Monday, April 11, 2016

An Error, But an Even More Serious Concern: NC Treasurer Joining Public Boards

An Error, But an Even More Serious Concern:  NC Treasurer Joining Public Boards

My apologies to James River Capital, the Richmond-based fund-of-funds group, because Treasurer Cowell isn’t joining its board.  Instead she’s joining James River Group Holding, a Bermuda-based insurance company with its main office in Chapel Hill.  Thanks to an article by David Ranii of the News & Observer[1], I became aware of my error and the necessity of reading James River’s 2016 proxy statement filed the day before I wrote my post.

In the proxy I learned that Treasurer Cowell will receive $75,000 year for serving on the board plus $25,000 in restricted stock units.[2]  Her service on Channel Advisor, her other board seat, will net her $50,000 in compensation and $150,000 in restricted stock units.[3]  As our State’s Treasurer she makes just under $125,000 per year.

In blessing the Treasurer’s appointment to these companies, the North Carolina Ethics Commission noted that the state pension plan doesn’t own either security in its investment portfolio.  However, the Ethics Commission didn’t go far enough. 

For starters, Treasurer Cowell is chairwoman of the North Carolina Banking Commission, and James River has a direct relationship with a state chartered bank regulated by the Commission.   The chairman of James River, J. Adam Abram, is also chairman of Yadkin Financial Corp., a North Carolina chartered commercial bank.  Mr. Abram owns 522,809 shares or 1.03% of the bank according to the bank’s latest proxy.[4]  Mr. Abram founded Piedmont Community Bank Holdings, which was acquired by Yadkin.  According to the James River prospectus, the company has also made investments and loans to a Piedmont, and those investments and loans were assumed in the acquisition.[5]  It’s unclear from SEC filings if those relationships are still in place, although Mr. Abram owns the stock and chairs the Yadkin board.  I don’t how the bank’s principal regulator can sit on a board of a company whose chairman is also chair of a state regulated bank, even if James River no longer has other investments or loans in Yadkin.[6]

Turning the ownership, of James River, the latest proxy lists D.E. Shaw, Fidelity, and Wellington Management each as owners of over 5% of the shares.  According to the June 30, 2014 holdings report for the pension plan, Wellington manages some $3.7 billion across four equity mandates for the pension plan.[7]  And, according to the December 31, 2015 report for the state’s 401(K) and 457 (deferred compensation plan), they manage another $300 million for the state[8].

Let’s leave aside the question as to why the latest ownership report for the pension is nearly two years old[9], and focus on the fact that Treasurer Cowell has a large investment and business relationship with Wellington.  Wellington earned $12.2 million in fees in 2014[10] and about $8 million in 2013[11] from the pension plan. In her job as pension fiduciary, the Treasurer is supposed to objectively evaluate Wellington’s performance and decide whether they should continue those mandates.   In her new role as a James River director, she now will also look after Wellington’s wellbeing.  Can she still be an objective fiduciary? 

Based on the Ethics Commissions report, none of North Carolina’s managers, including Wellington, owned any shares of James River in any account managed for the pension.  However, Wellington must think that James River is a good investment because they own 6.8% of the company.[12]  Are they now excluded from owning that stock in any portfolio they manage for North Carolina because Treasurer Cowell is a board member?  In other words, is the pension plan deprived of the opportunity to invest in James River because Treasurer Cowell will be a board member of the company?

Presumably Treasurer Cowell would also have to tread carefully when it comes to D.E. Shaw and Fidelity as well.[13]  While the pension doesn’t appear to have an investment relationship with either firm, Treasurer Cowell’s role a public director would make it difficult for the pension to engage either firm as a money manager.  So when the pension plan is searching for new money managers, will one of the largest investment managers in the world (Fidelity) and one of the largest hedge fund complexes (D.E. Shaw) have to be excluded from the searches?  I don’t see how that’s a benefit to the beneficiaries of the pension plan.[14]

Treasurer Cowell’s appointment to the boards of Channel Advisors and James River puts the pension in an unenviable position.  Presumably every long-only equity, credit and hedge fund manager has to be told to avoid the shares or debt of either company.  As I noted earlier, I don’t see why the pension should be deprived of that potential opportunity.  I don’t see how the Investment Division can monitor the situation since some of the pension’s investments are held in funds, rather than directly. 

The Treasurer’s appointment to the board of Channel Advisors is also a bit curious.  Rather than stand for election by the shareholders, the board expanded its membership by one and appointed her to fill the remaining term of that “vacant” seat, which ends after her tenure as Treasurers comes to an end.  Certainly a legal maneuver, but also a convenient way to avoid having the Treasurer subjected to a vote of the Channel Advisor’s shareholders, while she’s in office.[15]

In ethically challenged North Carolina, Treasurer Cowell will be allowed to serve as the sole fiduciary of the pension, Chairwoman of the Banking Commission, and a member of the board of directors of two public companies at the same time.  We don’t have a revolving door problem when it comes to public officials engaging in private sector activity.  The door is wide open.

Apologies also to Naked Capitalism, which picked up my original blog post with the mistake. 

[6] Moreover, James River regularly invests in bank loans according to its 10-K.  While it doesn’t provide any details of that portfolio, there’s certainly the possibility that James River is invested in other North Carolina chartered banking institutions.   See,, page 24.

[9] Not only is the manager performance and the fee reports stale, the information normally included for the Investment Advisory Committee has become very limited and untimely.  See, 
[12] Ibid, page 28.
[13] In addition to the conflict of interest between her current role as Treasurer, and a member of the board of James River, the Treasurer will have to navigate the myriad of corporate governance conflicts and affiliated relationships outlined in the prospectus when James River went public in December 2014.  See, pages 37-38,175-179.
[14] On the other hand, Treasurer Cowell will have a good opportunity to get to know D.E. Shaw because two of its senior executives sit on the James River board.  She’s going to discover that she’s working for them as they control James River with a 48.5% ownership stake.  See,, page 28. 

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