Thursday, July 11, 2013

No Time for Corporate Governance: What Eliot Spitzer Inherits If He Runs and Wins

No Time for Corporate Governance: What Eliot Spitzer Inherits If He Runs and Wins

Former Governor Eliot Spitzer is toying with the idea of running for Comptroller in New York City.  Mr. Spitzer seems to think that the City’s five pension plans with over $100 billion in assets[1] would be a tremendous platform with which to push an active agenda of corporate governance.  For what it’s worth, I think Mr. Spitzer would be a welcome addition to the cadre of activists trying to reform executive pay, board structures, and other company practices.  If, however, Mr. Spitzer were to win election, he’d discover that corporate governance is not high on the list of problems requiring his attention.
Fixing the Pitch (2010)
In my view, the New York City’s pensions are a shaky platform for pushing corporate governance reform.  While Mr. Spitzer was able to use the Martin Act to investigate Wall Street practices as Attorney General, he will not have that kind of leverage if he becomes City Comptroller.  While the City pensions are sizable, they are nonetheless small investors in most major corporations.  Even when they ally with other public pensions, they still do not constitute a huge position in most large companies.  In short, Mr. Spitzer won’t have the big stick he possessed as Attorney General.

However, there’s an even bigger problem with Mr. Spitzer’s agenda.  The New York City retirement plans are in sorry shape.  Collectively, the plans had $107 billion in assets at the end of fiscal 2012 and $171 billion in liabilities.  In other words, Mr. Spitzer would be walking into a $70 billion deficit[2], and that deficit is based on bad pension accounting assumptions.  I’m sure if New York City were required to properly discount the liabilities, the deficit would be 50% to 100% higher.  Moreover, Mr. Spitzer would get to preside over an aging pension plan.  In order to perform his job as Comptroller, Mr. Spitzer would have to spend most of his time trying to reform the existing benefit structure or begging the City for substantially higher contributions to the plans. 

As a steward of the City’s pensions, Mr. Spitzer would also discover that traditional equities would be a smaller and smaller component of the pensions’ assets.  A pension plan with aging beneficiaries requires higher components of fixed income and other lower risk assets.  As a result, Mr. Spitzer’s potential corporate governance platform is going to shrink.

Although the Comptroller is responsible for the City’s pension investments, Mr. Spitzer would have to deal with five different pension boards.  Several dozen trustees have to sign off on changes in asset allocation and corporate governance policies.  Thus, Mr. Spitzer would find himself lobbying and cajoling trustees representing city employees, teachers, the board of education, police department, and fire department.  Mr. Spitzer would find this method of decision-making far different from his days as Attorney General or Governor.

Historically, City Comptrollers has been extremely active in matters of corporate governance.  They’ve publicly chastised companies, joined in coalitions, petitioned the SEC, and sued companies.   When I was CIO for North Carolina, my boss Treasurer Richard Moore worked closely with then Comptroller William Thompson.  Rather than redefining the Comptroller’s role, Mr. Spitzer would join Harrison J. Goldin (1974-1989), Elizabeth Holtzman (1990–1993), Alan G. Hevesi (1994–2001), William Thompson (2002–2009), and John Liu (2010–2013) in the uphill battle of corporate governance.

If Mr. Spitzer wins election, he’s likely to find that corporate governance isn’t his primary challenge.

[1] City Employee’s Retirement ($40.4 billion); City Teachers’ Retirement, ($34.5 billion); Board of Education Employees’ Retirement ($2.1 billion); Police ($22.9 billion); Fire ($7.4 billion)

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