CalPERS Engineering Board Resignation: “Attempted Coup” via Unconstitutional, Fiduciary-Duty-Violating “Code of Conduct”

In our companion post today, we describe the deceptive manner in which CalPERS’ staff is trying to get the already zombified CalPERS board to cede what little is left of its authority to staff. That post also described two of the important elements of this scheme: that of greatly reducing the number of meeting of the most important committee, the Investment Committee and the Pension and Health Benefits Committee, and reducing the size of the Investment Committee.

This post describes how a proposed Board “Code of Conduct” is nothing of the kind, but is a device to vitiate already weak governance at CalPERS by trying to institutionalize unconstitutional and other illegal standards. They would then be used to oust board members who have the temerity to insist that CalPERS executives serve beneficiaries rather than their own interests.

Even though this is a relatively short document, there is so much wrong with it that we will limit ourselves to its worst features, and skip over other glaring problems, like the failure to reconcile this new set of requirements with existing board governance policies and embarrassing typos. We’ve embedded it at the end of this post.

Here is our high-level list of obvious defects:

Brazenly Asserts Staff Can Push the Board Around

The staff’s mask slipped off in Section 9.4, marked at the bottom of page 2 as inserted “at the request of a workstream lead.” We explained long form in our companion post that only the board subcommittee could present a draft to the Board Governance Committee. By virtue of having 2 members, both had to agree. A “workstream lead” is not a board member, let alone not 2 board members. So this addition is procedurally illegitimate.

It’s also a naked display of presumption and arrogance, and destructive to beneficiary interests:

9.4 CalPERS considers a breach of this code to be conduct which is “tending to injure the good name of the organization, disturb its well-being, or hamper it in its work”

“CalPERS,” which in the context of this document means the roughly 2700 employee organization, has absolutely no business sitting in judgement of the board, its bosses. Moreover, the statement as written is also ludicrous. How pray tell did “CalPERS” arrive at its opinion? Did CEO Marcie Frost fritter away yet more beneficiary funds on one of her all-too-many surveys?

The quote is even more laughable. Someone managed to find it, as a footnote right after the quote shows, on page 644 of a version of Robert’s Rules of Order. The pretense is that this is a relevant citation because the board uses Robert’s Rules of Order. While true, that’s irrelevant. For CalPERS, Robert’s Rules has been adopted solely for the conduct of board meetings, as a document helpfully presented at this very same Board Governance meeting shows:

The Board of Administration (Board) of the California Public Employees’ Retirement System (CalPERS) has embraced the parameters of the Bagley-Keene Open Meeting Act …As such, the Board and its committees must generally conduct their business in meetings that must be pre-noticed, and in which the scope of discussions is generally limited by a published agenda.

The purpose of these Rules and Guidelines is to establish the manner in which these meetings are to be conducted….

The very next section header is “200. Rules of Order,” and right underneath that is “Roberts’ [sic] Rules of Order.” It could not be more clear that Robert’s Rule of Order is to guide parliamentary procedure, and for no other purpose.

And in further proof of staff’s intellectual dishonesty, what pray tell is the context in which this finger-wagging extract about not getting uppity come from?

It also applies only to conduct in meetings. It’s a “haul the hecklers out” provision, nothing more.

Finally, in an institutional “put foot in mouth and chew” moment, in the very same board meeting, before this document comes up for discussion, the staff is asking the board to abandon Robert’s Rules of Order for the vastly shorter Rosenberg’s Rules of Order:

So the plan is to have officially ditched Robert’s Rules of Order and then selectively resurrect a dead letter a short while later.

But let’s now get to the serious part. This addition reveals the deeply warped perspective of CalPERS’ senior staff, that they truly believe that they are in charge and the board has no business asking anything of them. Frankly, anyone who believes that needs to be fired. This attitude is fundamentally hostile to any kind of oversight or even basic compliance with the law. And that means it also poses a threat to beneficiaries and taxpayers. CalPERS executives have just made clear that they regard their own convenience as more important than performing their fiduciary duty.

We’ll have to gloss over a key issue in the interest of space, but this horrid section is explicit, and there are other examples in this document, in depicting the board as having duties to CalPERS, the organization, when no such duty exists in law. In fact, implying or creating any board member duty that competes or conflicts with the board’s paramount duty to serve only the interests of the beneficiaries is a breach of the California constitution.

In keeping, any board member who accepted provision 9.4 by signing this code of conduct would be violating their fiduciary duty by deliberately abandoning their ability to get information out of the organization. After all, it might harsh the mellow of staff to have to ‘splain themselves and do work. And since the Public Employees Retirement Law, which is the statute that establishes and governs CalPERS, clearly makes the board responsible for the operation of the retirement system and contemplates no role for the staff or CalPERS as an organization, this provision also violates the PERL.

Imposes a Gag Rule

Even though the draft states, “No provision of this Code shall infringe upon a Board Member’s unalienable right to freedom of speech,’ it also says:

Board Members understand that they are representing CalPERS in and outside of committee and board meetings, Board Members will be truthful and use accurate characterizations in all platforms when making statements about CalPERS and its decisions and services.

The first sentence is abjectly false. CalPERS board members, like other government officials (see the Fed and the IMF as prime examples), regularly publish op-eds, which are very clearly labeled as their own view and not the views of their institution. The board cannot impose an obligation on board members to speak solely on behalf of CalPERS.

But that false obligation then leads to the trap, the requirement to “be truthful and use accurate characterizations.” Even parties with little history with CalPERS can see through that language. Who will be the arbiter of truth? The CalPERS PR department. This section is meant to require board members to say only things that have been pre-approved by the staff or be sanctioned….which as we’ll discuss shortly, is set up to be a felony.

Presents a Confidentiality Bait and Switch

Our alert readers will probably discern what is wrong with this section:

CalPERS operates as a highly transparent organization, and only limited data are deemed confidential due to investment market sensitivities, personnel and/or other attorney client privileged communications and work products. In those exceptions, Board Members shall maintain the confidentiality of information entrusted to them by CalPERS and any other confidential information about CalPERS business, investments, personnel and other privileged information, except when disclosure is authorized or legally mandated. Board Members will not selectively disclose any non-public information.

See that huge and unjustified leap? After going on piously about transparency and depicting only “limited” information as confidential, the document then requires board members not to disclose mere “non-public” information. There is tons of information that is not confidential at CalPERS that would be of legitimate interest to CalPERS beneficiaries and other external parties, from the trivial, like which sports teams certain staff or board members like, to the useful, like the average time CalPERS takes to complete Public Records Act requests (which could be derived externally by getting a large sample of PRA responses). Yet a board member could be sanctioned under this policy for a mere mention of “non-public” information at a beneficiary meeting.

Creates a Subjective and Therefore Arbitrary “Respect” Standard

This part is creepy:

The CalPERS Board is committed to creating an environment where all individuals are treated with dignity and respect. Informed, critical and respectful debate is expected to ensure the most informed decisions and best outcomes are made on behalf of beneficiaries. Board Members will be professional and respectful to one another, management staff, team members, beneficiaries, and all persons and entities conducting business or providing public comment to CalPERS.

“Respect” when it is not depicted as respect for something particular, like respect for the law, is a deferential attitude towards someone who has earned admiration. From the Oxford Online Dictionary:

1. a feeling of deep admiration for someone or something elicited by their qualities, abilities, or achievements

It is hard to imagine most staff members at CalPERS eliciting that reaction at work. They may be nice enough people but that only takes you so far.

And on top of that, when a person asks that another person change their behavior or actions, even if the one being asked to do something different is clearly in the wrong in the eyes of the law or normal custom, that individual may take offense and view the party making the request (or demand) as rude or abusive merely by virtue of having made the request. Since “respect” cannot be defined or objectively determined, this section provides an open door for ginning up bogus charges of “disrespect” against board members for seeking merely adequate performance from derelict employees or, say, vendors.

It’s perverse to see the staff and board attempting to fetishize respect when they’ve been breathtakingly rude towards board member Margaret Brown. You can be certain that this provision would be enforced selectively, and that stunts like Theresa Taylor shutting off Brown’s microphone, and in the process also violating Robert’s Rules of Order by not allowing her to raise a point of order (which is always in order and always takes precedence) is a reminder of how common childishness and pettiness is on this board.

Creates a Perjury Trap

Last but far from the least in this vague and arguably illegal document:

All Board Members shall read this Code at least annually and shall certify under penalty of perjury that they understand the Code and that they are in compliance.

Perjury is a felony in California. As reader David in Santa Cruz pointed out (emphasis original):

Read item 10 — which requires all board members to read the code of conduct annually and to certify under penalty of perjury that they are in compliance. It’s a Perjury Trap, plain and simple. The staff proposing this idiotic policy are trying to make non-compliance a felony subject to up to three years in the state prison.

They are unlawfully attempting to create a duty to “serve the interests of CalPERS” from whole cloth, when Article XVI section 17(b) of the California Constitution clearly states “A retirement board’s duty to its participants and their beneficiaries shall take precedence over any other duty.” Remember, most of the participants and beneficiaries are local agencies and their employees — who merely contract with CalPERS to invest and administer their retirement plans. The state constitution requires that the CalPERS board act as independent fiduciaries, with no duty to CalPERS itself other than “…providing benefits to participants in the pension or retirement system and their beneficiaries and defraying reasonable expenses of administering the system.“ Art XVI sec 17(a).

These people are diabolical. Follow the money…

The former co-head of McKinsey’s organization practice, Doug Smith, who has also sat on and advised many boards, sees this document as a governance atrocity:

In their latest effort to destroy any semblance of actual governance, CalPERS management now seeks to blow up the Board Code of Ethics with a poison pill that ensures the cabal can not only get rid of Board members who seek to serve beneficiaries but even send those members to jail.

Section 1.2 of the Code cannot be clearer: the Board’s duty to beneficiaries “shall take precedence over any other duty”.

But the proposed Section 9.4 makes it impossible for any Board member to fulfill this duty.

Why? Well to serve beneficiaries, the Board must have access to all information, must be able to question and challenge staff as well as other Board members, must be able to criticize, must be able to problem solve and must be able to communicate and get feedback from beneficiaries.

Section 9.4 eviscerates all of these by threatening Board members with expulsion and jail time for perjury if any action, words, questions, etc can be alleged to “tend” toward injury to the good name of CalPERS, “tend” toward CalPERS well being, or “tend” toward hampering CalPERS in its work.

“Tend toward.” Not actually does any of these things.

No Board member of any reputable enterprise would ever — ever — agree to this provision which, on its face, is nothing other than an attempted coup d’etat.

We’ll see if any board members have the ense to reject this appalling document. Even if it manages to get passed, it will ultimately damage the executives who no doubt would think they’ve pulled a fast one. This “code” is so clearly in conflict with foundational statutes that it would not survive a legal challenge, and the process would subject CalPERS to yet more self-inflicted strife and embarrassment. And if staff manages to pull off this coup, don’t be surprised if we see Fred Buenrostro-like prosecutions down the road.

00 Agenda Item 8a, Attachment 1 - Workstream Four: Code of Conduct – First Reading - item8a-01_a