As New York City Comptroller, ‘Sheriff of Wall Street’ Spitzer Would Face Limits

July 30, 2013 by Martin Z. Braun and Henry Goldman

Eliot Spitzer promises that if he gets elected New York City comptroller, he’ll reimagine the office, using about $80 billion in pension stock holdings to keep corporations well-managed and socially responsible.

The former New York governor, who resigned in a prostitution scandal, wants to shake up the comptroller’s role in the same way he revamped the state attorney general’s office when he ran it from 1999 through 2006. Beyond merely auditing agencies and reviewing contracts, he would examine programs to determine how well they are achieving their goals, Spitzer said.

Yet if elected, the former “Sheriff of Wall Street” will find that the comptroller’s office lacks the firepower he had targeting banks as the state’s top law-enforcement officer. He would have to share stewardship of five pension funds with 58 board members appointed by unions and other officials. He would also be working without the prosecutorial authority state law gave him as attorney general.

“The comptroller is not a Lone Ranger,” said Harrison Goldin, who held the post from 1974 to 1989. “The comptroller has to act in concert with others.” Goldin has endorsed Spitzer’s opponent, Manhattan Borough President Scott Stringer, in the Sept. 10 Democratic primary.

Wall Street

As attorney general, Spitzer, 54, rose to prominence by exposing conflicts of interest between Wall Street firms’ analysts and investment bankers. He disclosed subpoenaed e-mails and other evidence to persuade Merrill Lynch & Co., Citigroup Inc. and other securities firms to pay $1.4 billion in pretrial settlements, rather than go to court on charges they misled consumers with biased research.

He was then elected governor, serving for less than 15 months before getting caught patronizing high-priced prostitutes, which forced him to step down in 2008.

Spitzer says he wants to create a coalition of institutional investors, including other public funds, unions and nonprofits for a campaign he says could improve corporate profitability and social responsibility by selecting high-caliber board members, rationalizing executive compensation and forcing public disclosure of corporate political activity.

“Ownership trumps regulation as a way to change behavior,” Spitzer said in a July 29 telephone interview. “What’s been missing has been a unified organizing presence that weaves shareholders together.”

Unions Opposed

As comptroller, Spitzer would be denied one of his most potent weapons as attorney general: use of the Martin Act, a previously obscure 1921 state law granting broad power to prosecute financial fraud. Instead, his stewardship of New York’s pension funds will test his ability to work with dozens of board members, including appointees from unions, most of which have endorsed and raised money for Stringer.

Spitzer, who is financing his own campaign, says his lack of union support means he wouldn’t be beholden to special interests in setting policy. Stringer says the failure to get labor backing shows that Spitzer would have difficulty working with others. Spitzer is also opposed by some women’s groups and business leaders.

Stringer, 53, also says that what Spitzer presents as a new idea for the comptroller’s office really isn’t so new. Since 2006, the New York City funds have sponsored 119 of the 214 proposals put forth by government employee pensions at Fortune 250 companies, according to ProxyMonitor.org, a website sponsored by Center for Legal Policy at the Manhattan Institute for Policy Research.

Late Start

“Eliot is so late to the game,” Stringer said in an interview. “City pension funds have a proud history on corporate governance and responsibility, going back decades to disinvestment of South African companies for its racial policies in the 1980s.”

Stringer says his own views on using pension funds’ shareholder clout to influence corporate management and decision-making parallel Spitzer’s.

“You have to be aggressive with corporate-governance work, and need to press for reforms that improve accountability, transparency, efficiency and performance because that’s good for business,” Stringer said. “But you have to approach this work with balance and maturity and work with a lot of people. It’s wrong to think you’re the sheriff of our pension fund.”

Even when pensions successfully influence corporate behavior, they don’t have much of an impact on asset value, according to Brad Barber, a professor of finance at University of California, Davis. Public pension activism yields “weakly positive” improvements in shareholder value of about 0.3 percentage point, said Barber, who has studied the performance of the California’s Public Employees’ Retirement System’s governance program.

‘Gotcha’ Headlines

Spitzer also says he’ll revamp the way the comptroller audits city agencies, measuring a program’s performance against its goals, not just how an agency spends money.

“An audit should be done not only to ensure that the paper clips that we bought are delivered but also whether policies for which we are investing billions of dollars are in fact generating the results we want,” Spitzer said.

Stringer’s description of how he’d perform in the job doesn’t vary much from Spitzer’s.

“I would use the audit powers aggressively but constructively so we could get real solutions from government and not just get ‘gotcha’ headlines,” Stringer said. “It’s about demanding performance and cutting waste.”

No Club

Elizabeth Holtzman, a former U.S. representative and Brooklyn district attorney who served as comptroller from 1989 to 1993, said she used the pensions’ shareholder power to prod Exxon Corp., now Exxon Mobil Corp., to revamp its environmental practices after the 1989 Valdez oil tanker disaster, and to pressure companies accused of race- or gender-based employment discrimination.

“You don’t have a club, but you do have the power of persuasion,” she said. “In the end, all you can do is try to be persuasive, so it’s those skills that matter.”

Holtzman, former Comptroller William Thompson and former state Comptroller H. Carl McCall have endorsed Stringer.

As attorney general and governor, Spitzer had a reputation for confrontation, not collaboration. He sued Merrill Lynch without informing the U.S. Securities and Exchange Commission and as governor he referred to himself as a “steamroller” who wouldn’t rule out campaigns against fellow Democrats.

As comptroller, Spitzer won’t be able to impose his will on the five boards that control the public pensions, whose assets are valued at about $140 billion.

Union Resistance

When John Liu, the current comptroller, called for the pensions to sell their gun stocks following the shooting deaths of 20 children at a Newtown, Connecticut, elementary school last year, the city’s police retirement fund refused.

Liu did score a win last year when, under pressure from the city pensions, Apple Inc. and five other technology companies agreed to promote greater transparency of their suppliers’ compliance with standards on workplace safety, human rights and environmental responsibility.

Using the pensions to take more aggressive stands on environmental and social issues runs the risk of conflicting with the funds’ fiduciary duty to get the highest investment returns for retirees, said Ross Sandler, director for the Center for New York City Law and New York Law School.

“If climate change really matters, does that mean you can’t invest in Exxon or any gas or oil company, which pay good dividends?” said Sandler. “You’ve now raised the potential for a conflict.”

Spitzer presents the potential to change corporate power structures because he has shown a willingness to shame company officials into bending to his will, said James Copland, director of the Center for Legal Policy at the Manhattan Institute, which generally opposes government regulation of business.

“He’s mastered the art of influence by press conference,” said Copland. “If you’re a company that sells to the general public and Spitzer is out there saying you’re evil because you’re not doing what he says you should do, there’s the potential he can do much more damage.”

Editors: Mark Schoifet, Justin Blum