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CalPERS to seek improved corporate governance, stricter Wall Street rules

The huge state pension fund also plans a thorough review of its investments in May.

February 09, 2009|Marc Lifsher

SACRAMENTO — The nation's biggest public pension fund, which has lost more than a quarter of its value in the last seven months, is planning to rally big investors nationwide to demand changes in the way Wall Street operates.

The new chief executive of the California Public Employees Retirement System said the fund would work with other state pension funds and retirement systems to insist on greater openness in the way companies are run, tougher regulation by federal agencies, stricter rules on investment-rating groups and better international financial oversight.

CalPERS, an acknowledged pioneer in pushing companies it invests in to improve their internal governance, is ready to take the tactic "to a new level," said lawyer Anne Stausboll, a 10-year fund veteran, who took over Jan. 12.

Such moves, she said, will be a vital part of CalPERS' efforts this year to boost its financial performance. The $174.1-billion fund has lost $65 billion across its investment portfolio since July 1.

Stausboll also promised a full review of the agency's strategy by the CalPERS board in May, including delving into some controversial and money-losing investments.

The stepped-up Wall Street reform effort brought a cautious but initially favorable response from Robert B. McCormick, chief policy advisor for Glass Lewis & Co., a San Francisco firm that advises institutional investors on corporate governance and proxy issues.

"CalPERS has always been in the vanguard of corporate governance by engaging directly with companies," he said, and companies that wind up on CalPERS' "hit list" often "make very positive changes in their performance."

Based on its track record, CalPERS -- backed by other big public pension funds -- "certainly has the heft" to get the attention of executives and regulators around the world, McCormick predicted.

In her first interview, after four weeks on the job, the 52-year-old Stausboll said: "CalPERS will be a leader in trying to drive reforms to change the market both here in the United States and globally in order to restore trust and full transparency." Initial partners in the campaign include the California State Teachers Retirement System and pension funds in New York state and Connecticut, she said.

Details of the program will be outlined for the investment community and the public in March, she said. But its main thrusts already are clear.

* Ensuring more transparency in often exotic and hard-to-comprehend investments

* Strengthening the U.S. Securities and Exchange Commission to ensure that investors' rights are better protected

* Establishing an international organization to coordinate nations' financial regulatory activities

* Making sure that the private agencies that rate bonds and securities are not paid by the companies they are evaluating.

Heightened attention to corporate governance is just one of three strategies that Stausboll and CalPERS are planning with the goal of strengthening the fund's ability to provide healthcare and retirement benefits to more than 1.3 million government workers, retirees and workers' family members.

CalPERS is getting ready to conduct a detailed examination of its assets, with an eye to rejiggering its mix of stocks, bonds, real estate, commodities and private equity holdings. The May review, which has been moved forward from 2010, "is designed to look at whether we want to make any adjustment based on what's going on in the market," Stausboll said.

Though she declined to forecast the results of the asset reallocation, Stausboll expects that commodities, natural resources, real estate and private equity funds would remain part of CalPERS' holdings. "We still see opportunities for the private asset class, a lot of potential in private equity and real estate," she said.

CalPERS' losses in residential real estate have been particularly deep; those holdings fell 35% to $6.08 billion in the year that ended June 30. Its $970-million stake in a failed Santa Clarita project, LandSource Communities Development, is threatened by bankruptcy.

The drop in values is spurring Stausboll to pursue a third initiative, a heightened outreach to all of CalPERS' constituencies: labor, state and local government employers and business partners, including healthcare providers and investment consultants.

Because of recent losses, employers could be asked to increase their contributions to support workers' pensions, a cost that might be hard to bear if the current recession drags into 2010, Stausboll said.

She and her staff "will try very hard to find ways when the market recovers to give some relief to the employers," Stausboll said, "but the shape of that is not known."

CalPERS has suffered negative returns in only four of the last 25 years, she said. "We've been tested. We've been resilient."

The confidence and low-key leadership presented by Stausboll, fund watchers say, is what's needed to get the portfolio back on track in the wake of the departure last year of both the chief investment officer and chief executive.

"What's needed at the helm is common sense, intelligence and pure stability," said William D. Crist, a former longtime board member from the Central Valley city of Turlock. "We don't need wizardry or magic bullets."

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marc.lifsher@latimes.com

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