How CalPERS Staff Keeps the Board in the Dark About Compliance Problems
Recall that in the press reporting on l’affaire Meng, CalPERS in its spin to the press was remarkably open how it intended to bury the matter and not inform the board that its highest-paid officer might have violated the California Political Reform Act.1 From Bloomberg on August 8:
But she [Frost} planned to discipline him — either by cutting his incentive pay or possibly by placing a formal letter into his file.
Institutional Investor confirmed that Meng also believed that his case had been settled before the press uproar…and recall again that since the board had not been informed, it almost certainly implies that the plan was to keep the board in the dark. From Institutional Investor:
It was actually in April that the disclosure issues first came to light internally at CalPERS, when a compliance team flagged a violation: a $70,000 investment in shares of Blackstone Group, which Meng owned at the same time the pension fund made new investments in the firm, according to a Bloomberg report. A former colleague of Meng’s tells Institutional Investor that the then-CIO told this person at the time that an internal investigation had been done and that the issue was resolved.
Needless to say, keeping the board in the dark is a well-established pattern at CalPERS.
While CalPERS does give quarterly compliance reports to the Risk & Audit Committee, if you look at the document, you can see, as the table below illustrates, they are entirely about process and keep the board in the dark about the substance and seriousness of allegations. This example comes from a 2019 report, but if you look at more recent quarterly compliance reports, they all follow the same format:
Note that in the footnote, CalPERS staff directs the board’s attention to the number of complaints, which gives you no clue about that the matters are or more important, there severity. And highlighting that most alerts are about benefits fraud has the effect of flattering the staff, since it implies that most abuses are outside parties trying to take advantage of CalPERS, and not problems within CalPERS. The board would have no way of knowing it there had been an allegation of something as serious as embezzlement, kickbacks, or a rape from this report.
A final, and obvious problem is the unseriousness of the complaints hotline. A basic rule of compliance is that you don’t design an oversight process to report to people who may be part of the problem. Inherently deficient processes like that lead to JP Morgan London Whale and Wells Fargo fake accounts scandal type outcomes. No one interested in career advancement who had an ounce of common sense would ever report a serious violation to this sort of complaint line unless they were afraid they were going to be scapegoated.
If CalPERS actually cared about having an effective complaint process, the hotline, erm, “helpline” would go to the board, say via an outside consultant engaged by a law firm in case CalPERS might feel the need to take legal action. Instead, if you go to the Ethics Helpline page, even the name makes clear that it’s compliance theater. Ethics help? Like helping called redefine their ethics so they don’t see misconduct as a problem? Or like “I’m from the IT Department and I’m here to help,” which a client of mine, a top Chief Information Officer2 put in the same category as “Of course I’ll love you in the morning.”
Yes, there’s an outside consultant, EthicsPoint, Inc., who handles the abuse alerts, but since it reports to staff, who is CalPERS trying to kid?
Moreover, CalPERS makes clear that it might not be such a good idea to complain, with its “Think twice” warning:
And no assurance anything will happen:
The proof here is that no one at CalPERS reported Meng’s conflicts even though they were evident as of when he filed his “starting office” Form 700 on January 31, 2019. One of the reasons for failures to report, in addition to well-warranted cynicism, is despite all the handwaving about the measures EthicsPoint takes to keep reports confidential, any serious allegations of financial impropriety could be made with enough detail to be taking seriously only by individuals with access to information, meaning it wouldn’t be hard to make an informed guess as to who the filing party was.
In case you had any doubt, the compliance reports and the obviously defective complaints process offer further proof that CalPERS board isn’t interested in doing its job of minding a $400 billion store.
1 Meng did not fall afoul of Government Code 1090, which is a criminal conflict of interest, due to his income being so high that he fell into the exemption in 1091.5:
1091.5. (a) An officer or employee shall not be deemed to be interested in a contract if his or her interest is any of the following:
(1) The ownership of less than 3 percent of the shares of a corporation for profit, provided that the total annual income to him or her from dividends, including the value of stock dividends, from the corporation does not exceed 5 percent of his or her total annual income, and any other payments made to him or her by the corporation do not exceed 5 percent of his or her total annual income.
2 This is not an exaggeration. This client at the time was running the largest network in the world except for the Internet itself.