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Moore's law

North Carolina Treasurer Richard Moore is leading pension funds to clean up Wall Street abuses. Is he a force for corporate governance -- or just a canny and ambitious politician?

North Carolina Treasurer Richard Moore is leading pension funds to clean up Wall Street abuses. Is he a force for corporate governance -- or just a canny and ambitious politician?

By Justin Dini
October 2002
Institutional Investor Magazine

Back in the mid-1930s, with the U.S. economy mired in the Great Depression and Wall Street widely reviled as a haven for swindlers and crooks, an idealistic North Carolina congressman took up arms against corrupt financiers. Young and politically shrewd, Franklin Willis Hancock helped write the Securities Exchange Act and the Glass-Steagall Act. That legislation, designed to rein in financial excess, helped to define the course of American capitalism for the rest of the century.

Seven decades later, Hancock's grandson is following in the family footsteps, agitating to repair a U.S. financial system once again hobbled by scandal and corruption. Richard Hancock Moore, North Carolina treasurer and sole trustee of the state's $54 billion in retirement assets, has joined forces with Eliot Spitzer, New York's headline-grabbing state attorney general; H. Carl McCall, the New York state comptroller and gubernatorial candidate; California Treasurer Phil Angelides; and several other pension officers in a high-powered alliance designed, they say, to "expand the drive for improving corporate accountability and restore integrity to the financial markets."

Spitzer may be far better known, thanks to his landmark $100 million legal settlement with Merrill Lynch & Co. in May and his investigations of other Wall Street firms, but the native North Carolinian is fast emerging as a powerful advocate for reform. "Moore deserves credit for being the catalytic force behind the pension fund alliance," says Angelides. "It was his idea, and he got everybody together." Moore's group first unveiled its plans at a July press conference, and few doubt that its presence will be felt: Together the pension officers in the group control some $400 billion in assets. Their demands are straightforward, if stringent. Investment banks that execute trades and underwrite state bond offerings must sever the link between compensation for analysts and corporate finance activity and create a review committee to approve all research reports, recommendations spelled out in Spitzer's settlement with Merrill Lynch. The pension officers go further in requiring firms to disclose in research reports whether an analyst has received or is entitled to any compensation from a covered company over the past 12 months. The officers also establish a process to monitor compliance. In addition, Moore's group demands that money managers on the public payroll reveal potential conflicts of interest, such as whether they administer 401(k)s for companies in which they invest; disclose annually how their portfolio managers and research analysts are compensated; and report quarterly their brokerage commissions.

The group followed up its press conference by firing off dozens of letters to North Carolina's money management firms and investment banks, demanding that they provide detailed explanations of how they intend to comply. The pension officers threatened to fire noncompliant money management firms and to withhold business from Wall Street firms that failed to plug holes in the porous Chinese walls intended to separate their institutional research departments from their investment banking arms. Florida, Michigan and Ohio have joined Moore's crusade, and several other states, including Connecticut, are considering adopting Moore's principles as well.

"Thank God for this guy," says Robert Monks, a veteran governance activist and founder of Institutional Shareholder Services, a Rockville, Maryland­based company that advises institutional investors on corporate governance issues. "What Moore is doing is a lot more creative, imaginative and aggressive than anything else that's been done before. You're going at these firms where they eat."

Charismatic, confident, sporting boyish good looks and a Southerner's easy charm, Moore is a natural -- and openly ambitious -- politician who is doing everything he can to seize his moment. "We're sending a strong message to corporate America: We demand a higher level of service from you, and we can do more than just talk about it. We've got the clout to actually do it," says the 41-year-old former federal prosecutor and state legislator, who is widely seen in Democratic party circles as a contender for higher office -- runs for governor or senator have been mentioned -- before the decade is out.

Whether his principles will produce the reforms Moore seeks remains an open question, but money managers and bankers are certainly paying heed. "It doesn't take a brain surgeon to know we are certainly going to comply," says one money manager. "We're taking the requirements very seriously."

Still, some in the financial industry think Moore is overstepping his bounds. "It is a fine line between a principle and a regulation," says David Tittsworth, executive director of the Investment Counsel Association of America, a lobbying group for money managers based in Washington, D.C. "If something has the effect of precluding you from doing business with that state, it doesn't matter what you call it." There are also questions as to how closely Moore and his colleagues will be able to monitor Wall Street's compliance. "State governments generally don't have the staffs to monitor Wall Street goings-on, so the best that can be done is to sever a relationship with a Wall Street firm after the infraction has been committed," says Charles Geisst, a Manhattan College finance professor and author of Wall Street, A History. "After the fact is certainly too late."

Other critics carp that Moore is using the issue of corporate governance to bolster his political career. "It's just marketing," says Fern Shubert, a Republican North Carolina state representative who has sparred frequently with the treasurer. "He's just doing it to raise his profile."

Such criticism has dogged Moore since he mounted his campaign three years ago. Harlan Boyles, who was then serving the last of his 24 years as North Carolina's treasurer, worried that Moore was merely looking to use the job as a stepping stone to higher office. (Moore reportedly considered a run for lieutenant governor before setting his sights on treasurer.) The widely respected Boyles, a Democrat, withheld his endorsement until Moore reassured him that he would devote all his energies to his new post. Says Moore, "If I do my job here, the political side will take care of itself."

Certainly, the North Carolina treasurer draws upon the resources of a powerful office. As one of the country's four sole trustees of a state pension plan, Moore is the final authority on how North Carolina's pension assets -- composed of seven different retirement systems covering 600,000 workers -- are invested. He also chairs the board of trustees overseeing those retirement systems and supervises the state's debt offerings.

Even before he took center stage on the corporate governance front, Moore swept through the once-staid treasurer's office (the previous two occupants served for a combined 48 years) with the force of the hurricanes he battled as the state's top public safety official. Since his election in November 2000, Moore has overhauled the investment strategy of the nation's tenth-largest pension plan, aiming to shift assets out of fixed income and boost stakes in alternative assets like private equity and venture capital. Last year Moore successfully lobbied the North Carolina General Assembly to pass legislation that gives him a much freer hand. The law, enacted in October 2001, allows the pension fund to boost its stock exposure from 50 percent of the plan's book value (the value of the securities when purchased) to 65 percent of market value; raises the limit on alternative investments from 1 percent to 5 percent; and allows the state to invest for the first time in triple-B-rated bonds.

Moore has only slowly taken advantage of his newfound freedoms, largely because of the sorry state of equity markets. Beyond boosting the international stock position from 4.8 percent of assets at the end of 2000 to 6 percent by June 2002, he's done little tweaking. Reflecting declining equity values, and a decision not to rebalance the portfolio, bonds accounted for 45.3 percent of assets in June, far above the average of 31.4 percent for other public plans, according to consulting firm Greenwich Associates. The rest of the June asset allocation: 45.6 percent in domestic stocks; 3 percent in real estate; and 0.2 percent in alternative assets, an area Moore intends to get as high as 4 percent by 2004 or 2005.

Moore's conservatism has paid off. Dragged down by two bad stock bets -- a $15 million hit on its Enron Corp. stake and a $100 million loss on its WorldCom holding -- the fund lost 4 percent for the fiscal year ended June 30, 2002, but that was much better than the 5.9 percent loss for public funds over the same period, according to New York­based Mercer Investment Consulting.

As it happens, North Carolina's leading manager -- Alliance Capital Management, which runs $12.9 billion for the state -- was the biggest institutional shareholder of Enron and WorldCom. Unlike the Florida state pension plan -- which lost more than $300 million on its investments in Enron, fired Alliance Capital in December and is suing the money manager for its decision to continue buying Enron stock even after the company's problems began to emerge -- Moore says he still has confidence in Alliance. He sees its Enron bet as a bad judgment call, not one motivated by conflicts of interest.

Still, Moore says he won't hesitate to fire a money manager or underwriter if he sees fair cause. Doing so to a firm that has done business with the state for years would not be pleasant, but difficult -- and plainly political -- choices come with the territory. Moore will have many more to make.

"Moore is ambitious," says Theodore Arrington, a political science professor at the University of North Carolina at Charlotte. "He's a comer in the state Democratic party. He's articulate, he's got his own teeth, and he's got a lot of hair."

For nearly 300 years, the Hancock clan and its descendants have been living in the farm country of North Carolina's Granville County, hard by the Virginia border. A family of farmers and small-businessmen, the clan also produced more than its share of politicians, dating back to the 1720 election of representative William Hancock. When Moore was elected to the North Carolina House of Representatives in 1992, he represented the sixth generation to serve in the state legislature.

The son of a small-businessman who ran a storage warehouse, Moore spent his youth in Oxford, North Carolina, with his sister and two brothers. At Wake Forest University Moore got good grades, joined a fraternity and played golf. Handsome and 6-foot-3, "Richard never had any trouble getting dates," says Steve Nelson, one of Moore's fraternity brothers and now a partner at North Carolina venture capital firm Wakefield Group. Moore met his future wife, Noel Crook, at Wake Forest; the two were married in 1985 and now have three children.

After graduating in 1982, Moore earned a master's degree in accounting and finance from the London School of Economics in 1984. Two years later he received his JD from Wake Forest University School of Law. After a one-year clerkship for a federal judge in Corpus Christi, Texas, and a one-year stint as an associate in the Washington, D.C., office of now-defunct New York law firm Finley, Kumble, Moore returned home to work as a federal prosecutor tackling white-collar cases in the state's Eastern District under U.S. Attorney Margaret Currin, a conservative and an ally of U.S. Senator Jesse Helms.

Moore ran for a seat in the North Carolina Assembly in 1992 and sailed into office. But two years later, in 1994, he stumbled in a race for a seat in the U.S. House of Representatives. In the year of the Gingrich revolution, in which Democrats lost control of the House and the Senate, Moore lost by 8 percentage points. "In the toughest year in history for Democrats, he came awful close to winning," says mentor and former North Carolina governor Jim Hunt.

Hunt tapped the young politician to serve as secretary of Crime Control and Public Safety. When Hurricane Fran slammed into North Carolina in September 1996, killing 24 people and inflicting $5 billion in damage, Moore was stunned by the state's inadequate preparations.

He updated the state's technological capabilities, and three years later the state was far better prepared when the more powerful Hurricane Floyd struck the coast, killing 51 people and causing $6 billion in damages. Says Hunt, who was still in office at the time, "Moore really showed his colors."

In 2000, encouraged by Hunt and others, Moore ran against Henry McKoy, a former state senator, for treasurer. Vowing to institute a more aggressive investment strategy, Moore swept into office with more than 55 percent of the vote.

He named as his deputy treasurer Michael Williamson, a policy wonk with 20 years' experience in the Wisconsin and North Carolina state governments. Moore recruited Andrew Silton, a former Legg Mason portfolio manager, to be the plan's new chief investment adviser. Not least, he hired the department's first-ever director of communications to cultivate his relationship with the press.

Then Moore began his push to loosen state-imposed limitations on the plan; he was determined to heighten the equity exposure. After energetic lobbying from Moore and his colleagues, the legislature eased restrictions. Says Hunt, "This was a huge step forward for this state."

Moore's days as a prosecutor had prepared him for his current role as an activist. Outraged by the sheer audacity of executives at companies like Adelphia Communications Corp., Moore's prosecutorial instincts kicked in. When the news of Spitzer's investigation into Merrill Lynch broke in May, Moore decided to join forces with the high-profile New York AG.

"There's no doubt I bring a cop-on-the-beat mentality to this job," Moore says.

The two former prosecutors had a friend in common: Washington attorney Mark London. Moore had worked for London in the 1980s at Finley, Kumble, and London had met the New York AG in the early 1990s through Spitzer's sister. "Mark had been saying for a long time that Eliot and I would hit it off," Moore says.

Moore called Spitzer in May and ran his reform plan by the AG, who suggested that Moore include in it some of the elements of the Merrill Lynch settlement. Moore quickly agreed. Spitzer also recommended that Moore bring in New York State Comptroller McCall, who controls more than $100 billion in retirement assets. A few weeks later, California's Angelides, whom Moore had sought out for guidance soon after taking office, joined the team. Angelides sits on the boards of California Public Employees' Retirement System and California State Teachers' Retirement System, which have some $230 billion in assets.

California and New York have long traditions as shareholder activists, but North Carolina had been happy to stay on the sidelines. Says former treasurer Boyles: "I've always thought that securities rule-making should be best left to those who have the resources and expertise to do it. Who are we to supercede the regulatory authorities?"

In his corporate governance campaign, Moore will need to deploy some of his natural political finesse. So far, Moore says, the money managers on North Carolina's roster -- Alliance Capital and Wellington Management Co. run the most money -- have been open to these reform efforts. Wellington declined to comment. Alliance spokesman John Meyers says, "We're supportive of the state's efforts to provide greater transparency of its asset managers' activities." Says a spokesman for Bank of America Corp., which also manages money for North Carolina, "We're committed to addressing any concerns our investment management clients might have."

After Moore and chief investment adviser Silton collected responses from their money managers, they rated each response and sent back specific guidance to each manager. Underwriters and broker-dealers that are in the state's preapproved pool will be dropped if they do not develop procedures that eliminate conflicts between analyst compensation and investment banking.

While it's too soon to gauge the success of Moore's campaign to clean up Wall Street, he has surely had success in grabbing headlines back home. That's bound to help his political prospects. Still, it may take some time before Moore's ambitions are realized. To begin with, the state treasurer isn't the only rising star in the party; Attorney General Roy Cooper is also highly regarded. And there may be little opportunity for the treasurer to move up in the ranks anytime soon. The next gubernatorial election is in 2004, when incumbent Michael Easley, also a Democrat, is up for reelection. For the moment it seems a good bet that the governor will win the primary and run for a second term.

Moore might have a stronger shot at a U.S. Senate seat. Senator John Edwards, who is also up for reelection in 2004, is mulling a presidential run that year. In North Carolina Edwards would have to choose to run for either reelection or the presidency; he could not run for both. Moore, though, is also up for reelection that year, which means that he might not be able to wait Edwards out. In other words, Moore may have to wait until 2008 for another gubernatorial race; North Carolina's other senate seat is also up that year.

The treasurer says he's in no hurry, and certainly, his corporate governance campaign will demand much of his energy and imagination.

"I think all of us need to become more comfortable with exercising our ownership rights," says Moore. "By nature I am a fighter."

No one should count him out.

Laying down the law

Investment banks must:

* Sever link between analyst compensation and corporate finance activity;

* Disclose in research reports if analysts have received or are entitled to any compensation from a covered company over the past 12 months;

* Establish a monitoring process to ensure compliance.

Money managers must:

* Reveal any potential conflicts of interest, such as whether they administer 401(k)s for companies in which they invest;

* Disclose annually how their portfolio managers and research analysts are compensated;

* Report quarterly commissions paid to broker-dealers.

One voice -- and $1 trillion in assets

Disgusted by the recent spate of corporate scandals, U.S. public pension funds are swarming into courtrooms to threaten corporations, money managers and investment banks that fail to adequately protect the interests of their retirees. Though Richard Moore, North Carolina's treasurer, has taken the lead in corporate governance reform, he has plenty of company.

"We are gathered together to say that we have had enough, and together we are going to make a difference," declared New York State Comptroller H. Carl McCall at an August press conference, flanked by officials from 17 states and Washington D.C. Together they controlled pension assets in excess of $1 trillion. "Combined, our losses have been great. But as you can see by the people here today, our resolve to achieve change is as strong as ever."

California, New York and North Carolina have joined forces to impose new investment protection principles on investment banks and money management firms that do business with the state, but the corporate governance activism doesn't end there.

In August a federal judge named McCall, who serves as the sole trustee of the $112 billion New York State Common Retirement Fund and is a candidate for governor this year, the lead plaintiff in a class-action suit against embattled telecommunications company WorldCom and its accounting firm, Arthur Anderson. The New York fund lost more than $300 million on its WorldCom holdings.

The $83 billion Florida State Board of Administration fired money manager Alliance Capital Management in December; five months later Florida sued the firm, alleging that Alliance had breached its fiduciary duty with its "reckless purchase" of bankrupt energy company Enron Corp. Alliance calls the suit "completely without merit." Florida lost $328 million on its Enron investments; all told, public pension funds around the country lost a collective $1.5 billion on the company.

Ohio Attorney General Betty Montgomery is suing, in Ohio state court, Bank of America Corp., Citigroup, Credit Suisse First Boston, Deutsche Bank, Lehman Brothers, Merrill Lynch & Co., J.P. Morgan Chase & Co., Salomon Smith Barney and former Salomon telecommunications analyst Jack Grubman, among others, for their alleged roles in "artificially inflating the value of Enron and WorldCom stock." Ohio pension funds and the Ohio Bureau of Workers Compensation lost a combined $500 million in Enron and WorldCom.

Three California pension funds -- the California Public Employees' Retirement System, the California State Teachers' Retirement System and the Los Angeles County Employees Retirement Association -- have also filed suit against WorldCom executives and the big banks that underwrote the company's bonds. Combined, the funds lost $318.5 million on WorldCom bonds.

Politicians aren't confining themselves to corporate and Wall Street malfeasance; some are using their investing clout to force companies to enact changes in other areas. Phil Angelides, the California state treasurer who serves on the boards of both the California Public Employees' Retirement System and the California State Teachers' Retirement System, has called for both to stop investing in companies that move their legal residences offshore to reduce taxes. California State Controller Kathleen Connell, who also serves on the CalPERS and CalSTRS boards, is urging both funds to stop investing in companies that pad their bottom line by using overly optimistic pension fund return assumptions.

In Connecticut, state Treasurer Denise Nappier, who is the sole trustee of the $19 billion Connecticut Retirement Plans and Trust Funds, joined forces this summer with Attorney General Richard Blumenthal to stop New Britain, Connecticut­based Stanley Works from moving its legal residence to Bermuda. In July the two officials filed suit to prevent the switch. A month later Stanley Works decided to stay put. -- J.D.

The treasurer defends his turf

When it comes to governance, Richard Moore has to play defense as well as offense. Even as the North Carolina treasurer challenges the fiduciary stewardship of money managers and corporate executives, he is battling with some of the 600,000 state employees and retirees who are unhappy with his stewardship of their pensions.

Their discontent dates to February 2001, when Governor Michael Easley, faced with an $850 million budget gap and the state's worst fiscal crisis in a decade, froze $229 million in scheduled annual contributions by the state to the pension fund. At the time, Moore took a wait-and-see approach. The governor, a fellow Democrat, later restored $100 million to the fund, but state workers were outraged by Easley's maneuver -- and Moore's inability to rein him in.

"He is a good politician, but quite frankly, he has not been very strong in protecting our retirement system," says Dana Cope, executive director of the State Employees Association of North Carolina, which represents 60,000 current and former state workers. "As an employee advocate, I would rate his performance a C."

In June a group of 14 current and former state employees named Moore in a lawsuit alleging that he had failed to do his job by not stopping Easley, which, they argue, he might have done by filing suit against the governor. The employees allege that Easley's decision and Moore's inaction endangered the actuarial soundness of the retirement system. Filed in Wake County Superior Court, the suit is pending.

Moore's response is thoroughly political: He sides with his critics. "I agree with the state employees," he says, "and I have told the governor that I don't believe he had the legal right to take that money." Meanwhile, the state's General Assembly last year approved a bill stating its intent to repay the withheld money over five years, but that legislation is not binding. -- J.D.

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