Thursday, May 19, 2016

Legal Doesn’t Make It Right: The Ethics Commission Chair Defends His Opinion

Legal Doesn’t Make It Right:  The Ethics Commission Chair Defends His Opinion

Yesterday the Chairman of the Ethics Commission, Perry Newsom, defended the Commission’s decision to bless the North Carolina Treasurer’s appointments to two public company boards.[1]  I have no doubt that the Chairman is correct about his analysis and conclusion.  No one is in a better position to analyze a set of facts against the requirements of the state ethics law.  But Mr. Newsom and Treasurer Janet Cowell have completely missed the ethical issue raised when a sole fiduciary divides her loyalties between her duties to the beneficiaries of a public pension and her new obligation to shareholders.  Although the Treasurer has to think and act as a fiduciary, Mr. Newsom and the Ethics Commission do not have that responsibility.



The opinion of the State Ethics Commission is limited to the requirements of the State Government Ethics Act, G.S. Chapter 138A.  It doesn’t consider the State Treasurer’s obligations under other statutes or regulations and doesn’t opine on the Treasurer’s ability to carry out her duties under N.C.G.S.§ 147-69.7, which establishes her fiduciary authority.  The Ethics Commission’s remedy for any potential conflict (recusal) may work for most public acts by North Carolina officials, but it doesn’t work for sole fiduciaries (see, my post “A Fiduciary Can Only Delegate So Much [May 3, 2016]”).

While the Ethics Commission reached the proper conclusion under its statute, the State Treasurer reached the wrong conclusion in accepting the appointments to the corporate boards. The Treasurer has repeatedly cited the Ethics Commission to defend her decision, which should come as no surprise to those who have followed her stewardship of the pension plan. Treasurer Cowell has taken a very legalistic approach to investing.  During her tenure, policies and procedures have piled up, and the investment statute has become even more convoluted.  I wrote about this mistaken approach several years ago (see, “When Lawyers Manage Investments [December 19, 2013].” 

If a sole fiduciary sitting on the board of public company troubles you, you should be even more upset that the Ethic Commission’s opinion applies all the employees of the Department of State Treasurer.  Thus there’s nothing to prevent the Chief Investment Officer, Fiduciary Counsel, or director of an asset class supplementing their incomes by joining corporate boards. 

North Carolina’s public pension plans require the undivided attention of the fiduciary and her agents.  I suspect that Treasurer Cowell would have been very upset if one of her senior advisors had sought permission to join the board of a public company.  However, she thought of the idea first, so it’s apparently okay.

Monday, May 16, 2016

SEANC Calls on the NC Treasurer to Make a Choice and My Latest Painting from the Sea of Cortez

SEANC followed the lead of various media outlets in calling for Treasurer Cowell to resign from her public position or the two corporate boards.  SEANC's Position

Pelicans Solitaria 11" x 16" (2016)  Watercolor and ink

Based on a composite of photos taken on the Sea of Cortez near Roca Solataria at Agua Verde.

Thursday, May 12, 2016

Islands of Cortez 11" x 17" (2016) Watercolor & Ink

Islands of Cortez 11" x 17" (2016)  Watercolor & Ink
Painted based on a composite of photos from the Sea of Cortez

Tuesday, May 10, 2016

A Small Bit of Progress: Most Statewide Candidates in NC Would Not Serve on a Corporate Board

A Small Bit of Progress:  Most Statewide Candidates in NC Would Not Serve on a Corporate Board

I've written a series of posts about Treasurer Cowell's appointment to two corporate boards. The story was picked up by several newspapers in North Carolina and a number of national publications. Editorial boards at the Charlotte Observer, Raleigh News & Observer, Asheville Citizens-Times, and the Greensboro News & Record have condemned the Treasurer's appointments.

Now the N&O is reporting that the vast majority of statewide candidates in NC have pledged that they will not join corporate boards if elected in November. Treasurer Cowell has set a bad precedent. At least her successors and other officeholders won't follow suit.

Here's the N&O's latest story: Most North Carolina statewide candidates would not follow Janet Cowell's decision to join company boards


Here are the editorials:
News & Observer
Charlotte Observer
Greensboro News & Record
Asheville Citizens-Times


In Addition to the News & Observer and International Business Times stories, Treasurer Cowell's appointment and the conflicts of interest have been reported by WUNCBloomberg NewsCNBCIndyweekPoliticoGawker, and Esquire.


Friday, May 6, 2016

Ethical Lapses: The Treasurer’s Appointment to Corporate Boards

Ethical Lapses:  The Treasurer’s Appointment to Corporate Boards

I keep thinking that the story of the North Carolina’s Treasurer’s appointment to two corporate boards is complete.  However as the press picks up the story, I’m finding more and more problems.  In this post, I want to respond to the call by the Asheville Citizens-Times[1] for tighter ethics standards.  Treasurer Cowell has enacted strong ethics standards,  but I suspect she didn’t follow her own standards.   I also want to highlight the finding in David Sirota’s reporting in the International Business Times[2] that makes clear that department staff were involved in her appointment to the two positions. Using public employees or resources for private purposes is a serious matter.[3]


In an editorial the Asheville Citizens-Times called for tighter ethics standards in the wake of North Carolina Treasurer Cowell’s appointments to the boards of Channel Advisor and James River Group Holding.   Jeff Tiberii, a reporter for WUNC, did a fine job of laying out the ethical concerns.[4]  However, I don’t think anyone has looked at the existing regulations promulgated by Treasurer Cowell.  The “Code of Ethics and Conduct”[5] and the “Supplemental Ethics Policy for State Treasurer, Senior Executive Staff and Investment Division”[6] govern the Treasurer’s action. These documents provide detailed guidance and procedures for the precise situation arising out of the Treasurer’s appointment to the two company boards.  Unfortunately, the State Treasurer didn’t follow her own ethics standards.

The Code of Ethics sets an appropriately high standard of conduct for the Treasurer and her employees.  They are to:

Act with integrity, competence, diligence, respect, and in an ethical manner in dealings with the beneficiaries and stakeholders defined by applicable statutes, and in dealings with other participants in the global capital markets.

• Owe a duty of loyalty to beneficiaries and act for their exclusive benefit.

• Exercise prudence consistent with the Treasurer’s fiduciary duties under G.S. Section 147-69.7 and exercise independent professional judgment when conducting investment analysis, making investment recommendations, taking investment actions, and engaging in other related activities.

• Have an affirmative duty to proactively identify and promptly disclose to the Compliance Counsel any personal, social, employment or business activities and relationships that:
-  impact my objectivity
-  create potential Conflicts of Interest
-  impair my ability to make impartial decisions
-  otherwise interfere with my proper performance of official duties

I think it’s self-evident the State Treasurer’s ability to act for the “exclusive benefit” of the beneficiaries has been compromised by the State Treasurer’s appointment to two private sector corporate boards.  Similarly, I believe her “independent professional judgment” has been put into question.  The experts interviewed by WUNC, the News & Observer, and the International Business Times confirm my view.

I’m left to wonder whether Treasurer Cowell followed the affirmative duty to proactively and promptly notify the Department’s Compliance Counsel (the third bullet I reproduced above).  The Code of Ethics calls upon the Compliance Counsel to investigate the situation and make a report to and advise the General Counsel.  I wonder if the Compliance Counsel made the required report.   Clearly, strong ethics procedures didn’t prevent this ethical lapse.

I’m also troubled that department staff were involved in Treasurer’s appointment.   In developing his story David Sirota of the International Business Times made a public records request of the Treasurer’s emails.   It’s now evident that members of the Treasurer’s staff were involved in working on her appointment to the corporate boards.  According to the emails cited by Mr. Sirota, attorneys in the Department worked on both appointments.  Nonetheless, the Treasurer’s press secretary Brad Young, said, “Members of the State Treasurer’s staff were not involved in any way in the negotiation of either board appointment, nor were staff members involved in the process of these board appointments.”  Clearly, Mr. Young is wrong.  Moreover, Mr. Young contradicted himself when he said, “Treasurer Cowell has not been in contact with anyone at the State Ethics Commission.”  The Commission crafted an opinion stating that the appointments would not violate the State Ethics Law.  If the Treasurer didn’t work with State Ethics Commission, then her General Counsel or others in the Department had to have worked on the matter and communicated with the Commission. 

Since Janet Cowell’s role on these boards is supposed to be purely in her capacity as a private citizen, she should not have involved anyone in the department in the matter.  To the extent her appointment raised legal or ethical questions, she should have hired her own attorney.  At this point she should reimburse the State for the work performed by every state employee involved in her appointment to Channel Advisor and James River Group.[7]

After reimbursing the State, the Treasurer has to make a choice:  resign as Treasurer or resign from the corporate boards.




[3] see for example, http://www.wral.com/news/local/story/147459/ reporting the resignation of the Secretary of State in 1996.  According to audit report cited by WRAL, the Secretary of State had used public employees for personal work.
[7] The State Treasurer insisted on this remedy in another matter, according to the News & Observer.  http://www.wral.com/news/local/wral_investigates/story/6071551/.  The Treasurer required her former Chief Investment officer to reimburse the State for the use of a cell phone for private purposes. 

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
[5] https://www.retirement.prudential.com/RSO/web/fundsheets/012003_E023167.pdf
[7] See, the Charlotte News & Observer editorial supporting this view.  http://www.charlotteobserver.com/opinion/editorials/article75204647.html#navlink=Lead

[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.

Tuesday, May 3, 2016

A Fiduciary Can Only Delegate So Much: The North Carolina Pension

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[1], 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.[2]  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. 

The Treasurer’s two private sector appointments and recusal pledge set a bad precedent and should alarm North Carolina’s taxpayers and public pension beneficiaries.  



[2] 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