A Setback for NYC Pensions

NYC had the opportunity to set a new standard for public pension fund governance.  However, Reuters reports the unfortunate news that Liu’s proposal is DOA:

A contested plan to consolidate the management of New York City’s public pension funds, which was presented in 2011 as a way to depoliticize the system and improve returns, will be dropped by Comptroller John Liu, a source familiar with the situation said on Saturday.

“Liu is pulling” the plan, said the source, who requested anonymity. “Most unions were never really supportive because they believed the city should give some kind of collective bargaining credit to the unions” in return for their agreement.

The comptroller’s decision to relinquish the plan was first reported by the New York Post, citing unnamed sources. . . .

The aim of the plan was to save money, by fattening the pension funds’ returns and lowering management costs.

“We’re overhauling an antiquated pension management system that has needed restructuring for generations – depoliticizing the process, further professionalizing the staff and implementing industry best practices,” Bloomberg said.

NYC Comptroller John Liu (image mycaribnews.com)

Nigeria: Why Its Governors Oppose Creating a Sovereign Wealth Fund

An insightful interview in Nigeria’s Leadership newspaper reveals the reasons for the Nigerian state governors’ resistance to Nigeria’s national SWF:

We have typical problems of infrastructure today: our roads are not good; there is no water, there is security problem; we need to support agriculture; our schools needs classrooms; we require to buy textbooks; we require to build health institutions – and the money we are going to use for these is being saved for the future, don’t forget that we are still moving these problems to the future, too.

So in the final analysis, the savings would be a mockery, unless we come out with a process that allows us to take care of current needs and jointly agree on what the saving should be like.

If we are not talking about infrastructure; we are not talking about roads, water, energy and other things at the local government levels; if there is excess, then we can agree that the excess be saved for the future.

On the other hand, as this WSJ article makes clear, “by saving and investing the petro dollars, Nigeria hopes to break the resource curse. The nation, which derives 80 percent of its revenue from oil, created the sovereign wealth fund to buffer its economy from volatile commodity prices and impose fiscal discipline.”  The Nigerian debate makes clear how political will is essential to the creation and proper functioning of a SWF, but also how the creation of a SWF can shift power within a political system.  In the US, some states have seen their funds as a way to liberate themselves from the federal government’s power of the purse.  A national US sovereign fund, however, would arguably have the effect of consolidating federal power and weakening federalism (and depending on your political leanings, this could be either a positive or negative development).

Qatar Holdings and SWF Passivity

The financial press (see, e.g., this FT article) reported last week that Qatar Holding, a Qatari sovereign fund, is demanding better terms in the Xstrata/Glencore merger.  Bloomberg reports:

Qatar Holding LLC, which built an 11 percent stake in Zug, Switzerland-based Xstrata since February at a cost of about $4.3 billion, wants the agreed offer raised to 3.25 Glencore shares for each of Xstrata’s, compared with the current offer of 2.8 times, according to a statement yesterday.

The move from Qatar’s sovereign wealth fund pressures Glencore to sweeten the bid or walk away as it takes those dissatisfied with the terms to about 14 percent of Xstrata shareholders. That’s close to the 16.48 percent threshold that has the power to block the offer because U.K. takeover rules prevent Glencore from voting its shares in Xstrata.

The move from QH surprised some observers because Gulf SWFs have tended to be passive investors.  I am currently at work on an article on SWFs in corporate governance, and my view is that what QH is doing falls comfortably within both external constraints on SWF activity (rules such as the US’s FINSA) and internal best governance practices.  Briefly, I see Qatar exhibiting what could be called “restrictive” governance–like a restrictive covenant in a contract is used as an accountability mechanism, the idea here is that an appropriate governance stance by SWFs is neither passive nor active in the same sense as, say, an activist hedge fund. Instead, a restrictive governance position implies stepping in to hold the board and management accountable and to prevent loss of value, as QH is doing here.  The SWF is acting as a residual claimant.  There is no attempt to affect the day-to-day business policy, and there is no effort to, say, encourage the portfolio company to engage in a particular transaction that might create private benefits for the SWF but not for the other portfolio company shareholders.  The SWF is simply using its voting rights as an accountability mechanism. 

What stops the SWF from using its shares to move beyond accountability efforts and into activism?  As I explain in my paper Sovereign Wealth Fund Investment in the Shadow of Regulation and Politics, SWFs recognize that overreaching in governance matters of a particular company will not only increase scrutiny of that investment by host country regulators, but will also increase transaction costs in other investments as regulators in other host countries increasingly scrutinize the SWF’s activities.