A Fiduciary Can Only Delegate So Much: The North Carolina Pension
As more details emerge about North Carolina Treasurer Janet Cowell’s appointment to the boards of Channel Advisors and James River Group Holdings, it becomes clearer that this is a terrible precedent. Recently the News & Observer’s David Ranii quoted extensively from the North Carolina Treasurer’s recusal pledge, which details how she’d resolve conflicts of interest between her public duties and her membership on the boards of. She asserts that if there is conflict requiring her to recuse herself from making a decision, “I hereby delegate my signatory authority to the Chief Investment Officer for any decisions, contracts and related documents.” This remedy doesn’t work.
While a fiduciary can delegate a great deal of oversight and decision-making to third parties, I do not believe a fiduciary can completely delegate her responsibility for decisions, which the recusal pledge requires. The Treasurer was elected by the voters to be the sole fiduciary of the State’s pension plans. They didn’t elect the Chief Investment Officer or anyone else to perform that task. While the Treasurer can delegate various aspects of oversight, due diligence, negotiations, and analysis to the CIO and the investment professionals in the Investment Division, she always maintains overall oversight of the pension and the decisions of her subordinates. She can hire money managers, consultants, and other experts to assist her in carrying out her duties. However, she has a duty to make sure she has the people, systems, reports, and processes in place to provide oversight of all contractors. The recusal pledge attempts to completely sever her fiduciary oversight if her involvement on the boards of the two public companies conflict with her government duties. In short, the Treasurer’s attempt to delegate her ultimate oversight over any decisions involving conflicts of interest between her private sector activities and her public duty goes too far.
If one of the Treasurer’s equity managers were to attempt to implement the same remedy in order to address a conflict of interest, the Treasurer would undoubtedly terminate the manager for violating the State’s Investment Management Agreement (IMA) and the fiduciary standard set forth in the IMA. The Treasury rightfully expects her equity managers to act as fiduciaries and would be greatly alarmed if they unilaterally proposed delegating their overall responsibility to an agent.
 See for example, the IMA between Wellington Management and the State Treasurer pertaining to the Wellington Quality Value, which was provided to SEANC under a public records request. See sections 2.1, 3 and 17.1, which make clear that the State’s equity managers must maintain oversight even they employ one of their affiliates, act solely in the interest of the State pension, and cannot assign their contract without the Treasurer’s approval. https://www.dropbox.com/sh/qlyo20q9theslou/AAAeTkLimpGU3mdSPIhfBRzUa/Wellington%20Quality%20Value%20-%20Wellington%20executed%20IMA%20-%202011%200407.pdf?dl=0