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The reporters at the News of the World hacked cell phones to get tabloid scoops, and CalPERS is appalled.
In a statement last week quoted by many financial news outlets, Anne Simpson, the state pension fund’s corporate governance chief, denounced the “corruption of the governance system” at News Corp., the international media conglomerate commanded by Rupert Murdoch.
Until Murdoch pulled the plug in hopes of tamping down the scandal, the London-based News of the World was News Corp.’s biggest newspaper, with a circulation of 1 million.
CalPERS owns a $110 million stake in News Corp., and Simpson seized on the illegal phone-hacking to criticize the company’s dual-class share structure, which allows Murdoch to keep control without owning a majority of the stock.
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“The situation is very serious, and we’re considering our options," Simpson was quoted as saying. “We don’t intend to be spectators – we’re owners.”
Critics say CalPERS’ pronouncements on corporate governance carried more weight before the pension fund’s own in-house corruption scandal and its alleged unfunded pension liability became public.
CalPERS has “so many governance challenges and conflict of interest problems,” said Stanford University Professor Joe Nation, who supervised a 2010 study that pegged the state’s unfunded public pension liability at half a trillion dollars.
“The question we need to ask is: Should CalPERS be as concerned about these governance problems elsewhere, or the social interest issues they take on?" Nation said in a phone interview. Perhaps, he said, CalPERS' focus should be on "earning the rate of return they need to fully fund their system.”
Jack Dean, editor of the California Public Policy Center’s pensiontsumani.com, which tracks public pension issues, called the CalPERS pronouncement on News Corp “pot-calling-the-kettle-black syndrome.”
In a phone interview, he continued: “Even if (CalPERS) were squeaky clean in terms of what’s been transpiring with these scandals, I would still have a problem with them criticizing the way other boards are set up, because I believe the CalPERS board is stacked against the taxpayers.”
Of course any shareholder in News Corp. has a right to be concerned about the trajectory of the British phone-hacking scandal. News Corp.’s share price has dropped from about $18.50 to below $16 in a month, and there’s no sign that the scandal has been contained.
Police, parliament and a British judge are conducting investigations. In addition to shuttering the newspaper where hacking newsmakers’ phones was apparently a regular practice, Murdoch has been forced to withdraw his $12 billion bid to buy the BSkyB satellite broadcasting company.
Meanwhile, Rebekah Brooks, a Murdoch news executive, has been fired and arrested. During testimony before Parliament, Murdoch himself was hit with a protester’s shaving-cream pie. The scandal has even touched Piers Morgan, the former News of the World editor who replaced famed interviewer Larry King on CNN in the U.S.
It’s a made-for-the-tabloids story, mingling politics (Murdoch is a power in the Conservative Party) and celebrity (the News of World allegedly even hacked the phones of the Royal family).
CalPERS’ bribery scandal lacks celebrities, so it’s not really tabloid fare. Still, it’s dispiriting enough: As the Los Angeles Times’ Michael Hiltzik wrote, it combines “corruption, moral corrosion and board-level inattention on a staggering scale.”
As described in a lawsuit filed by the state attorney general’s office, the scandal involved former CalPERS board member Alfred Villalobos, who went to work as a placement agent for firms that wanted to help run CalPERS’ money.
Villalobos allegedly helped the firms obtain contracts to manage $4.8 billion in CalPERS securities; Villalobos was paid more than $47 million. To get the business, Villalabos allegedly wined, dined and bribed. He allegedly gave thousands of dollars worth of gifts to then-CalPERS CEO Federico Buenrostro. The day after retiring, the CalPERS CEO went to work with Villalobos, according to the suit.
The lawsuit accuses the men of securities fraud.
CalPERS said it has cooperated with investigators and is pleased the scandal has been rooted out. Referring to its own internal probe of the issue, CalPERS said:
The special review indicated that although the failures of individuals, rather than CalPERS policies, were what damaged CalPERS and gave rise to the need for the special review, the best policies and procedures should always anticipate that individuals may fail to live up to their ethical and fiduciary obligations.
The scandal broke when CalPERS was reeling from billions in losses from the market downturn that brought on the 2008 recession. Since then, the market has rebounded, and so has the pension fund: in the fiscal year ending June 30, the fund grew 20.7 percent, the best recorded return in more than a decade.
That’s excellent performance, but it doesn’t come anywhere near to digging CalPERS out of its financial hole, says Nation, a former Assembly Democrat-turned Stanford public policy professor.
Nation advocates fundamental reform of the state pension system, on both sides of the ledger. Failing that, given CalPERS’ obligations to pensioners and the likely performance of its investment portfolio, he believes it’s almost inevitable that the fund will need a massive taxpayer bailout within the next 16 years. CalPERS disputed Nation's study.
In an e-mail, spokesman Brad Pacheco wrote, "CalPERS has taken significant steps to put our own house in order and strengthen accountability, transparency and ethics. It's also important to note alleged breaches under investigation by authorities were made by former officials no longer with CalPERS."
As to Simpson's comments about News Corp., he wrote, "At the end of the day, we are a shareowner in these companies and have a responsibility and fiduciary duty to our members to voice our concerns."