Copyright 2004, Wall Street Journal

Calpers and Cronyism

No group has been more aggressive in promoting good corporate governance than Calpers, the giant California state pension fund. And for the past decade Calpers has more or less practiced what it preaches. Lately, however, that practice has been slipping.

Calpers' recent record-and a lack of transparency to cover its tracks-is especially notable because of the political nature of its board of trustees. Its 13 members are almost exclusively representatives of organized labor and the Democratic Party. Six are elected by members of Calpers, four are appointed by the Governor (remember Gray Davis?) and three are state officials designated by statute. Under this board, many investments by the $166 billion fund have increasingly focused on satisfying the political goals of labor and the Democratic Party faithful.

The most recent sign of slippage came last month when the California First Amendment Coalition (a group of news organizations) sued Calpers in state court to force the pension fund to disclose the management and advisory fees it pays to private equity and hedge funds. Calpers refused to disclose these fees, arguing that disclosure would shut it out of some funds, hampering its ability to maximize investment returns.

Two years ago, Calpers resisted a similar call for transparency by refusing to disclose performance results for its 300-plus private equity funds. After the San Jose Mercury News sued to make this information public, Calpers settled out of court and began posting performance numbers on its Web site every quarter. What's been revealed since does seem to involve cronyism. Consider:
o In 2001, Calpers began investing in Yucaipa Companies. Yucaipa's head happens to be supermarket titan, Ron Burkle, a generous political donor to two Calpers board members-legendary Democrat Willie Brown, and state Treasurer and likely candidate for Governor Phil Angelides. Mr. Brown worked for Mr. Burkle from 1993 to 1995 as a lawyer and so did another Calpers board member, Sidney Abrams, who has done actuarial consulting for Mr. Burkle. So far, aggregate returns from these investments have been negative.

o Then there's Calpers' relationship with funds managed by Grove Street Advisors. Grove Street manages Calpers' Emerging Ventures program that encompasses over 100 partnerships, and Calpers has also made direct investments in some of these partnerships. More than 25 of these funds' managers have given campaign contributions to Mr. Angelides or to another Calpers' board member, California Comptroller Steve Westly. Returns from all three of the investment funds managed by Grove Street are negative.

o Or how about Calpers' investment in Premier Pacific Vineyards, whose co-chief executive, Richard Wollack, is a Democratic money bags who has also contributed to Mr. Angelides' campaigns? Both investments are under water.

o Another interesting investment was $2 billion with Progress Investment Management. In 2001, Willie Brown got a nice campaign contribution from the firm. So far returns are, yes, negative.

o Also fascinating is Calpers' investment with CIM California Urban Real Estate Fund. Kurato Shimada, a board member, took two years off to work for the marketing firm that was lobbying Calpers to invest in CIM. After the board voted to invest $125 million, Mr. Shimada rejoined the board. (Calpers' staff, by the way, opposed the investment sum of $125 million on grounds that the firm had a limited track record.) Calpers has had better luck on this flyer: Returns have been triple-digit positive.

Calpers, we should note, argues that internal rates of return are not meaningful in the early years of a fund.

Perhaps all of these investments only look like conflicts of interest and they are all worthy on their merits. But they certainly do raise specific questions that warrant disclosure: For example, whether the investment returns are high enough to justify the deals on economic grounds, and whether the fees are in line with the returns-or, at the least, in line with other fees on similar investments or even to other investors. Given that most of these investments have so far been dogs, the question of fees is even more relevant.

Calpers has committed $19 billion to more than 350 private equity funds. These aren't small numbers, and Calpers owes it to its employee clients to account for this money. Transparency, as Calpers so often reminds the world, is a cornerstone of good corporate governance.