A bit of CalPERS Kremlinology: when a staff member is tasked to present a policy change devised by someone else, it’s a sign mischief is afoot.1
The example set to take place this Monday at the Investment Committee meeting is that Eric Baggesen, who is in charge of Trust Level Portfolio Management (aka risk and strategy), is going to walk through a slideshow that presents a major organizational change for the Investment Office. Needless to say, Baggesen didn’t devise or recommend these moves. They were almost certainly cooked up by Chief Investment Officer, Ted Eliopoulos, Baggesen’s boss, probably with input from Wylie Tollette, the Chief Operating Investment Officer and the most influential staff member reporting to Eliopoulos.
Here’s the astonishing part: Eliopoulos, as told by his human shield Baggesen, has dumped his most important job responsibilities on Baggesen, who is not even getting an upgrade in his title for all the added stress and added duties. 2 Nor is Eliopoulos proposing what ought to be happening, a change in his title to reflect the abdication of most of his duties, along with a pay cut, and a corresponding pay increase to Baggesen.
Eliopoulos no doubt assumes he can get away with this because he has the board eating out of his hand. After all, the board has already made clear they will allow him to shirk the duties that go with his role and his $700,000+ compensation, so this is just another step in that direction.
For instance, in June, Elipoulos made an aggrieved speech to the board in which he claimed that he was unable to keep staff focused on doing their jobs because CalPERS was getting so much unfavorable press. As North Carolina’s former CIO, Andrew Silton, pointed out:
As the leader of North Carolina’s investment effort, it was my job to ensure that the attacks didn’t distract staff. We simply continued to invest. Mr. Eliopolis’s statement to the investment committee only serves to reinforce my critique of CalPERS. The pension plan has a leadership problem.
Appallingly, instead of telling Eliopoulos that if he couldn’t handle critical press stories and keep his team focused on their duties, maybe he needed to look for a new job, the board gave Eliopoulos an extended round of applause.
Another sign of how well-established the Cult of Ted is at the board is that it awarded him a $135,000 gift last year in the form of bonus clearly in excess of what his bonus plan permitted. 70% of his bonus is based on investment performance. In CalPERS’ 2015-2016 fiscal year, the giant pension fund earned a mere 0.61%, which was clearly below the level needed for Eliopoulos to get any bonus for the investment-related part of his bonus calculation. Yet the board paid him as if he’d met the performance target when he hadn’t.
As reader Brooks Hurd pointed out:
The 0.6% gain that Eliopolous managed to eke out in fiscal year 2016 is roughly equivalent to the rate of inflation for that period. Consequently the real gain of CALPERS for fiscal year 2016 is closer to zero than the abysmal rate of 0.6% that they reported. During the 2016 Fiscal year, the S&P 500 was up 1.2% and the S&P Bond index was up 8.2%. A blind squirrel might have done better than Eliopolous for fiscal year 2016. In my mind, this raises the basic question beyond Eliopolous’ compensation as to whether anyone is actually running CALPERS.
The organizational change raises the question of why Ted thinks he deserves his level of pay when he’s not willing to do the work, and why Baggesen should have Eliopoulos’s duties foisted on him with no corresponding compensation increase. On top of that, it causes other organizational problems and risks.
We’ll review the key part of the proposed change and then discuss the implications.
How Eliopoulos Ditched Most of His Responsibilities
In this presentation scheduled for Monday’s board meeting, . You can see it’s substantively the same as that portion of the CalPERS Enterprise Organization chart, so there is no change in formal reporting relationships. But page 23 (and page 22) focus the discussion on “Trust Level Portfolio Management,” the activity Baggesen runs.
The big switcheroo comes at the very end, the last page of the presentation, after several soporific slides of organizational apple pie and motherhood:
One board trustee’s terse reaction to this page: “What does the CIO do?”
A longer-form take from another expert:
Eliopoulos seems to be explicitly embracing a role for himself as purely the administrative manager of the investment office, while giving away the functional role of Chief Investment Officer to the Trust Level Portfolio Management Managing Investment Director (Eric Baggesen). This role has all of the investment decision-making delegated authority. Surely, Eliopoulos must recognize that he is leaving himself as a minister-without-portfolio and jeopardizing his job over the long-term. Perhaps one could view this positively, that he knows that he is not competent in this area and is not comfortable making risky decisions without the requisite skills.
The wee problem with that generous interpretation is that if Eliopoulos recognizes that he is over his head and has decided he needs to offload the substance of his job to Baggesen, why in God’s name did he seek far more power by asking for and getting for $2 billion of delegated investment authority well over a year ago?
Moreover, by effectively giving up the CIO role, save the public relations and personnel duties, Eliopoulos has confirmed that JJ Jelincic was correct when he said Eliopoulos was unqualified for the job, which should hardly be a controversial statement. Eliopoulos is a lawyer by training, and wound up in his post by virtue of having been a protege of former state Treasurer Phil Angelides. He has no finance training, no CPA, CFA, or even a mere MBA. Nor does he have meaningful on-the-ground experience to compensate for a lack of relevant education. Yet Jelincic was censured for stating the obvious.
Elipolous may try to defend this major change by claiming that the Investment Office needs someone to be able to respond to the need to make quick trigger investment decisions. That “someone” already exists, and it’s the Chief Investment Officer. His most important duty is making major investment decisions. Everything else is secondary.
If there actually were to be a special situation which required CalPERS to make a yes or no call in 48 hours, it falls on the CIO’s desk. If Eliopoulos thinks being out of town at a conference, or having a meeting with the SEC chairman is an excuse for handing off his paramount duty, he’s wildly mistaken. In our overly-connected world, that might mean (gasp!) having to cancel non-critical meetings and dinners with consultants and other s, and hunkering down in his hotel room while accessing a data room remotely.3
Finally, as you can see from the note at the very bottom of the slide, this change is already effective and was made without Board approval.
Eric Baggesen Is On His Way to Becoming a CIO….Somewhere Else
Eliopoulos has set Baggesen up with the perfect CalPERS exit strategy. Having all the taxing parts of the CIO job without the pay and the title makes for a great reason for leaving CalPERS and becoming the CIO at another public pension fund or making the leap to a better paid private sector fund management job. Alert headhunters are almost certain to start calling Baggesen nine months from now, if not sooner. Unless Baggesen is very attached to living in Sacramento, the odds favor him being at another institutional investor within 24 months.
And what does CalPERS do when that happens? Who is going to want to take the thankless job of being the CIO-in-substance to replace Baggesen without the corresponding pay, title, and presumably also the usual perks of external visibility and networking that go with it? And what person with the requisite skills would want to report to a CIO who has kept his job only because he’s great at stroking the egos of troublingly finance-ignorant board members?
More generally, it’s a very bad sign in any meaningful-sized organization when roles that are reasonably well set in that field for good reasons are redefined well away from established norms to work around the peculiar shortcomings of particular individuals. It makes replacing someone much harder in the event of a job vacancy. And those can and do occur for all sorts of reasons. Recall that Eliopoulos’ immediate predecessor Joe Dear died.
Eliopoulos’ De Facto Admission of His Limitations Fatally Undermines the “Independent” Private Equity Entity Scheme
If Eliopoulos think he shouldn’t be making investment decisions, which is the message he has sent loudly and clearly with this organizational change, that also says he has no business being the person in charge of devising and setting up the creation of an “independent” private equity investment unit. As we warned a few weeks ago:
…while the idea of finding ways of making more direct investments and reducing the role of the private equity middleman is sound, the way that CalPERS is proposing to go about it, even at a high concept level, is very poorly thought out and likely to produce bad results…
CalPERS has come up with a bizarre and counterproductive remedy to a glaring problem: it is wanting in private equity expertise….there’s no excuse for CalPERS’ failure to address staff shortcomings. When Mark Anson became Chief Investment Officer of CalPERS in the early 2000s, he saw that members of the investment team needed additional training. Anson, who had a PhD in Finance from Columbia, a JD from Northwestern, and is a chartered financial analyst and a CPA, led twice-weekly after hours sessions himself. Today, CalPERS could require ongoing study from senior investment professionals, organize video courses from top experts, and encourage junior staff members to join in.
Eliopoulos instead appears to be trying to come up with even better devices to mask his shortcomings. And that predisposition greatly increases the odds that the outcome that concerned us most, that of CalPERS replicating the worst feature of its current private equity program by having “independent” mean the new unit runs with little if any oversight and control by CalPERS, is precisely what will come to pass.
The Board Has the Power to Intervene…But Probably Won’t
As we can see above, at a minimum this barmy change is setting Baggesen up to be poached pronto, and to make it more difficult to hire a replacement by having created a bespoke, underpaid post. On top of that, it has to be horribly demoralizing to staff to see Eliopoulos hollow out his job by handing off his most important duties, yet retain his status as best paid employee, and by a huge margin.
Given the strict duties that the California constitution imposes on public pension fund directors to be vigilant about spending trust monies (the “don’t waste money” provisions are tougher than in ERISA), the logical, as well as fair, solution, is to cut Eliopoulos’ pay and increase Baggesen’s, both in a big way.
While Eliopoulos has taken the position that he has the power to give away his job duties and still keep his lofty compensatino, it is the board that controls his compensation and that of Eric Baggesen too. 4
From the CEO delegation:
9. Set the compensation of employees listed in Government Code section 2.0098 and those in Career Executive Assignments consistent with the Board’s established compensation policies and procedures. Thee Board retains the authority for setting the compensation structre and approving the annual incentive plan for 1he CEO. The Board and the CEO share responsibility to set structure and approve the annual incentive plan for the CIO.
If the board were to reduce Eliopoulos’ salary ($503,500 as of fiscal year 2015-2016), he could try claiming that the cut was punitive. But his recourse would be to make a filing with the State Personnel Board, which would result in a public hearing. But people at his level just about never do that because the resulting press attention is deadly. Similarly, Baggesen could file claim that he was being paid “out of class,” meaning too little for his responsibilities, but it would similarly be a career killer.
The final question is where CEO Marcie Frost sits in this picture. Even though the CalPERS board is remarkably passive, that does not mean, as you would assume in a public company, that the CEO has filled the power vacuum. A CEO in a public pension fund has informal constraint on their authority and it takes time to weaken them. For instance, shortly after she took the helm at CalPERS, Frost tried bringing in her chief actuary from her former public pension fund, the State of Washington. She did not appear to appreciate that the chief actuary job at CalPERS is the second most difficult in the US by virtue of CalPERS managing 2200 pension funds. It is exceeded only by the chief actuary for the Social Security Administration. Her candidate was not up to the task. But the way she found out was via a staff revolt, something that would be inconceivable in a public company.
Even if Frost has the nous to recognize that Eliopoulos’ latest move is too cute by far, we have no idea whether he presented it to her as a fait accompli or not or whether she participated in the decision process and failed to see its considerable defects.
Unfortunately for Frost, even though Eliopoulos does not deserve it, he has a lot of credibility with the board, and she almost certainly has noticed that. The board is not capable of admitting to itself that Eliopoulos is what Corporate America calls an empty 42 long. The main source of the board’s fondness for Eliopoulos, his Mr. Rogersish performances, could be provided by an actor at vastly lower cost. I’m sure the Yes Men would be happy to give it a go.
But Eliopoulos is now so clearly not performing that he is on his way out, whether consciously or not. So a charitable interpretation of Frost’s inaction is that she sees the trajectory and it serves her to let nature take its course.
Independent of the internal dynamics, the general public will witness yet another test of whether the board is willing to do its job by intervening in this travesty. History strongly suggests it won’t.5
1 Some recent examples of “Hide the managerial ball”: last month, when Ted Eliopoulos didn’t have the guts to present the new scheme to set up an “independent” and therefore apparently unsupervised private equity entity and so had John Cole do the dirty work. Cole is the Senior Portfolio Manager for “Global Equities” and has not had meaningful involvement in private equity. Similarly, when General Counsel Matt Jacobs used the California open meeting laws as an excuse for having the CEO act as gatekeeper to board members sending articles to each other (which BTW would still be a violation of the law if you accepted the barmy premise that sending an article was tantamount to having a meeting), he had a henchman present the proposed new policy.
2 It appears that Ron Lagnado, who is listed in the slideshow as “Investment Director” (, for instance) may be taking some or part of Baggesen’s former duties, but the presentation isn’t clear, presumably by design. . The fallback was that Baggesen’s then Senior Investment Officer role even as of then was meant to backstop Eliopoulos. So why is Elopoulos even less up to carrying his weight now?
3 But that would require Eliopoulos to travel with a laptop, when the bizarre cultural norm among senior employees at public pension funds is to treat out of town trips for business as a quasi vacation, and take at most a tablet.
4 We are also in the process of investigating whether this organizational change really was within Eliopoulos’ authority.
5 CalPERS loyalists might argue that Baggesen is being set up for a promotion to the CIO job at CalPERS and that Eliopoulos is trying to ease himself out. Even if that’s the case, there are tons of reasons to not like this way of achieving that end. First, even if Baggesen is ultimately the right guy for the job, any search for a new CalPERS CIO should also consider outside candidates. While Baggesen has a lot going for him, CalPERS is weak in the area where it is taking the biggest risks, private equity. A CIO search should give high priority to finding someone with solid expertise in this area. Second, if Eliopoulos is planning his exit, whether or not he has CEO Marcie Frost on board, this approach looks like Eliopoulos is giving himself a lavishly-paid partial sabbatical so he can network more under the guise of participating in various “external relations” events.