Wednesday, August 9, 2017

Radical Transparency

As noted by Bloomberg News some days ago, "a recent Wall Street Journal editorial, hardly a left-wing Donald Trump critic, called on the president to adopt a new strategy on the Russia probe: "radical transparency." The recommended course of action is perhaps also fitting for the members of the Board of Administration at the California Public Employeesʻ Retirement System (CalPERS).

Among the harshest criticisms leveled at CalPERS is the lack of transparency surrounding varied decisions combined with a steadfast refusal to engage in open discussions regarding its policies. Indeed, another candidate as a board member at CalPERS has detailed sustained efforts by staff and current board members to prevent the necessary deliberations regarding specific policies.

The red-flag rising from such episodes at CalPERS is familiar terrain for anyone who has conducted reviews of state agency practices. In various over-sight investigations/hearings I conducted over my years with Californiaʻs Legislature, similar efforts to prevent more fulsome discussions often signaled practices that directors of agencies wanted to remove from public view. Some observers of CalPERS have referred to such issues as a problem of "CalPERS culture." Framing the issue as one of CalPERSʻ culture, however, is unnecessarily vague in addition to obscuring what needs to be done to turn things around at CalPERS.

Others in Sacramento have analyzed the so-called cultural problem at CalPERS more succinctly: "Look," as stated by one of my experts from the world of finance described the problem to me some years ago, "if you walk into CalPERS and talk to one or another of their financial consultants, you readily comprehend that too many of these folks view their jobs as preparing their vita for the next available position at Carlyle, Goldman, or some other outfit." The CalPERS problem, from this perspective, is not an abstract, fuzzy cultural attribute - it more closely resembles a more traditional problem of agency capture by a private interest. Too many in top management positions perceive their job as meshing their responsibilities with large financial interests, including private equity firms, instead of a career defined by serving the beneficiaries and people of California.

As still other critics have written, CalPERS management has become wedded with a system of rewards promoting risky behaviors when it comes to investments. Paralleling the kind of analysis provided by Michael Lewis (The Big Short), the CalPERS organization shares a potentially dangerous trait marked by many other "masters of the universe" from the world of finance - they have no skin in the game. Losing beneficiariesʻ money is simply an abstract risk having little bearing on various other rewards.

This system of rewards and compensation, revolving doors with clients, and critical reviews of management practices requires a much higher level of scrutiny. And these are only the initial steps necessary to ensure that the primary objectives of serving both beneficiaries and the public is on firm foundation requires a transformation from management practices obscuring decision-making at CalPERS. It is a policy premised on what we might term a "radical transparency."

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