Is It CalPERS' Turn to Clean House?

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Critics say CalPERS' response to the debate over placement agents is even more disappointing. Placement agents, the middlemen who direct state investment contracts to money managers, have been the subject of state and federal probes in recent months. The SEC is considering an outright ban on these players—and several pension funds have preemptively decided to restrict their money managers from using placement agents.

CalPERS hasn't. The California pension fund's official position on the SEC proposal is "neutral." "If the only way you are able to get access is to pay someone to use their connections, then you shouldn't get that business," says Mercer Bullard, a law professor at the University of Mississippi and advocate of pension fund reform. "It's morally wrong."

CalPERS' Dear says placement agents play a useful role in connecting big funds with small money managers, who don't have ample marketing staffs. CalPERS recently hired the law firm Steptoe & Johnson to review its relationship with these middlemen. It also asked investment bank Houlihan Lokey to assess the pension fund's lineup of outside money managers to see if they're doing anything improper or charging too much for their services. "One of the major expenses of running a fund is fees," says Dear. "I'm determined to get a deal for our fund."

These sorts of issues have been dogging CalPERS of late. In October the California pension fund disclosed that Arvco Financial Ventures, a placement agency run by former CalPERS board member Albert Villalobos, had received $50 million in fees for winning state investment contracts on behalf of money manager Apollo Global Management (AINV) over a five-year period. Even Dear said the sum "amazed" him. Villalobos didn't return calls.

WEDDING FAVORS

Adding to the controversy, Villalobos hosted a wedding in 2004 at his Nevada mansion for CalPERS then-Chief Executive Fred Buenrostro, according to a Nov. 3 article in The Sacramento Bee. Buenrostro said he didn't have to disclose the wedding under state rules. "It's not whether it is right or wrong, it is the appearance of impropriety," says William J. Pollacek, treasurer for California's Contra Costa County.

Meanwhile, CalPERS' practices seem to be at odds even with its own advice for companies. In recent years the pension has fought hard to get companies to hold annual elections for the entire board so that directors will be held more accountable. That means getting rid of so-called staggered terms in which only a handful of board members come up for a vote each year. At CalPERS' urging, hospital bed maker Hill-Rom Holdings (HRC) announced on Oct. 6 that it would eliminate staggered terms for its board.

CalPERS itself has no such policies. None of its board members sit for an annual election; most serve four-year, staggered terms. CalPERS says its board election process is far more democratic than that of the typical company, where even getting on the ballot can be difficult. Nonetheless, says a CEO at a large company that has been targeted by CalPERS over this issue: "I don't think they have the moral high ground. They have a lot of issues in their shop."

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau. Follow him on Twitter @chrispalmeri .

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