Before I was a money manager, I practiced a little bit of law. As a young attorney in 1981, I drafted a bill to vest oversight of the investments in the New York Common Retirement Fund in the hands of a board of trustees. New York had and still has a sole fiduciary making investment decisions for their state pension plan. State Comptroller Edward “Ned” Regan was seeking broader investment authority, and Gov. Hugh Carey thought that fiduciary responsibility should be vested in a board.
I wish I still had a copy of the bill and accompanying memorandum, because it perfectly mirrors the majority recommendation in a recent report issued by the North Carolina Investment Fiduciary Governance Commission. Thirty-three years later, we’re having the same debate about the oversight of North Carolina’s pension plan.
There is one important difference, and that difference is unusual. Back in 1981, Comptroller Regan didn’t support the bill, and it died without ever getting out of committee. In 2014, Treasurer Janet Cowell actually formed the commission and urged it to consider alternatives to North Carolina’s sole fiduciary model. It’s a big mark of progress when an elected official actively considers reducing or sharing power. Even one of Cowell’s most ardent critics, SEANC, has lauded the recommendation. Cowell has yet to endorse her commission’s recommendation and ask the General Assembly to form a board of trustees to oversee the state’s pension investments.
After 30-plus years of making presentations to, working for, and sitting on investment boards, I am no longer an ardent supporter of replacing North Carolina’s sole fiduciary with an investment board. Clearly, the concentration of power in one elected official is cause for some level of genuine concern. The state’s pension plan has $87 billion in assets, and one person has responsibility for every decision from asset allocation to individual money managers. Moreover, that person has to simultaneously inhabit the worlds of North Carolina politics and fiduciary responsibility. It’s not a comfortable combination.
However, an eight-member board appointed by various politicians and chaired by the state treasurer isn’t going to eliminate politics from the investment process. While it will ameliorate the appearance of “pay-for-play,” it will create new avenues for political influence. Moreover, exchanging campaign contributions for investment mandates isn’t how politics intrudes into any investment process. Does anyone really think that a money manager can buy a multimillion-dollar investment mandate for a series of $350 campaign contributions (the Securities and Exchange Commission limit)?
If you actually study the list of the pension’s money managers and campaign contribution filings for treasurers Harlan Boyles, Richard Moore and Cowell, you won’t find any pattern. Some money managers contributed. Others didn’t. Most money managers who contribute didn’t get anything.
The politics that infect investment decisions at public funds, as well as endowments and foundations, are far more subtle. Influence is manifested in relationships developed between money managers and politicians. The nine-member board will simply give money managers eight more opportunities to cultivate those relationships. In addition to increasing the role of political influence, an investment board tends to foster compromises rather than investment decisions.
Let me give you some examples from my career. At one point when I was chief investment officer, the treasurer received a phone call from a former president of the United States urging us to make an investment with a certain private equity manager. While we never made the investment, the former president’s call allowed the manager to jump ahead in our due diligence process and get a full hearing. On other occasions, U.S. senators, current and former treasurers from other states, legislators, North Carolina corporate executives, real estate developers, and unions all intervened to push a particular money manager or investment.
With eight new board members appointed by the governor, treasurer, Senate majority leader and House speaker, this type of influence will only increase. Political influence won’t go away; it will just be more diffuse.
During my money management career, I spent a great deal of time cultivating relationships with trustees. It was much more difficult to get access to the sole fiduciaries in places like New York, North Carolina, and Connecticut. However, it was relatively easy to foster a relationship with two or three trustees on a multiperson board and turn them into an advocate for my firm. When it came time to appoint a manager, they would help push the mandate to fruition or force a compromise in which multiple managers split what should have been one mandate. On other occasions, trustees would trade votes. Trustee A would support trustee B’s favorite private equity mandate, if trustee B would support trustee A’s preferred real estate manager.
Not too long ago, I resigned from a retirement board because the internal politics among board members was toxic. I know this all sounds kind of ugly, but moving from a sole fiduciary to a board doesn’t eliminate politics.
The board will also make the chief investment officer’s job a lot more difficult and less productive. Instead of working with the professional staff to develop recommendations for the state treasurer, he’s going to spend an enormous amount of time cultivating relationships with and attending to the particular concerns of board members. When I was chief investment officer for North Carolina, CIOs in other states envied the fact that I could focus on investments instead of the care and feeding of a board.
Critics of the sole fiduciary model point to serious improprieties in New York, where the former comptroller went to prison in 2011. However, the same improprieties occurred at CalPERS and the New Mexico Investment Council, which both have long traditions of using investment boards. In particular, California has more policies, procedures, and transparency than any other public pension plan in the country. Nonetheless, over the years politics has crept into its investment processes, and misconduct has made an occasional appearance.
More pressing matters
The North Carolina investment commission’s report contained a minority view that recommended that the state treasurer remain sole fiduciary, while expanding the role of the Investment Advisory Committee. It’s a close call, but I’d back the minority report.
Although SEANC and others have leveled all sorts of charges against the state treasurer and the pension plan, the vast majority of these assertions are without merit. I believe there are legitimate concerns about the pension plan’s increased investments in alternatives and the accuracy of the national accounting standards governing pension plans. However, the fact remains that North Carolina has one of the strongest public pension plans in the United States. It has survived stock market crashes and recessions, an Internet bubble, and a credit crisis. It operates in the real world, so politics have come into play from time to time.
While the governance of the state pension plan can be strengthened, I’m not sure we need to have a board of trustees. Moreover, if I were a state employee, I’d be far more concerned that salaries for the average public employee have not budged in five years. The General Assembly has far more pressing matters than adding eight more chairs to the treasurer’s conference room.
Andrew Silton’s Meditations on Money Management columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/