Wednesday, May 4, 2016

The Treasurer versus the Director: Corporate Governance

The Treasurer versus the Director:  Corporate Governance

I’ve written numerous posts about one of the most unusual developments I’ve seen in the world of public pension plans.  North Carolina’s State Treasurer, the sole fiduciary for the defined benefit plan and Chairwoman of the Supplemental Retirement Boards (the State’s 401(K), 403(B) and 457 plans), is also a director of two publically listed companies.  Yesterday she was elected to the board of James River Group (JRVR).

I’ve been wondering how Treasurer Cowell the public fiduciary might view newly elected Director Cowell through the lens of the Treasurer’s proxy policy.[1]  The proxy policy establishes how the Treasurer votes on corporate matters and the types of policies she prefers when investing in publically listed companies.  The Treasurer’s proxy policy covers all sorts of matters, but three items struck me as issues that would grab Treasurer Cowell’s attention in evaluating Director Cowell of JRVR.

First, Director Cowell sits on a staggered board (also known as a classified board), which Treasurer Cowell’s proxy policy opposes.[2]  A staggered board is one in which directors are elected in two or more classes that are elected in different years.  Director Cowell is a class 2 director.  Staggered boards tend to help entrench management, which fiduciaries like Treasurer Cowell dislike.

Another provision of Treasurer Cowell’s proxy policy calls for executives and directors to own stock in the company (other than grants or options issued by the company) that is a multiple of their compensation.[3] This policy is based on Treasurer Cowell’s sound notion that executives and directors should have some of their own money invested in their companies.  Director Cowell doesn’t own any stock in JRVR other than future grants from the company.

A third provision of Treasurer Cowell’s proxy policy calls for companies to make annual disclosure of their political and charitable contributions.[4]  Director Cowell is a member of a board at JRVR that hasn’t adopted this policy.  On the one hand, Treasurer Cowell favors transparency when corporations enter into political or charitable matters.   On the other hand, Treasurer Cowell has received $7,500 for her two election bids from the Chairman of James River, J. Adam Abram.

The previous discussion might seem academic, except that the North Carolina Supplement Retirement Plan (SRP) appears to own a small amount of JRVR.  One of my readers observed that one of the options in the SRP is a Small/Mid Cap Index Fund managed by Blackrock.[5]  The underlying index is the Russell 2500, and that index includes JRVR.  In addition, Blackrock’s Small/Mid Cap index mutual fund owns JRVR.[6]   Since the Treasurer does not publish a comprehensive set of holdings for the Supplement Retirement Plan, I can’t be totally certain that the state owns a small amount of JRVR in the SRP.  However, there’s a lot of circumstantial evidence that the SRP does own a bit of stock.  Therefore, it’s possible that the Treasurer’s Investment Division had to cast votes involving the election of directors for James River Group Holding.

If the Treasurer’s Investment Division received the proxy, how did it vote in the matter of electing Janet Cowell to the board of directors?  Whether or not they voted, the election of Director Cowell to the James River board highlights the inherent conflict of interest when a sitting Treasurer attempts to serve two masters.[7]  I suppose Treasurer Cowell and Director Cowell can sit down and discuss the matter when the newly minted director returns from her inaugural board meeting in Bermuda.[8]

[2] See, Proxy Policy, Section III, paragraph L
[3] See, Proxy Policy, Section VIII, paragraph E.  Treasurer Cowell would give Director Cowell a bit of leeway on this provision since she’s newly elected to the board.
[4] See, Proxy Policy, Section VII, paragraph B, subparagraph 4
[7] See, the Charlotte News & Observer editorial supporting this view.

[8] If Director Cowell didn’t attend the meeting, Treasurer Cowell won’t be too happy.  The Proxy Policy frowns upon directors who miss meetings.  See, Proxy Policy, Section 3, Paragraph B.

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