On Monday, CalPERS announced that its Board of Administration had adopted 10 “investment beliefs”. According to the press release, these beliefs are intended to provide “a basis for strategic management of the investment portfolio, inform organizational priorities and ensure alignment between the Investment Office and CalPERS staff”. Here are the 10 beliefs:
- Liabilities must influence the asset structure;
- A long time investment horizon is a responsibility and an advantage;
- CalPERS investment decisions may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and beneficiaries;
- Long-term value creation requires effective management of three forms of capital: financial, physical and human;
- CalPERS must articulate its investment goals and performance measures and ensure clear accountability for their execution;
- Strategic asset allocation is the dominant determinant of portfolio risk and return;
- CalPERS will take risk only where we have a strong belief we will be rewarded for it;
- Costs matter and need to be effectively managed;
- Risk to CalPERS is multi-faceted and not fully captured through measures such as volatility or tracking error; and
- Strong processes and teamwork and deep resources are needed to achieve CalPERS goals and objectives.
Each of these beliefs have sub-beliefs. For example, a sub-belief relative to the belief relating to effective management of capital is “Governance is the primary tool to align interests between CalPERS and managers of its capital, including investee companies and external managers”.
At a purely analytical level, these beliefs are so general and open-ended that they could be interpreted, like Polycrates’ dream, in a variety of ways. Nonetheless, these are likely to provide justifications for CalPERS’ positions on shareholder activism, social and environmental issues, corporate engagement and external management compensation.
One also wonders why CalPERS ignored the rulemaking provisions of the California Administrative Procedure Act. Under the APA, a “regulation” means every rule, regulation, order, or standard of general application or the amendment, supplement, or revision of any rule, regulation, order or standard adopted by any state agency to implement, interpret, or make specific the law enforced or administered by it, or to govern its procedure. Cal. Gov’t Code § 11342.600. While there is an exception for a regulation that relates only to the internal management of the state agency, that exception is very narrow. Cal. Gov’t Code § 11340.9(d). To be excepted from the rulemaking requirements of the APA, a standard must directly affect only the employees of the issuing agency, and not address a matter of serious consequence involving an important public interest. Clearly, CalPERS’ beliefs affect persons outside of the agency (e.g., issuers and fund managers) and they address many matters of serious consequence involving an important public interest (i.e., fund condition, corporate governance, climate change, etc.).