CNBC: Spitzer as Comptroller of NYC Could Be Bad News for Investors

Friday, 12 Jul 2013 08:08 AM

By Michael Kling

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Eliot Spitzer wants to be an "activist investor" as the next New York City comptroller, and that could spell trouble for individual investors.

Spitzer, the former New York governor who resigned after a prostitution scandal, hopes to win the election for New York City comptroller and influence how companies are run as an activist investor.

The comptroller manages the five New York City pension funds, which hold approximately $140 billion in assets in total.

Forbes Columnist:
‘Who the Hell Cleared This?’

If elected, Spitzer said he would avoid political activism.

"This isn't about political activism, let me just take that off the board," Spitzer told CNBC. "This is about the appropriate role shareholders as owners of entities should play. Ownership trumps regulation. ... Neither regulation nor prosecution can generate good judgment within organizations. Only ownership can generate that."

Yet some commentators question if he'll steer clear of political activism. They point to Spitzer's article for Slate last December that urged pension funds and university endowments to pressure private equity firm Cerebus to change its dealings with gun makers.

"Ownership has both responsibility and power," Spitzer wrote in Slate. "It is time for every comptroller and pension fund manager with an investment in Cerberus to use that power."

Spitzer may end up costing other investors, as he could press for uneconomic demands, CNBC cautioned.

"Examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment," legal scholar Roberta Romano wrote in a paper on pension-fund activism.

The pension funds are unlikely to obtain much, if any, gains from shareholder activism, according to CNBC.

Most institutional investors lack the clout to make a difference. In addition, persuading other shareholders to take its side can be challenging, and proxy contests are expensive.

Plus, turning around a troubled company is difficult. Even if the endeavor is successful, stock price gains are shared with the company's other investors. Because fund managers are compared against each other, the activist investor may be helping his competitors.

As comptroller, Spitzer could play favorites with Wall Street by picking which banks get city contracts, which get tougher auditing standards and which get perks like tax-exempt bonds, according to New York Magazine. He could decide to divest from sectors such as tobacco, gambling or food chains using genetically modified organisms.

"These powers have always existed among managers of large pension funds, but they're rarely used," says New York Magazine. "Spitzer, though, seems to relish the chance to bring them back into vogue."

Forbes Columnist: ‘Who the Hell Cleared This?’

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