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Risk September 19, 2010
In Effort to Restore Confidence, CalPERS Adds Risk Management Officer and Whistleblower Helpline
Following allegations of influence peddling at the nation's largest public pension fund, CalPERS has revamped its governance policies, and its latest reforms are designed to help better manage risk and restore accountability.
(September 19, 2010) — The Sacramento-based $205.5 billion California Public Employees' Retirement System (CalPERS) recently announced two significant reforms designed to restore confidence – the establishment of a Senior Level Enterprise Risk Management Office and Enterprise Chief Risk Officer, and the launch of a new Ethics Helpline to identify fraud and waste.
"Recent events on Wall Street, pension fraud in this state, and even allegations of wrongdoing at CalPERS have taught us that managing risk and ensuring accountability across the enterprise are critical to our effectiveness today and tomorrow," George Diehr, who served as Acting President of the Board at the pension fund's September Board meeting, said in a statement.
Those recent events include allegations of influence peddling by placement agents, or middlemen who help money managers get pension-fund business. In May, California's attorney general filed a civil lawsuit alleging the state's pension fund officials Federico Buenrostro Jr. and Alfred R. Villalobos participated in a scheme to obtain business for investment firms, providing pension officials with luxury trips and other gifts.
"It's a new day at CalPERS, and these additional tools for managing CalPERS are being added to a very important list of efforts we have undertaken in the last 12 months to restore confidence, integrity, and accountability to all that we do," said Diehr.
Until a recruitment search is completed for a new chief risk officer, the board has named Larry Jensen, assistant executive officer, to serve as interim. The chief risk officer will report to Anne Stausboll, CalPERS CEO, and the system's board. While the existing investment risk management team will remain separate from the newly created office, they will work in partnership. The existing team is led by Farouki Majeed, senior investment officer for the asset allocation/risk management unit, and Richard Roth, senior portfolio manager in charge of risk management, who both report to Joseph A. Dear, chief investment officer.
Chief Executive Stausboll added in a statement: "We strive to be the very best at risk management. We will ensure that we ask the important questions, challenge our own assumptions, and hope to become the best at utilizing this discipline to understand and manage threats that could hamper our ability to deliver the best services to our members and employers."
According to a release issued by the largest public employee pension fund in the US, the newly created Helpline will enable the fund to receive tips, concerns, and information regarding possible instances of wrongdoing – including possible allegations of fraud, waste, abuse, conflicts of interests, safety violations, harassment, or other misdeeds.
Additional outlined changed include:
Co-sponsorship of legislation (AB 1743) that will require placement agents to be subject to strict gift limits, campaign contribution prohibitions, and be prohibited from receiving compensation contingent upon any CalPERS investment decision;
Tough rules for communication between Board Members and staff about investment proposals;
Authority to discipline Board Members who violate policy; The pursuit of information and a special review to ensure CalPERS has not been victimized by placements agents; and
A ban on gifts to employees from business partners and potential business partners
Earlier this month, investment chief Joe Dear said during a pep talk to more than two dozen colleagues at CalPERS that the only way out of the pension's mess — the loss of $70 billion in the credit wipeout of 2008 and 2009 and controversy of influence peddling — is to take more risk. "We can take control of our destiny," said Dear, according to Bloomberg. "We can make concrete improvements. Let's get to work."
The news service reported that Dear is embracing investments in private equity, emerging nations, hedge funds and public works projects to achieve market-beating profits, as opposed to investing in safe bets, such as US Treasury bonds. Additionally, he will request the pension's board of administration to trade exchange-traded funds and derivatives more aggressively than it does now.
To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742
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