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A truly civil servant
Low-key and little known, Rob Feckner, the new CalPERS president, is toning down the activist rhetoric. But he vows to fiercely defend the pension fund from its powerful critics -- including California Governor Arnold Schwarzenegger.
Rob Feckner was sitting in his small, windowless office in Sacramento in mid-February when the phone rang. On the other end of the line was one of the country's most famous -- and controversial -- CEOs, Walt Disney Co.'s Michael Eisner, calling from his corporate jet en route to a shareholders' annual meeting in Minneapolis.
Feckner, a 47-year-old glazier just days from becoming president of the board of the California Public Employees' Retirement System, wasn't expecting the call. But he knew immediately its purpose. Eisner hoped that CalPERS would vote its 9.4 million Disney proxies in favor of his reelection to the Disney board.
A year earlier, under Feckner's predecessor, Sean Harrigan, $183 billion-in-assets CalPERS had led a group of pension funds calling on Eisner to step down as chairman and CEO. Under pressure, Disney's board in March 2004 took the chairmanship from Eisner; that September, Eisner announced that he would step down as CEO in 2006. But the media mogul had not yet committed in writing to leaving the job or the board, and that rankled Feckner.
"Nothing has changed," the CalPERS president told Eisner. "We're voting no."
Later, Feckner softened the blow. He decided not to issue a press release reporting on the proxy vote, as CalPERS had done in the past. "We could have done that. But I didn't want to say, 'Mr. Eisner, you're a jerk,'" Feckner remarks.
As it turned out, no bile was needed. Shortly after, Eisner said he would resign this September, a year earlier than expected.
Low-key and unassuming, a natural consensus builder who works quietly behind the scenes, Feckner took the reins of the country's most influential pension plan at a tumultuous time. On February 16 he succeeded hard-charging, headline-creating California labor leader Harrigan, who had been ousted in December after two years in office. CalPERS, which provides retirement and health benefits to 1.4 million workers, has long been a champion of shareholder rights. But under the fiery Harrigan, the nation's biggest pension fund lost support among corporate governance advocates amid sharp criticism by corporate groups that its fights had become politicized and scattershot.
When he signed on as CalPERS president, Feckner also inherited a pitched battle with California Governor Arnold Schwarzenegger over a host of fiscal reforms designed to help close a yawning budget gap. The reforms would have required newly hired public employees to be offered 401(k)-style retirement accounts instead of traditional pension plans. Over time that could severely diminish CalPERS. Insisting that the state could no longer afford the burden of supporting the pension fund, the governor threatened to take the issue to voters this fall in a special election if the legislature didn't pass a law mandating the change.
In late April the governor backed away from the fall ballot initiative in the face of declining approval ratings and a backlash against his proposals. Still, Schwarzenegger says he plans to put an initiative on the ballot in June 2006 unless the legislature enacts pension reforms he can accept. Among the proposals floated by the governor's aides: raising the retirement age, cutting benefits and requiring that the pension system buy derivatives to lessen the volatility of its portfolio.
"We're pleased the governor has backed down and hope that it will open us up to some dialogue," says Feckner. "But we're not going to lose sight of the fact that the governor said he might bring back a proposal for a defined contribution plan. We're not going to let up on our effort to defend America's biggest public pension fund."
Under its new leader, CalPERS will soldier on as one of the country's leading shareholder activists. In the past several years, the pension plan has pushed for additional independent board directors, auditor independence and curbs on excessive executive compensation at the companies in which it holds stakes. Feckner may be soft-spoken -- he says he can count on the fingers of one hand the number of times he has lost his temper -- but he promises to be as forceful an advocate for corporate governance as any of his predecessors.
Most recently, Feckner has taken aim at American International Group, the embattled insurer under investigation by New York State Attorney General Eliot Spitzer and the Securities and Exchange Commission, among others. Feckner and Philip Angelides, the state treasurer and a powerful CalPERS trustee who will run for governor in 2006, urged the pension plan's 13-person board to fight to recoup about $240 million in stock losses that the fund has sustained from its 12.5 million-share stake in AIG. "The losses we have experienced at AIG are beyond the realm of excessive," Feckner says.
Challenging AIG is consistent with the pension plan's tradition of shareholder activism. Last year, though, CalPERS came under fire from even longtime supporters, who argued that the giant pension plan was abusing its proxy powers. The board's most controversial move came in April 2004, when it voted to push for the ouster of Steven Burd, chairman and CEO of supermarket giant Safeway. ThenCalPERS board president Harrigan is an international vice president of the United Food and Commercial Workers Union. He joined CalPERS as a designee of the State Personnel Board, which represents civil service employees; members are appointed by the governor for ten-year terms. Critics charged that the plan was unfairly retaliating for Burd's tough stance against striking Safeway workers, who belong to Harrigan's union.
"Because of Sean Harrigan the argument that shareholder activism is a labor union conspiracy is no longer irresponsible," says shareholder activist and author Robert Monks. "Harrigan has provided the atrocity story that is always going to be available to people who want to undercut responsible corporate governance."
Feckner says he wouldn't have done anything different on Safeway. In fact, he says it was he who took the lead when the board began to discuss its Safeway investment. Still, he adds: "Sean didn't help himself with his style of leadership, which people took to be abrasive and boisterous. We can deliver a strong message without the same media splash."
As chairman of the powerful investment committee in 2003 and 2004, Feckner earned a reputation as a leader who could run a vigorous debate and forge a lasting consensus. He was the trustees' clear choice to succeed Harrigan. (Six of the trustees are elected by active or retired pension plan members, most of whom belong to a public labor union; two are appointed by the governor; one is appointed by the speaker of the California State Assembly; and the four ex officio trustees are the state treasurer, the state controller, the director of the Department of Personnel Administration and a designee of the State Personnel Board.)
"Rob represents a quiet, behind-the-scenes, get-it-done approach," says State Controller Steve Westly. "It's a change in style that in the long run may help to make CalPERS more effective."
But Feckner is no pushover. "He's not a flashy guy; he's not a fiery guy," says State Treasurer Angelides. "Rob's a worker, and he makes no pretense about that. But, boy, he's rock solid."
As he fights to defend the pension fund against its critics, Feckner can point to the plan's solid investment performance. Under the leadership of Mark Anson, chief investment officer at CalPERS since December 2001, the plan's portfolio grew 13.3 percent last year. That compares with a median of 11.8 percent for public pension funds with assets greater than $1 billion, as tracked by Wilshire Associates. The California plan grew an average annual 8.1 percent over the past three years, versus the 7.5 percent median. Over ten years it gained an average annual 10.4 percent, matching the median.
The fund's track record is impressive but irrelevant, argue Schwarzenegger's allies. No state, city or public agency can afford to take on the obligation of supporting a defined benefit plan, they say. The financial risk is simply too great.
Not surprisingly, Schwarzenegger has focused on finances from his first days in office. After defeating Governor Gray Davis in a recall election in October 2003, Schwarzenegger faced a budget shortfall of $15 billion. To balance the budget for the fiscal year ending June 30, 2005, he borrowed the needed $15 billion. Now he faces a projected shortfall of about $6 billion for fiscal 2005'06. Insisting that he will balance the budget without raising taxes, the governor is proposing a $115.7 billion budget that includes cuts in education, social services and state employees' compensation.
Whether Schwarzenegger will be satisfied with pension reforms that stop short of introducing defined contribution plans is unclear. What is clear is that public employees are not exactly clamoring for 401(k)-style retirement plans. Ten states have introduced defined contribution plans for their employees. Participation rates have been dismal even in Michigan and West Virginia, where the plans are mandatory for some employees (see box).
The new CalPERS president, who in February led the board in a 9-3 vote to oppose new defined contribution plans, vows that state workers will never give up guaranteed benefits. "Defined benefits are an insurance policy," Feckner says. "It's something people have worked for forever."
ROB FECKNER KNOWS ABOUT HARD WORK. THE CalPERS president lives on 3.5 acres in Napa that overlook a canyon and a grove of 150-foot redwoods. His maternal grandfather bought the property in the late 1930s, and the Feckner family moved there in the early 1960s. Feckner's father, Chuck, after a stint in the Navy as a fireman on an aircraft carrier, worked as a lineman for Pacific Gas & Electric Co. His mother, Virginia, worked in supply operations in the Air Force for several years. She quit work to raise Rob and his younger brother, Scott, who was adopted in 1963.
When Feckner was growing up, he and Kurt Henke, a neighbor and lifelong friend who is the assistant fire chief with the City of Vallejo Fire Department, spent long summer evenings clearing brush and cutting wood to fuel the stoves that heated their homes through the winter. "There was always work to be done. We could go through 11 or 12 cords of wood in a winter," says Henke.
Henke describes Feckner's father as a physically powerful disciplinarian "who could pick up the end of a power pole and set it in the back of a pickup truck. Chuck would give the shirt off his back to somebody who was downtrodden, but he could be a son of a bitch. You didn't show disrespect, or you got handled the old-fashioned way." Feckner felt the wrath of his father. "The military has never been my style," he says. "I couldn't abide that type of rule. I was always one to question authority. My father and I fought constantly."
Feckner's parents separated in 1976 (they later divorced); his father dropped out of his life, leaving the 18-year-old Feckner to help support the family. "Rob sacrificed more than the average person would ever dream of to take care of his mom and brother," says Henke. "There's some soreness with that. And look at where he is today."
Feckner studied business administration at Napa Valley Community College for two and a half years but failed to graduate. As a student he held part-time jobs driving a school bus and working as an educational aide to a child with muscular dystrophy. Feckner then became a youth adviser at DeMolay International, a Masonic fraternity that aims to instill moral principles in young men aged 12 to 21. It was the start of a lifelong involvement with the organization.
In 1983, Feckner married and took a full-time job as a garbage collector with the Napa Valley Unified School District. The marriage lasted only 16 months, and the job didn't last much longer. In 1985, Feckner qualified as a glazier; he took a job fixing windows and repairing ceiling and floor tiles for the school district.
A natural leader, Feckner found himself drawn to union activities, where increasingly he focused his energies. In 1988 he was elected president of the Napa chapter of the California School Employees Association (its members are school employees other than teachers or administrators). That same year he remarried. That marriage, too, lasted only 16 months.
Feckner proved to be a tough negotiator, disciplined but diplomatic, relentless. He emphasized a process known as "interest-based negotiations." Unlike traditional bargainers, who state their positions and concede as little as possible, interest-based negotiators focus on identifying mutual goals and finding a consensus solution. Feckner bargained fiercely, not only for better compensation and benefits but also for greater respect and compassion for his workers.
To give a custodian with limited literacy a chance for promotion, for example, Feckner persuaded management to have a qualifying exam read aloud. "Rob has a deep respect for people for who they are and not what they do," says Barbara Phare, who retired last year as assistant superintendent of the Napa Valley school district. Three years ago, when budget cutbacks forced a one-third cut in the number of maintenance workers, Feck-ner insisted that the district not hire nonunion employees when it could afford to replace the fired workers.
"His honest, straightforward approach to truth endears him to people," says Phare. Adds John Glaser, the school district's superintendent: "Rob is neither vindictive nor power-oriented. He's a down-to-earth leader who understands politics and is a very effective advocate. That's why he has gotten where he has."
After serving as president of the Napa chapter of the CSEA, Feckner joined the association's statewide board in 1996; three years later he became the CSEA's representative on the CalPERS board. He was a quick study; by 2001 his fellow trustees had elected him head of the health and benefits committee.
Two years later Feckner won the important job of chairman of the investment committee, where he was quick to show his commitment to corporate reform. In April 2003, one month after he became committee chairman, CalPERS approved a $200 million investment in the Taiyo Fund, which invests in underperforming Japanese companies that it seeks to turn around by improving corporate governance. Later that year the committee took a public stance against what it deemed excessive executive pay, deciding that it would vote its proxies against any compensation plan that does not prohibit the repricing of stock options. It also asked the 90 investment banks and brokerages that CalPERS uses for trading to adopt a set of 15 standards to prevent conflicts of interest.
But CalPERS's activism took a decidedly new turn last year when the fund demanded the ouster of Safeway CEO Burd. Because Harrigan is an official of the grocery workers' union that had been striking against Safeway since October 2003, Feckner took the lead when the board began a discussion of its investment in the stock. In December 2003, Feckner wrote a letter to Burd urging him to wrap up negotiations with workers and provide basic health care. "We feel that your corporation's blatant disregard for quality-of-life issues for your long-term employees is having a significant impact on our investment," the letter said.
Then in April 2004, two months after the striking workers had thrown in the towel and accepted a two-tier system with lower wages and reduced health coverage for new employees, Feckner sent a letter to Safeway's board calling for Burd's ouster.
"CalPERS's involvement was a blatant conflict of interest," says Karen Hanretty, spokeswomen for the California Republican Party. "It had everything to do with union membership and very little to do with whether Safeway is a good investment or not."
"The longer the strike dragged on, the more it was costing our fund money," Feckner argues. "It you're dropping that kind of money, it's going to hurt the portfolio."
Even some CalPERS trustees concede that the episode gave corporate activism a black eye. "It didn't look too good," says Robert Carlson, the vice president of the board and its senior member, having served since 1971.
From his first days in office, Feckner avoided the gunslinger approach. Tackling the high-profile issue of proxy voting, Feckner led the board in a move to soften CalPERS's widely criticized policy of opposing corporate directors with perceived conflicts of interest. Previously, the pension fund had automatically withheld proxy votes from members of audit committees of companies that used outside auditors to perform nonauditing jobs, such as tax consulting.
However, Feckner's CalPERS is hardly defanged. The fund may still vote against corporate audit committee members in cases of "egregious behavior." The upshot: In the current proxy season, CalPERS projects that it will withhold votes from about 5 percent of directors up for reelection at the 1,940 companies in its stock portfolio, compared with 24 percent of directors in 2004.
"Last year we went too far and used a shotgun instead of focusing on a few companies," says board vice president Carlson, who served as CalPERS president from 1976 to 1985.
As Feckner fights to protect CalPERS from any future attacks by the governor, a key element of his strategy has involved changing accounting policies to reduce the volatility of state infusions into the plan. The swings in state contributions -- minimal when markets are strong, more substantial when markets are weak -- can wreak havoc with a state's finances. In April the CalPERS trustees decided to revise the fund's actuarial methods to lessen the volatility of the required contributions. Beginning in fiscal 2006, CalPERS will use an unusually long time period -- 15 years -- to calculate what accountants call the smoothed actuarial value of assets. That's a moving average that evens out the swings in market value from year to year. The new method of calculation will lower the state's contribution to CalPERS in the coming fiscal year by $185.6 million, to $2.42 billion. Previously, the pension fund had smoothed over a three-year period; most public plans use a five-year time frame, according to Rick Roeder, an actuary with Gabriel, Roeder, Smith & Co. in San Diego.
Some pension experts think that smoothing is misleading because the actuarial value of a plan's assets can be far removed from the market value. "There's some merit in using smoothing if the sole purpose is to stabilize the level of contributions," says Kenneth Buffin, president of Buffin Partners, a pension consulting firm in Sparta, New Jersey. "But it can result in a funding ratio that is greatly overstated."
At their April meeting the CalPERS trustees also wrote new accounting rules that will ensure that the smoothed actuarial value doesn't vary more than 20 percent from the plan's market value. The almost certain result of these accounting changes: a reduction in the volatility of the state's pension contributions.
ASSET ALLOCATION, WHICH IS SET BY THE BOARD with strong input from CIO Anson, is one area where Feckner sees no need for dramatic change. At the end of March, 67.9 percent of the CalPERS portfolio was invested in U.S. and foreign publicly traded equities and U.S. private equity (CalPERS is one of the country's biggest private equity investors, with holdings of $8.7 billion), 25 percent in bonds, 6.1 percent in real estate and 1 percent in cash equivalents.
Back in 2000, CalPERS shook the pension and hedge fund worlds when it proclaimed its intention to invest $1 billion in hedge funds (the investments are categorized as part of the global equity allocation). But the pension fund has moved slowly and had invested $921 million as of the end of February.
"We took our time," says Anson, noting that the fund was deliberately cautious as it set up risk management and other controls. "Now it will be easier to invest." In December, he says, CalPERS boosted its hedge fund allocation to $2 billion and may soon target it at 3 percent of the global equity allocation, or about $3.6 billion. At the moment there's no timetable for putting the money to work. "I don't think we should be rash," the CIO says.
Even as the board addresses Schwarzenegger's concerns about the volatility of contributions, Feckner remains intransigent in his opposition to any kind of public 401(k).
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Not surprisingly, here CalPERS finds itself supported by firefighters, teachers and nurses, all of whom have been outspoken foes of the governor's proposed reforms. Nurses were upset with Schwarzenegger's attempt, beaten back recently in the courts, to lower required staffing levels for nurses. Teachers, who belong to the California State Teachers' Retirement System, didn't like the idea of merit pay.
Police and firefighters complained that the introduction of defined contribution plans would take away death and disability benefits. Schwarzenegger and Keith Richman, a Republican assemblyman who authored a pension bill that the governor endorsed, insist that that was never part of the plan. But the second sentence of a summary of the initiative that would have appeared on the ballot -- prepared by California Attorney General Bill Lockyer, a Democrat and a likely 2006 gubernatorial candidate -- stated that the measure would eliminate these benefits. Schwarzenegger was forced to back off.
After Schwarzenegger's retreat, Richman quickly proposed legislation that would set up a defined contribution plan and a low-cost hybrid defined benefitdefined contribution system. In the hybrid system the state's pension contribution would be capped -- at 7 percent for white-collar workers, 10 percent for teachers and 14 percent for cops and firefighters. Those rates are about 1 percentage point above the normal rate -- the percentage the state would pay if the pension plans were 100 percent funded. In the hybrid system the money would be divided between the defined benefit and defined contribution plans, with the ratio dependent on investment returns. Employees would also contribute.
Richman's bill would also guarantee that survivors of police and firefighters who die on duty would receive one-time payments of $1 million. Currently, they receive one half of the deceased's final salary annually, which can easily reach more than $1 million over time.
Democrats, who control the state assembly 48-32 and the state senate 25-15, have shown little interest in Richman's proposals. They're cool as well toward a bill that would crack down on disability fraud and another that would calculate a retiree's retirement income based on the final three years' salary, instead of the current final year's.
But Feckner, for one, would like to see some compromise that would prevent Schwarzenegger from calling a special election to vote on a public defined contribution plan.
"I feel that our actuarial staff has created new and innovative ways for us to stabilize the rate of state contributions," Feckner says. "I hope that their hard work pays off and the governor decides that the defined benefitdefined contribution issue can just fade away into the sunset."