National Press Club

Pension Fund Head Advocates Stronger Regulation, Change in Corporate Governance

November 3, 2009 | By Lorna Aldrich |

Joseph Dear, chief investment officer of the California Public Employees’ Retirement System (CalPERS), listed the three critical aspects of financial reform - s trengthening and reinvigorating existing regulations, closing gaps in regulation and improving corporate governance – at a Newsmaker Nov. 3.

He particularly favored a bill coming before the House Financial Services Committee Nov. 4 that would provide shareholders access to proxy ballots for boards of directors. He called this measure the most important in the tool kit to improve corporate governance.

The speaker began with a personal note: his father, J.A. Dear, was president of the NPC in 1964. The younger Dear drew the conclusion that journalism must be a good profession if it meant you got to “hang around” a club. Now, however, he manages assets of $200 billion to provide for health and pension benefits to 1.6 million employees.

He said the financial crisis following the Lehman Brothers collapse in September 2008 created a “wrenching fear that we were headed for financial Armageddon.”

CalPERS lost 35 per cent of its assets from peak to trough of the cycle, which occurred in March 2009, although there has been some recovery since.

“Could that happen again?” he asked. “Yes,” he said, “unless we learn the lessons from the crisis and take the necessary steps to reform.”

Strengthening current regulation of markets would require giving the Securities and Exchange Commission the resources it needs to do its job without being dependent on the firms it regulates, he said.

An important gap in financial regulation could be closed, he argued, if over the counter derivative contracts were required to be traded on exchanges. This measure would allow regulators to create order and bring transparency to this market, he said. But there has been backsliding as legislation has proceeded, he warned, allowing customized as opposed to standardized contracts, a significant loophole in his opinion.

Another reform he advocated would make credit rating firms accountable for their ratings. And they should not receive fees from companies they rate, he added.

On corporate governance, in addition to shareholder access to proxy ballots, Dear proposed separation of the CEO from the chairman of the board position, annual elections and shareholder advisory votes on pay packages. CalPERS did not formulate these positions alone, he pointed out, but as part of the Council of Institutional Investors, which Dear chairs.

Dear reacted to the proposal of an agency to oversee systemic risk in the financial system by saying that if there were proper regulation systemic risk would not arise. But such an agency, he said, should be neither the Federal Reserve not a committee of regulators but a separate entity.