One of the reasons for dysfunction and poor governance at CalPERS is that its board has gone from being an effective oversight body to acting as a rubber stamp for CalPERS’ staff. Weak supervision is dangerous in any organization and the public should be alarmed about the ongoing evidence of it at CalPERS. The California public pension fund already had an infamous case of staff misconduct in form of the successful criminal prosecution of its former CEO, Fred Buenrostro, for taking bribes. Now like most of its peers, CalPERS is also under attack for its underfunding, which plays into the hands of public pension fund opponents.
CalPERS needs to aspire to be as pure as Caesar’s wife in terms of its governance standards, yet it appears to be going forcefully in the wrong direction.
One example of CalPERS’ board failing to assert its proper authority over staff is in the selection of fiduciary counsel, arguably the most important advisor to the board. CalPERS has already suffered a public relations fiasco over tolerating a power grab by its then-new general counsel, Matthew Jacobs, when it last selected a fiduciary counsel in October 2014.
The result was that CalPERS retained a scandal-plagued Florida lawyer, Robert Klausner, who had nearly two decades of press reports of ethically questionable conduct, including ones by the New York Times and Forbes, describing how he ran pay-to-play conferences. More recently, he had helped set up a secret and allegedly illegal pension fund in Jacksonville, Florida. Klausner resigned last year as the barrage of critical media coverage continued, leading to the need to hire a new fiduciary counsel. The board will interview finalists next week.
In the 2014 process that led to the embarrassing selection of Klausner, Jacobs withheld information that the board had always gotten in the past. Both lawyers on the board, Richard Costigan and Dana Hollinger, even the reliably staff-friendly Priya Mathur, objected to the thin briefing. But no one had the guts to call the process procedurally deficient and demand the decision be put on hold until the board got the materials it needed.
make clear that it is the board, and not the legal department, that should be choosing the fiduciary counsel:
The objective of this agenda item is for the Board to reestablish its primary control over the selection of fiduciary counsel.
Unless the board objects to Jacobs thumbing his nose at the board in a more flagrant manner than he did in 2014, it will be sanctioning a deficient process for choosing a key adviser and tolerating staff insubordination. The board needs to tell Jacobs that it cannot make a decision on the fiduciary counsel candidates until it has had the opportunity to review written background information properly. That means the interviews and vote need to be moved back to a later board meeting.
The apparent reason for Jacobs’ misconduct is either sheer laziness or attempting to put the finger on the dial so as to favor the candidate that the board knows better, its current interim general counsel, Ashley Dunning. Neither is an acceptable reason. A lack of adequate briefing will work against the less familiar party. And while Dunning may in the end be the better choice, some of the positions she has taken as interim general counsel indicate she is too willing to take dubious legal positions that help staff further increase its power relative to the board.
How the Board Is Being Deprived of Information
Fiduciary counsel is hired by the board, which is the board of trustees, or in the case of CalPERS, the Board of Administration. However, there is a gap between theory and practice. In CalPERS’ case, as occurs in other public pension systems, the candidates for fiduciary counsel submit requests for proposal that are vetted by staff. In CalPERS’ case, they are scored and staff makes a recommendation to the board to interview only a subset of proposers before the board interview and vote.
This process allows the staff to influence the decision, which also occurs even when a fiduciary counsel contract is up for renewal. That means there is a significant risk that fiduciary counsel will see himself as serving staff, or at least needing to be unduly attentive to its agenda, even though it is the board that is formally his primary client. As we’ll discuss below, the fiduciary counsel bias in favor of staff is already evident in the case of the interim general counsel who is also one of the two finalists, Ashley Dunning of Nossaman, LLP.
In the 2014 interviews, four board members objected to the fact that the board was being denied detailed backup information on the responses to the RFPs, which made them more dependent on the staff’s subjective overall ranking. Yet no one moved to halt or change it.1
Moreover, the legal staff keeps the board on a short informational leash in another respect. The Request for Proposal stipulates that the presentation time and board question time are limited; you’ll see from the 2014 interviews that the candidates each have 10 minutes to present and the board has only 20 minutes per firm for questions (see here at 4:30). While it make sense to make sure every candidate has the same amount of time to make its pitch, there’s no good reason to limit board question time, particularly since 20 minutes is so short that only three or four at most of the 13 board members could probe what a prospect had said.
And even more troubling, in introducing the candidates in 2014, Jacobs treated the board like children. : “You have also been provided with sample questions that you may ask the firms during the interviews.” While Jacobs allowed for the possibility of asking firms further questions after all had made their presentations, in practice this does not happen. One board member, Richard Costigan, stated that he had had no opportunity to ask questions at all. He was answered by Jacobs rather than having any of the firms called back.
But what is vastly worse about 2014 versus now is that even though the board was unhappy then about being short-shrifted on information, it did get further detail in advance of the meeting. This came about in part by the fact that the entire board in 2014 participated in the process of reviewing the 5 candidates recommended by staff based on interviews (out of 10 who responded to the request for proposal), and then deciding which three were to be interviewed. This time, only Jacobs, board president Rob Feckner, and State Controller Betty Yee participated in his screening process. Neither Feckner nor Yee are lawyers, raising questions as to why they were chosen as opposed to board members with expertise.
It’s gotten even worse this year in other respects. You’ll see embedded at the end of this post the sketchy summaries produced by CalPERS’ legal office. The 2016 versions are even more cursory than the 2014 ones. And even though the agenda item promises that the board members will receive “A complete copy of each finalist’s proposal and sample interview questions,” that has not been provided. If you’ve ever looked at the CalPERS board meeting agendas, you will see that any written material, as well as slide shows, is provided in advance. That’s because it is understood that it takes time to read and think about information in order to deliberate properly. No judge would accept being presented with briefing documents in a courtroom with the counsels from both sides waiting for him to get on with it.
Yet Jacobs apparently plans to give the additional material either the very day of the meeting, when it is impossible for the board members to read and reflect on it, or at worst early in the week, when they will be in the throes of the board meeting and too distracted and tired to give it the attention it deserves.
Why Dunning Warrants More Scrutiny
With only two candidates and the board already likely predisposed towards Ashley Dunning by virtue of her having acted as interim fiduciary counsel and giving the board its annual fiduciary training, why is Jacobs putting his finger so heavily on the dial by railroading the board?
While Dunning is no Robert Klausner, she’s already tipped her hand that she regards her real loyalty as to the staff and has made clearly dodgy recommendations, with the apparent aim of further increasing staff’s control over the board.
In the fiduciary training session in January, the board discussed the question whether and when board members could e-mail articles to each other. The reason this can be a no-go for a public board in California is that under the Bagley-Keene Open Meetings Act, a deliberative process is supposed to take place in view of the public unless the topic area is deemed so sensitive that the board is permitted to discuss it in private, in a so-called “closed session”. Even so, those closed session discussions are all to be listed as agenda items with the statutory basis for it being in closed session cited. In other words, having substantive discussions about pending board matters outside board meetings isn’t kosher.
Now obviously, this prohibition isn’t absolute; board members can and do talk to each other off line. But what Bagley-Keene prohibits is deliberative discussions, as the board thrashing out issues in private outside the formal process. Thus there’s a legal question: when is sending an article around merely useful general information versus serving as part of a deliberative process that should be limited to board meetings?
If you look , you’ll see Dunning not only taking a very hard line on what can and can’t be shared, but then proposing a fix that the California Attorney General explicitly has deemed to be a violation of Bagley-Keene. What kind of lawyering is this?
Let us remember that the paramount goal of Bagley Keene is public participation and monitoring. From a 2004 document from the Attorney General, :
In effect, the Legislature said that when a body sits down to develop its consensus, there needs to be a seat at the table reserved for the public. (§ 11120.) By reserving this place for the public, the Legislature has provided the public with the ability to monitor and participate in the decision-making process. If the body were permitted to meet in secret, the public’s role in the decision-making process would be negated.
It is perverse to see Dunning repeatedly take a very dim view of the board not only sharing general information via e-mail but also even writing op-eds, when an op-ed is explicitly communicating with the public. Her basis for reservation seems to be that citizens might communicate back. Huh? Taken to its logical conclusion, this similarly means board members should never give speeches or meet with beneficiaries similarly because they might say stuff, and that even general CalPERS matters might turn into board questions at some point down the road. State Controller Betty Yee roused herself to object at one point, but didn’t pursue the matter that far.
Specifically, you’ll see that Dunning treats even a tweet or a comment on LinkedIn as potentially troublesome, when Twitter and LinkedIn, unlike e-mails to fellow board members, are used to communicate to people that have chosen to “follow” you, and thus extends well beyond the board. How a one-way communication to ad hoc groups can be construed to resembling a board engaged in a deliberative process is beyond me. 2
Dunning’s (and implicitly Jacobs’) position is astonishing in light of the fact that CalPERS regularly and routinely engaged in activities that contradict her recommendation. In fact, the legal department is apparently fine with board members writing op-eds, a topic the board addresses every month in its Investment Committee. But Feckner was acting as a mouthpiece for staff, so no wonder the legal department didn’t raise any objections.
Similarly, CalPERS’ Media & Stakeholder Relations Department prepares a daily summary of news which it post on an internal website, and also e-mails the board about these stories. This is not only identical to the sort of e-mail on general topics of interest that Dunning deems to be verboten, but more specifically, if you see sharing news items in the ambit of CalPERS’ general interest as being potentially a deliberative process, this fits the classic definition of a “hub and spoke serial meeting,” something that the Attorney General specifically deemed to be a violation of Bagley-Keene.3
So it should not be surprising to see Dunning endorse what amounts to an extension of CalPERS’ arguable ongoing violation of Bagley-Keene. If it’s not kosher for board members to share even general articles with each other because it might amount to a deliberative process, it’s not any more permissible to launder them through the CEO or another staff member. This is what Dunning recommends:
Dunning: So the Attorney General has said communicating even about what’s to be on the agenda could be a violation of open meeting rules. My view is the type of communication you’re talking about is something that should be given to your CEO to decide whether it should be part of agenda backup, or if you want to mention it during trustee comment at a board meeting – “Hey, I saw this really fascinating article. I think you’d all be interested. I’ve brought copies of it. I’m happy to provide it.” That’s where you do it. You don’t do it through emails before the meeting.
Notice that what Dunning recommends is to make the CEO the arbiter of what the board can and cannot share, further limiting its authority and even competence. If this really is a legal issue, the CEO is not the person to make the call, but the fiduciary counsel, in its presumed capacity as a lawyer acting primarily for the board.
Moreover, as anyone who participates in meetings knows, information in an article will not be read carefully or digested in real time. That’s the big reason PowerPoint is a poor information vehicle: studies have found repeatedly that people cannot digest information verbally and visually at the same time. Even trying to absorb dumbed down bullet points interferes with comprehension.
Finally, there is a fix for CalPERS’ problem, even if you accept Dunning’s stringent view of when information-sharing amounts to deliberation. The Board could convene a weekly meeting solely for this purpose. The board does not need to have a quorum, since that is a requirement for decision-making under Rogers Rules of Order, not for Bagley-Keene. The board president or a designee could call the session, where any other interested members could participate telephonically. He could take any news or other information items, without further comment, from board members. The video would be posted and the stories and/or URLs would be posted on CalPERS’ website.
The fact that Dunning proposed to reduce the caliber of information going to the board and the public rather than trying to increase the quality of decision-making and transparency, does not speak well of her sense of priorities or her problem-solving skills. She may still be the better of the two candidates, but at a minimum, she should be subjected to probing questions so that she understands who she is really serving.
From a 2015 post, with the times referencing a video clip:
Here, staff takes the position that the board does not deserve to have the information it received in the past because it’s not required under California law. In other words, board members are being pushed to accept a lowest-common-denominator standard of review. This is particularly troubling given that the fiduciary counsel advises the board, and not CalPERS as an institution. Thus the board should feel free to set whatever parameters it deems fit above and beyond the legal nminimum.
To their credit, the board members that do object to general counsel Matt Jacobs and his staff trying to present the degradation of the review process as a fait accompli do not back down quickly. Priya Mathur, who speaks at the beginning of this segment, describes how the information about candidates was broken down into subcategories and repeats her view that not having this information makes the board more dependent on staff’s subjective overall ranking. As she makes clear, the candidates supplied information on their various aspects of competence and the board, unlike in the past, is now being denied access to that data (astonishingly, Jacobs takes the position at roughly 1:10 that it would be difficult to do this type of scoring when it was previously the norm).
Similarly, at 2:50, Richard Costigan makes the most vigorous objection to this process, and points out that other recent contracts provided detailed rankings and subcategory information. Again the legal team falls back on the lame, “That information is not required to hire attorneys.” And at 12:31, Dana Hollinger voices her support for the earlier objections and points out that an attorney that already knew CalPERS might be cheaper all in and that she wanted to see an overall budget. While her tone stays level, her face conveys her disgust. And at 2:12, JJ Jelincic had pointed out that the staff scoring process had not corresponded with board’s assessment: the lowest scored candidate last time got the highest marks in the board interviews.
2 The threshold question in Bagley-Keene is whether a meeting has occurred and the public has been deprived of the opportunity to participate. As the Attorney General’s guide notes:
A meeting occurs when a quorum of a body convenes, either serially or all together, in one place, to address issues under the body’s jurisdiction…But a meeting also includes situations in which the body is merely receiving information. To the extent that a body receives information under circumstances where the public is deprived of the opportunity to monitor the information provided, and either agree with it or challenge it, the open-meeting process is deficient.
It’s hard to see how Twitter is problematic. First, it’s not clear that a quorum of board members even subscribes to each others’ Twitter s. Second, any member of the public can not only follow a board member’s Twitter , but they can talk back and everyone who follows can see the reply. In fact, Twitter is arguably a better means for the board to get public input than the tightly subscribed comments period, which required members of the public to schlepp to Sacramento merely to get three minutes of input.
3 From the attorney general’s guide:
The Act expressly prohibits the use of direct communication, personal intermediaries, or technological devices that are employed by a majority of the members of the state body to develop a collective concurrence as to action to be taken on an item by the members of the state body outside of an open meeting. (§ 11122.5(b).) Typically, a serial meeting is a series of communications, each
of which involves less than a quorum of the legislative body, but which taken as a whole involves a majority of the body’s members. For example, a chain of communications involving from member A to member B who then communicates with member C would constitute a serial meeting in the case of a five-person body. Similarly, when a person acts as the hub of a wheel (member A) and communicates individually with the various spokes (members B and C), a serial meeting has occurred.