NYC pension funds demand tougher clawback provisions

New York City Comptroller John Liu has rallied NYC pension funds in a call for high profile firms JPMorgan, Goldman Sachs and Morgan Stanley to beef up clawback provisions for senior executives.

Liu, who manages assets of five NYC pension funds, has filed shareholder proposals calling on the firms to hold senior executives financially accountable for losses that result from excessive risk-taking and improper or unethical behavior.

Liu says that he targeted JPMorgan, Goldman Sachs and Morgan Stanley because these firms were “among the largest and have come under scrutiny for improper practices”.

The shareholder proposals seek to strengthen the firms’ current clawback policies in three key areas.

Current clawback policies at Goldman Sachs and JPMorgan hold executives responsible only for “material” losses, which Liu says creates unrealistically high legal and financial barriers to clawback actions.

Morgan Stanley’s existing clawback policies do not have this same protection for executives.

Along with the five NYC pension funds, Liu also garnered support from the UAW Retiree Medical Benefits Trust in the shareholder resolution presented to Goldman Sachs.

The medical benefits trust provides health care benefits to 840,000 auto industry retirees and has $54 billion in assets under management.

Liu has also called for the firms to hold their executives accountable for the actions of the subordinates they supervise.

Under current clawback policies, senior executives could still profit from the unethical, improper or excessive risk taking of a more junior staff member.

Finally, the shareholder proposals have called for any decisions by the firms’ boards to recoup executive compensation to be disclosed.

Currently the firms do not have to make such decisions public.

Liu, in a statement announcing the shareholder push, says that the firms have paid out more than $100 million each in the past 18 months to settle state and federal charges in connection with mortgage securities.

Liu says the proposals aim to prevent the types of incentives that encouraged bad practices that contributed to the global financial crisis in 2008.

“No-one should profit or be rewarded with bonuses when engaged in improper or unethical behaviour, Liu says.

“These tougher clawback provisions will not only recover money that shouldn’t have been paid in the first place, but also set the tone for a stronger standard of conduct for company executives as well as their bosses.”

It is unclear how successful Liu will be in his push, but the five NYC pension funds combined hold almost 15.5 million shares in the three firms, valued at more than $483 million.

The New York City pension funds cover municipal government employees and are the New York City Employees’ Retirement System, Teachers’ Retirement System, New York City Police Pension Fund, New York City Fire Department Pension Fund and the Board of Education Retirement System.

As of the end of last year the funds held 10.6 million shares of JPMorgan, valued at $324.3 million; 1.2 million shares of Goldman Sachs, valued at $107.1 million; and 3.7 million shares of Morgan Stanley, valued at $51.9 million.

The five NYC pension funds have more than $108 billion in funds under management.

Liu, a publically elected official, has recently been embroiled in his own scandal, with allegations an intermediary organising fundraising for Liu’s mayoral campaign engaged in improper behaviour.

The intermediary was alleged to have set up straw donors to funnel funds to the campaign, with Liu eventually returning more than $13,000 of electoral donations.

Recently, Liu’s ambitious plans for governance reforms of the five NYC pension plans foundered after he came under scrutiny for several appointments he made to key positions in the Comptroller’s office.

Last year the Wall Street Journal revealed that Liu had appointed two former senior executives of the failed broker MF Global to positions in the Comptroller’s office.

Liu hired Larry Schloss, a former director of the now bankrupt MF Global, to serve as deputy controller for pensions and chief investment officer.

In September last year, Liu appointed Kevin Davis, MF Global’s former chief executive officer, to oversee the pension system’s commodities program.

MF Global collapsed amid allegations that more than $1.2 billion had been withdrawn from clients’ accounts as the broker got into financial trouble.

Liu has proposed a radical overhaul of the NYC pension system, which would result in a single board that would manage investment decisions for the five funds.

Under the governance proposal, which is still being finalised, an asset management organisation overseeing investments for the five funds would be run out of the Comptroller’s office.

The board overseeing the five funds’ investments would also have members appointed by the Comptroller.

The reform proposal needs state approval and legislation is yet to be drawn up detailing the governance changes for the funds.