Among state pension systems, North Carolina’s has been one of the generally-better-run one, with it having comparatively modest underfunding (putting it in better shape than CalPERS and CalSTRS), and historically taking less risk, via having more allocated to fixed income and less to alternative strategies like private equity than its peers. However, the flip side is that North Carolina, thanks to the tender ministrations of the Fed pushing investors our of safe assets, North Carolina has been increasing its allocations to riskier strategies.
North Carolina has a glaring weakness, which is a poor governance structure. It has only one trustee for the state pension system, its State Treasurer. Let us turn the microphone over to former North Carolina Chief Investment Officer Andrew Silton. As the lawyers like to say, res ipsa loquitur. From his website:
Last month North Carolina’s State Treasurer accepted positions as a director for Channel Advisor, a public company in the Raleigh area, and James River Capital, a fund-of-funds in Richmond, Virginia. I’m not talking about ex-Treasurer Janet Cowell. She will be North Carolina’s Treasurer for the next nine months. Among her many public duties, Treasurer Cowell is sole fiduciary of North Carolina’s public pension plan. In my view, these private sector financial positions compromise her role as fiduciary for the pension plan and are a large step backward in the governance of its assets.
In brief, here’s the Treasurer’s case for accepting private sector opportunities while acting as sole fiduciary for the pension plan. First, there’s precedent. In ethically challenged North Carolina, our governor and commerce commissioners also maintained private sector board positions after becoming public servants. Second and rather amazingly, the Treasurer’s private sector activities have the blessing of the State Ethics Commission. In other words, it has been done before, and it is ostensibly legal.
While Treasurer Cowell’s private sector appointments may be legal, they are wrong. As sole fiduciary of the state’s pension plan, the Treasurer has a duty to act in the best interest of the beneficiaries, state employees, and taxpayers who ultimately bear the risk of the state’s pension plan. The standard of conduct is perhaps even higher than the conduct expected of her when she sits on the Council of State, Banking Commission, or Board of Public Instruction. Moreover, recusing herself from decisions that might involve a conflict is hardly a remedy. By accepting a board seat on public company and by advising a fund-of-fund company, the Treasurer has compromised her investment priorities.
Let me underscore how bad the optics are. Cowell couldn’t wait nine months to take these posts? That has the appearance that her new employers particularly valued her current political power and couldn’t wait. The fund of fund role is particularly troubling. Fund of funds, even more so than other investors, find it incumbent to play nice with alternative investors, since their pitch is that they have great access to managers and special acumen in picking among them. And the wealthy individual investor who are important targets for the fund of fund business are not only in no position to assess the various funds in a fund of fund. They often value bragging rights, getting into funds that will give them bragging rights at the country club because they are well known, even better if they are perceived to be difficult to get into. Moreover, one of the reasons the public pension fund world is rife with scandals and lousy performance is fund managers use their political connections to push for special consideration, or have supposedly well informed insiders apply pressure by vouching for the caliber of the manager. Cowell is making herself more, not less, likely to be tainted by wearing multiple hats.
In 2014, the Treasurer commissioned a study to look at potential new fiduciary models for North Carolina’s pension plan and identify other deficiencies in the management of the plan. While the Treasurer accepted and pushed for changes in staffing and employee compensation, she never acted on the new fiduciary models. In my last column for the News & Observer, I wrote about the Treasurer’s failure either to propose a board of trustees for pension investments or to beef up the sole fiduciary model. By accepting private sector employment and not resigning as Treasurer, Treasurer Cowell has tipped the scales. North Carolina needs to have a board of trustees for its pension plan, since it can’t count on its elected sole-fiduciary to devote her undivided attention to the investment requirements of the pension plan.
If you have family, friends, or colleagues in North Carolina, or better yet have media contacts, I hope you’ll send them a link to this post and urge them to take it up with the press and their state representatives. Treasurer Cowell has already pushed the envelope in a very bad way. This can only set the stage for worse.