The Great Omission
People are the most important component of any investment organization. Policies, procedures, contracts, and fee schedules have their place in any forensic investigation, but it’s human beings that really matter. People make the investment decisions and conduct due diligence. They also waste their time filling out forms to comply with public records requests. Benchmark Financial’s 147-page report, North Carolina Pension’s Secretive Alternative Investment Gamble: A Sole Fiduciary’s Failed “Experiment” doesn’t contain any analysis of the staffing levels, compensation plans, or professional challenges facing the Investment Division of the State Department of Treasurer. An institutional investor cannot prudently make an investment without evaluating the folks making the investment decisions, managing the risk, and running the business. A forensic analysis of an institutional investor can’t reach any valid conclusions without considering the investment professionals who manage the investment program.
Benchmark’s report pays a fair amount of attention to the State Treasurer and references the uncomfortable interface between the Treasurer’s official responsibilities and politics. Mr. Siedle’s references to campaign contributions reminds me of a famous line in the movie Casablanca, “I’m shocked, shocked to find that gambling is going on here!” Politics is a part of any investment process whether we like it or not, just as gambling was a regular activity in Rick’s cafe. I’ve written extensively about the role of politics and influence in public pension plans as well as in endowments and foundations. Moreover, campaign contributions are only are only a small part of political influence. Politics play a role in highway construction contracts, purchasing school textbooks, and investing a pension plan. Rather than merely expressing shock, we need to find ways to limit its influence. The report has little constructive to say on the subject.
While the State Treasurer makes the final investment decision for the State’s pension plans, the professional staff does an enormous amount of work screening and monitoring the pension’s assets, risks, and managers. Although Treasurers Cowell and Moore have made enormous strides in increasing the size of the staff and levels of compensation, the State continues to face challenges in retaining professionals and filling positions. Frankly, money isn’t the only problem. In the last several of years, the Treasurer has enacted more and more policies and regulations that take investment staff away from exercising professional judgment. While some level of paperwork is needed, in my view it has become excessive. Today, the staff can’t accept a cup of coffee from anyone without running afoul of ethics rules. Does anyone really think that a state employee can be bought for a cup of coffee? Does anyone think these kinds of restrictions foster trust and professionalism?
As Benchmark’s report correctly asserts, there’s a great deal at stake as the pension invests more of its assets in alternative investments. Regulations, check lists, and computer systems alone will not suffice. Referrals to the SEC won’t improve the prospects of the state’s pension. A proper analysis of the state pension’s investment program would have covered staffing. If Mr. Siedle had spent just a little bit of time focusing on the professionals, he would have discovered a group of people who work very hard to do the right thing. Moreover, as a consultant for the state employees association, he should have been advocating measures to allow more functions and money to be managed internally. If SEANC were really interested in saving money, they’d support their fellow employees who work in the Investment Division. Instead, they’ve made massive public records requests and then issued a report that tells current professionals that they aren’t valued or trusted. Rather than contributing to a serious discussion on the issues facing the State’s pension plan as it increases its allocation to alternative investments, Benchmark’s report has done a great deal of damage.