Columbia students solve governance problems

Financial studies students at one of New York’s most-respected business schools, Columbia Business School, are asked to suggest a new governance model for the State Common Retirement Fund, as its current model of a single trustee is held up to be “the worst example of governance” in a large pension fund in the developed world by Professor Andrew Ang.

The current governance structure, where the state comptroller is the sole trustee for the pension fund, has not functioned well in New York. Three comptrollers over a continuous period from 1979 to 2006 have been associated with ambiguity between state (pension) business and personal and political gain.

The current Comptroller, Thomas DiNapoli, has introduced a number of reform initiatives to prevent fraud and increase transparency, including banning placement agents, later adopted by other state funds. And Governor of New York, Andrew Cuomo, this year also introduced a piece of legislation, nicknamed “Hevesi’s law” intended to ban state government officials convicted of abusing powers in their office from collecting a pension upon retirement.

But Ang says none of these reforms address the overall governance of the fund, and the impact of good governance, which according to a number of academic studies is a direct link with better investment performance.

“Who benefits from this – not unions, not taxpayers, not the governor,” Ang says. “To be cynical perhaps the unions don’t understand the true costs of providing the pension, and under the current governance structure, the governor can put blame on the comptroller, the taxpayer doesn’t understand the full extent to which they are being swindled and funds managers are on the inside,” he says.

“There has to be a balance between this model, where the comptroller is the single trustee, and some other large funds, where there are too many trustees.”

Ang, who is the Ann F Kaplan Professor of business and the research director for financial studies at Columbia Business School, challenges students to suggest a better model for governance.

Students study Ang’s paper “Who watches the watchman? New York State Common Retirement Fund”, and are asked a series of assignment questions, including 12 on governance and seven on investment. (access the paper here)

On its website the office of the state comptroller argues that: “Having one person ultimately responsible for the CRF has enabled comptrollers to act quickly to respond to market changes and to protect the CRF from being raided by past governors.”

This is held up in Ang’s class as a case of what not to do.