “630,137 euros ($913,000)” so far for a $300 million investment from CalPERS, whose value had dropped to $191.9 million at the end of last September.

He told the newspaper he expects to receive a larger fee for a $350 million investment in Governance for Owners by the California State Teachers Retirement System.

An official of the London-based fund, Peter Butler, said in a letter to CalPERS last June that he is not certain Crist fits the description of “placement agent.” He said the fee is a way of paying Crist for “many tasks” since the fund was launched.

In the disclosures released by CalPERS last October, the biggest single fee was $13.2 million, part of a total of $42 million in fees paid to Villalobos by Leon Black’s Apollo private equity fund, which has staff marketers and is partly owned by CalPERS.

The new disclosure last week showed an even larger single deal, $17 million in fees paid by Relational Investors of San Diego, which works with management and shareholders “to build a consensus for positive change to improve shareholder value.”

Relational has paid the fees since 1996 to Donal Murphy of Tullig, Inc., who helped the firm with marketing since its beginning and reportedly worked the first two years without a fee.

The fees paid placement agents moved into the spotlight after a public pension scandal in New York last year. Several persons have pleaded guilty to bribery-related charges.

In California, Attorney General Jerry Brown and federal officials reportedly are looking at the activities of placement agents. But there have been no public reports about the extent of any probes.

Placement agents, banned in some states, have strong defenders. One argument is that small investment firms, which cannot afford the marketing staff employed by large firms, need placement agents to contact pension funds throughout the nation.

But when the disclosure forms list services provided by placement agents, terms such as “introductions” can make it sound like their key role is to provide connections and influence with pension fund officials.

The huge placement agent fees also raise the question of whether CalPERS is paying excessive management fees. CalPERS hired a consulting firm in May, Houlihan Lokey, to review ways to reduce management fees for private-equity firms and others.

The CalPERS position on placement agents has evolved over the years, perhaps reflecting a changing board and new top administrators in addition to reaction to the scandal in New York.

Four years ago a newspaper’s Public Records Act request for information about Villalobos and other placement agents was rejected by CalPERS, which said its relations with “top-tier private equity funds” might be harmed.

“CalPERS has been advised by a number of general partners that CalPERS’ current status as an ‘investor of choice’ will be damaged if we provide confidential information of the type requested,” Marte Castanos, CalPERS senior counsel, said in a letter dated July 12, 2006.

CalSTRS began requiring that investment firms report placement fees four years ago. CalPERS did not adopt a placement fee disclosure policy until last May, when investment firms also were asked to voluntarily report previous fees.

In October while revealing the big Villalobos fees reported in the disclosures, CalPERS announced that a law firm, Steptoe and Johnson, had been hired to conduct a “special review” of placement agent fees.

In December the CalPERS board voted to sponsor legislation requiring placement agents to register as lobbyists and banning “contingency” fees based on receiving pension fund investments.

Former Assemblyman Dave Elder, D-Long Beach, told the CalPERS board in November that his legislation in 1991 banning contact between board members and persons selling investment products was undermined later by a CalPERS-backed bill.

The CalPERS board adopted new ethics guidelines in December allowing board members to refer investment communications only to the chief investment officer, not other staff, and to recommend investments only in board and committee meetings.

“In light of recent questions raised about placement agents, we are working aggressively to take measures to provide transparency, adopt thoughtful reforms, and restore trust in our system,” Anne Stausboll, the CalPERS chief executive officer, said in a news release last week.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 18 Jan 10

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