In a little more than a year, two champions of shareholder and investment management reform — Eliot Spitzer and Alan G. Hevesi, both coincidentally from New York, the capital of corporate America — have fallen over allegations of illegal activity.
The fall of Messrs. Spitzer and Hevesi ought to prompt pension fund executives, and other institutional investors who had looked to them for leadership in shareholder activism, to re-examine the objectives of corporate and money management reform, and the people leading the charge.
Both Mr. Spitzer, when he was the state's attorney general, and Mr. Hevesi, when he was New York state comptroller and sole trustee of the now $164 billion New York State Common Retirement Fund, achieved some major accomplishments as crusaders on behalf of investors.
Mr. Spitzer brought to light abuses in the mutual fund industry, including improper market-timing. He represented the prototype of the aggressive state attorneys general, often encroaching on federal jurisdiction. In the case of mutual funds, the Securities and Exchange Commission was moving too slowly.
Mr. Hevesi's efforts brought about a $6.1 billion settlement in the WorldCom Inc. class-action securities fraud. Many pension funds, among other investors, shared in the restitution.
In terms of re-examining corporate reform, the troubles of Messrs. Spitzer and Hevesi should reinforce concerns shareholders already have about concentration of power when the position of CEO and chairman is held by one person. This dual role often has led to excesses in executive compensation, and a board of directors complacent about its oversight role and lack of accountability to shareholders. Activists have correctly sought to keep the chairman independent when a company lacks counterbalancing influence from a strong independent board.
In a similar way, the power wielded by the positions held by Mr. Hevesi and Mr. Spitzer can have a corrupting influence, leading to ethical and illegal behavior.
Shareholder activists, like the $850 million American Federation of State, County and Municipal Employees staff pension plan, Washington, and the $558 million United Brotherhood of Carpenters and Joiners of America Pension Fund, Washington, deserve praise for the way they've conducted their campaigns for corporate reform. They have pursued reform through shareholder proposals, seeking and discussion with boards or taking the lead in class-action securities litigation.
But both Messrs. Spitzer and Hevesi could be arrogant and overbearing.
Mr. Spitzer, who resigned as governor March 13 following allegations of his involvement with a prostitution ring, described himself as a “steamroller.” suggesting innocents could get caught in an indiscriminate course to smash wrongdoers. Mr. Hevesi resigned as comptroller in December 2006 after pleading guilty to a felony count of misusing state employees. Mr. Hevesi committed his wrong, in contrast to Mr. Spitzer, to assist his ailing wife.
The fall of Messrs. Spitzer and Hevesi should also chasten corporate CEOs and directors, as well as pension fund trustees, and remind them institutions thrive, not by relying on finding the right person to fill top spots, but by creating a structure of proper checks and balances.
Leadership is important in corporations and fiduciary institutions in focusing on creating value for shareholders and participants. But all leaders need oversight to make them accountable.
