Jason Perez’s Ouster of CalPERS Board President Priya Mathur Sends Shockwaves Among Private Equity, Environmental, Social & Governance (ESG) Boosters

As we pointed out before, even though Margaret Brown’s 2017 election defeat of CalPERS board member Michael Bilbrey rattled insiders because Bilbrey had firm union backing and a big warchest, they could still rationalize it because Bilbery had said virtually nothing at board meetings for years. But it’s much harder to brush off Jason Perez’s decisive defeat of board president Priya Mathur. Because Mathur is well spoken and has made herself the face of CalPERS’ ESG (Environmental, Social & Governance), some stories are painting Perez’s victory as a blow to CalPERS’ ESG efforts. Although I didn’t work with Perez on his campaign and spoke to him only briefly, when we were both at the same CalPERS board meeting in July, the press seems to have misread Perez’s stance, likely based on Mathur’s caricature of his views. Similarly, the fact that Mathur was a spokesperson for CalPERS’ half-baked private equity scheme means her defeat is being depicted as a setback to that as well.

We’ll look at two stories, one in Funds1000, the other in Responsible Investor. They are both stunned at the fact that Perez won, which suggests that they haven’t been following Mathur’s checkered career closely enough. The last time she was up for election. Mathur’s challenger was an open pension “reformer,” as in backer of restricting benefits, which is usually a prescription for an extremely meager vote. If you knew the positions of Mathur’s opponent, the fact that she got 44% was uncomfortably high. The fact that Mathur’s opponent got over 40% despite being a not-very-coded advocate for pension-cutting says beneficiaries have a lot of antipathy for Mathur’s long record of scandals. That was compounded by bad press Mathur created for herself in her short tenure as board president, such as failing to clean up the illegal practice of having board members pre-sign blank travel expenses forms until it was called out on this blog, intercepting board member mail, and staunchly defending resume fabricator and now departed Chief Financial Officer Charles Asubonten.

What was important about Perez’s win was that it was decisive, 57% to 43%, and took place despite Mathur having the support of the biggest unions. That points to broad-based unhappiness among beneficiaries, not just with Mathur’s marquee cause, ESG.

We’ll first turn to a story in Fund1000: CalPERS shake-up may delay PE plans. The author covered a presentation Mathur gave the night before election results were due in, apparently expecting it to be a puff piece about a victor, and had to rethink it in light of Mathur’s loss. From the piece:

The far-reaching changes the $365.5 billion California Public Employees’ Retirement System plans for its private equity program still need final board approval. Yet one of the new model’s most important advocates, Priya Mathur, has just lost her seat on the 13-member CalPERS Board of Administration…

“I really believe this is essential for us and I hope to see the board endorse it in coming months,” she said.

Mathur’s sudden departure after losing to first-time candidate police officer Jason Perez means CalPERS needs to elect a new president, heralding a board shake-up that could delay the urgent plans.

Help me. There is absolutely nothing urgent about what CalPERS is trying to do. And the article takes swipes at Perez via “first time” and omitting to mention that he’s actually the head of his union.

The story quickly descends into incoherence and disinformation:

CalPERS is in the final stages of approving a separate entity that would make direct private equity investments and would be governed by a separate, independent board.

It’s not direct if you are having outside operators make the investment. It’s indirect. And then the author repeats some of what Mathur said without exhibiting well-deserved skepticism:

“We are a maturing system, paying a lot in benefits and don’t want to sell assets to pay benefits,” Mathur told delegates. “As truly patient capital, we are not just looking to sell after five to seven years.”

She said the pension fund needed to invest over the longer term to better match its liabilities and tap private opportunities as the number of public companies declines.

First, trees do not grow to the sky. Even companies showing higher-than-normal growth revert to the mean or worse. One can argue that the normal three to six year time horizon for private equity firms may be too short in some cases and lead investors to sell out before a run of outperformance is over does not mean that holding companies longer will produce better returns. This is sheer magical thinking.

Moreover, equities are not a “better match” for fund liabilities. Equities are an extremely uncertain promise and companies fall by the wayside due to changes in regulations, disasters, management scandals, and other reasons.

This is also false and Mathur should know better:

Discussions among investment staff and the board have referenced creating a separate corporation with its own investment staff and board. This would allow CalPERS to compensate and reward private equity professionals differently with more than what is possible in a public pension fund, to help recruit the talent required.

CalPERS in fact can pay investment professionals market rates. And private equity expert Ashby Monk recently told the board that private equity professionals who decide to work for public pension funds are willing to take somewhat lower pay to be in a less aggressive environment.

Mathur also ignores what ought to be a deal killer: any board of a new entity will be responsible under the law to that entity, not to CalPERS.

A much better, but still somewhat problematic story is an op ed by Jay Youngdahl at Responsible Investor, CalPERS election earthquake should shake up responsible investment narrative. Youngdahl argued that there were two theories as to why Perez won. One is that it represented a beneficiary backlash against ESG in the person of Mathur, a high profile advocate:

Mathur has also served three terms on the Board of the Principles for Responsible Investment and is the highest profile PRI official in the U.S. Her defeat is a clear repudiation of the PRI strategy in the US.

Youngdahl also describes a second point of view, that CalPERS has governance problems such as a weak board that does an inadequate job of supervising staff, and graciously credited Naked Capitalism for making that case.

Youngdahl proceeds to make a very important case about the problems with EGS as practiced in the US, and I recommend reading his article in full. However, in doing so, he misses what Perez’s main objections were, and instead fixates on the how the conservative press in California’s straw man.

First, Perez is opposed to how the board spends huge amounts of time on ESG to the detriment of serious consideration of other investment issues. For instance, CalPERS staff has presented almost nothing except a very few, cringe-worthy, childish slides with hardly any text on them describing CalPERS newfangled private equity scheme. CalPERS staff almost certainly wrote the Mathur presentation described above and prepped her for questions, and it’s clear Mathur has no understanding of what she is saying. This is consistent with her lack of any questions about the PE plans except as they relate to her pet ESG agenda. For instance, last November, the sole concern she had about turning over private equity to hired guns it would be even harder to divorce than now was, “Do they share our values?”

ESG is an easy way out for the low-competence CalPERS board because they can look like they are Doing Something in a realm where CalPERS gets positive PR. As far as Perez is concerned, it takes time and energy away from confronting the tough issue of what to do about CalPERS underfunding, and what risks look sensible when so many assets are richly priced?

Second, CalPERS has not been honest with itself that ESG can result in lower returns, despite its own costly decision to dump tobacco stocks at the worst possible time, right before the Federal-state settlement. That example underscored that CalPERS also has a bad habit of jumping onto fads at the worst possible time. Perez does not want CalPERS to stop considering ESG issues, but he wants the board to consider the possible costs to returns….which they should have been doing all along, as fiduciaries.

Recall that when CalPERS started becoming an activist investor, in the 1990s, it focused on governance, and that was a win/win. Focusing on well run companies and forcing reforms in ones that weren’t was a profitable approach and also boosted CalPERS’ influence and image.

There is also evidence that boards and senior managements that are more diverse deliver better investment performance. That may be due to the fact that they are less subject to groupthink, and that more representative leaderships can help avoid product and marketing gaffes.

However, as Youngdahl raises a different set of issues, that ESG represents the top 1%, and that isn’t a good image:

Two crucial errors have been made in the U.S. The first is that the ESG community has made a conscious decision to ally, not with beneficiaries or those seeking to change greedy Wall Street practices, but with mainstream financial entities who are reviled by the American electorate at large – including the electorate at CalPERS.

Recently, for example, PRI staff have appeared arm in arm and coast to coast, avoiding the “fly-over” states in between of course, with the portion of Goldman Sachs that is a PRI signatory.

Goldman Sachs is reviled by the American electorate as an example of those responsible for the 2008 financial crisis, and a major part of the D.C. “swamp.” Those who follow pensions even a bit, know that the US government bailed out financial institutions in that crisis but gave no help to pension funds. The resulting pension underfunding is being used as a tool to increase precarity among workers in the US.

ESG is increasingly seen as the “nice” arm of American financial capital, which is not an attractive look to the American population. ESG conferences, signatories and organizations laud practices such as “activist investing” which leads to major job losses, “alternative investments” with ridiculous fees which diminish returns, and “impact investing” which ignores the “S” and whose only impact is often upon service providers’ bottom line. Workers are not stupid and they can instinctively feel a disdain for this stance.

Youngdahl then gets to issues that Perez might well agree with, that ESG oriented investors have tried making the claim that ESG is a win/win, when that isn’t necessarily so, and relying on that notion makes it easy to go after ESG on its exaggerated claims of merit:

…when “values” are sacrificed for “value,” ESG is just an investing style like any other. Then, ESG becomes only a marketing moniker and the PRI membership becomes a “Good Housekeeping Seal of Approval.”

The “business case” argument, which dominates today, is a very slender reed on which to support ESG activity. Frankly, as much as we would like, the evidence is not that strong. The result is that ESG does not provide enough intellectual support on which to consider and analyze hard issues that exist in ethical investing today, for investors large and small. For example, given rising oil prices and the extraordinary prevalence of fracking, neither divestment nor engagement in the oil and gas sectors is helpful to fund returns today.

Maybe in 40 years this activity will look good, but most present pensioners will be dead by then. Without giving workers and beneficiaries a coherent narrative as to why investors should not fund planet killing activities, not just the report from another swanky conference at a $1,000-a- night New York hotel, they are ripe to fall for the propaganda of the worst forms of investing.

ESG has a story to tell. It is a story of the holistic support and care of retirees. It is a story that takes the community and workers into account, not just the shareholder value. It is a story of investments that provide a decent return without producing inequality or killing jobs. It is a story of the use of savings to combat environmental problems, not exacerbate them.

And, it is a story of not investing in a way that funds the coffers of the 1% who electorally launder their profits through the American political system.

In fact, the number of junkets that board members take, particularly overseas ones, stuck in both Brown’s and Perez’s craw as unjustified given CalPERS’s underfunding. The fact that some of those are ESG related, when flying, particularly business class, has a big carbon footprint, screams hypocrisy.

Youngdahl argued ESG needs to reform itself, but the movement may be too late:

Workers and beneficiaries can become the main advocates for ESG. But unless a major change comes in how today’s ESG is conceived and practiced it is quite possible that we have seen its high water mark. Without such change, it will take a long time to recover.

Yes, an ESG movement that never considered preserving jobs or protecting worker rights looks an awful lot like one that defines “social” interest along conveniently narrow lines. If Perez’s win causes some long-overdue soul searching about whose interests are really served by ESG investing, that would be an unexpected plus.