Having spent more than a decade looking at the design and governance of institutional investors, I think there’s something really quite appealing about giving a single, highly skilled professional — who is also completely apolitical and highly ethical — absolute authority over a given public pension or sovereign fund. Why? We in the governance game spend a lot of time (too much) thinking about appointment procedures that balance the representative interests of the fund’s stakeholders with the demands of a modern financial institution in terms of skills and talent. And, I assure you, the level of difficulty of staffing an entire Board with sophisticated and depoliticized individuals is, to put it simply, high. (Think triple lindy levels of difficulty.) So, this ‘benevolent dictator style governance model’ has a certain appeal; it would permit real time decision-making and avoid a plethora of extra-financial interests that too often creep into board meetings and decisions. I mean think of it: a sort of Warren Buffet type character that you can trust to run the entire show. It would be awesome!
Snap out of it, Ashby! Pull your head out of your ivory tower! Seriously. As theoretically appealing as this governance model may sound, it’s a recipe for trouble. (As we know all too well, theories of finance don’t always translate into sound finance practice.) And for real world evidence, you need look no further than the New York State Common Retirement Fund.
At the CRF, the New York State Comptroller has absolute authority over the fund. And what happens when you give one man authority over 140 billion dollars? Let’s just say it hasn’t been pretty, as Columbia’s Andrew Ang details in a new case study:
“Edward Regan, who served as comptroller from 1979–1993, was investigated in 1989 by the New York Commission on Government Integrity for directing state business to investment banks and lawyers who had donated to his campaign. The commission also found that an adviser to the comptroller’s office had used office letterhead to produce a campaign agenda which apparently tied the awarding of government contracts with campaign contributions.
H. Carl McCall served as comptroller from 1993–2002. He was criticized for writing to companies in which the CRF had invested on state letterhead asking them to consider the resumes of a number of friends and family members. McCall was also accused of directing CRF business toward campaign contributors. In a class action suit led by the CRF, McCall selected two law firms which had donated approximately $100,000 to his election campaign. The selection of these firms was contested by the other plaintiffs in the case, but the district court ruled that there was inadequate proof of a “pay-to-play” scenario. The third circuit court upheld this finding.
McCall was succeeded by Alan Hevesi…In 2007, then Attorney General Andrew Cuomo launched an investigation into “systemic conflicts of interest” in the comptroller’s office during Hevesi’s tenure. Hevesi was accused, and eventually pleaded guilty, of accepting $1 million in gifts and travel from Elliot Broidy, the founder of Markstone Capital Group, in exchange for granting Markstone a $250 million investment mandate. Hevesi’s political advisor, Henry Morris, pled guilty to taking placement fees on the CRF’s alternative investment portfolio and to providing access to the fund in exchange for campaign contributions. David Loglisci, former chief investment officer of the fund, also pled guilty in connection with the scandal. In total, eight people pled guilty and $170 million was recovered on behalf of the fund.”
I think it was William Pitt who said that power is apt to corrupt the minds of those who possess it. No doubt that’s as true today as it was back in the 1700s.