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Sunshine is the best disinfectant. It also causes sunstroke. The San Diego Country Employees Retirement Association (SDCERA) probably receives more negative attention than all other Southern Californian pension funds combined—from this magazine, as well as local and national news organizations. Yet, is it the fund’s attempts at good governance, and not poor investment decisions, that are causing its problems? The composition of the fund’s board is the rule, not the exception, for American pension governance. It has one ex-officio member, four appointed members, and four members elected by pension members. According to our sources, only one of those appointed members has serious financial experience. Compared to its international or endowment equivalents, this board is non-professional and susceptible to public pressure. Yet it has adopted one central tenant of good governance—transparency.
Yes, investment employees have invited criticism that would exist regardless of this transparency. Outsourced chief investment officer Lee Partridge has garnered some vitriol from outside skeptics and internal staff—specifically, Lisa Needle, who recently departed the pension for hedge fund consultancy Albourne Partners. Another employee was recently fired after (but not because of, according to a SDCERA spokesperson) going public with accusations that the fund had breached risk budgets. Yet there is contention within most organizations. The difference between SDCERA and other public funds is its transparency, which manifests with the fund posting video of its board meetings on its website. Combine this with a relatively contentious local political environment in conservative San Diego and a board susceptible to public pressure, and you have a recipe for—well, an SDCERA-type problem.
So is transparency alone insufficient for—and potentially harmful to—good governance? According to numerous governance experts, the answer is yes. “Greater transparency which causes problems, or great transparency alone, is insufficient to have a well-functioning system,” one well-known governance guru, who wished to remain anonymous, told me. “Transparency alone doesn’t fix things.”
“Look, the key is with the Board,” said another governance guru, also anonymously. “You need expertise and you need objectivity. With expertise, it’s about what they bring to the table, what their background and training are. You need knowledgeable people on your investment subcommittees, people with actual expertise in private and public markets. With objectivity—who do they owe their appointment to, and who has the power to remove them?” In SDCERA’s case, these sources say, the true problem lies with the board—not the levels of transparency the fund provides an interested public. With a majority of board members being non-experts, and many being voted in and taken out at the behest of a segment of the public, providing transparency is a half-measure that misses the mark and can, in fact, make the job of managing billions of dollars in retirement capital more difficult.
Perhaps it is helpful to look abroad for the appropriate counterpoint. In Canada, for example, pension funds are organized under the Crown Corporation structure, where there are several degrees of removal from the political process for pension board members. These members almost always have legal or financial backgrounds, and are appointed by individuals who themselves often have expertise in financial or legal matters. Transparency, however, is not considered the height of good governance.
Perhaps SDCERA should be applauded for attempting to improve governance in a field that has much to improve. However, if pension governance experts—and much-lauded examples such as the Canadian model—are to be believed, it has not gone nearly far enough, and is suffering because of it.
—Kip McDaniel
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