Wednesday, June 18, 2008

Board members of ESDC, other authorities, would finally become fiduciaries if reform bill passes

Somewhat buried in a New York Times Empire Zone column on Monday, headlined Stance on Same-Sex Marriage Brings Surprises for Paterson, was an item, under the sub-headline "Seeking Oversight for Agencies," indicating the potential passage of “the first meaningful oversight of the Metropolitan Transportation Authority, the New York State Thruway Authority, the Empire State Development Corporation [ESDC] and a multitude of other state and local authorities.”

Notably, it would require a fiduciary duty of authority board members--a duty of care arguably lacking in the ESDC's treatment of the Atlantic Yards project.

Such proposed reforms have been under discussion for years, and the current proposal draws on both Assembly and Senate bills and the report of a special commission convened by then-Gov. George Pataki. As the Times reported:
The broad outlines of the proposal would overhaul an existing budget office for authorities and transform it into an entity with teeth, as well as give the state comptroller broader power to reject contracts. Board members of authorities would also be considered fiduciaries under the plan, with responsibilities that would make them legally responsible to uphold the interests of state taxpayers and potentially subject to legal recourse if they did not.

Negotiations among the Assembly, Senate, and Governor’s office are ongoing, with the goal of reaching a resolution before the legislative session ends next Monday, Emma Furman, Deputy Chief of Staff for Assemblyman Richard Brodsky, told me. “We are working hard to try to get it done.” Brodsky is sponsor of Assembly Bill A9296A.

Bill details

According to a memorandum in support of the bill, it would not only establish and fund the Independent Office of Public Authority Accountability, it would require study of additional potential reforms, mandate referral of suspected wrong-doing to entities qualified to conduct investigations, require the State Comptroller to review and approve certain public authority contracts, prohibit state public authorities from forming subsidiaries without legislative approval, except under defined circumstances, and require all state authorities to include contract participation by minority-and women-owned businesses.

The fiduciary duty & AY

The plan to establish a statutory fiduciary duty owed by public authority board members to the authorities they serve and to require such members to acknowledge their fiduciary duties upon taking office, while too late, most likely, for the Atlantic Yards project, suggests that future iterations of the ESDC might not approve a project so cavalierly.

Did ESDC board members, in their brief 12/8/06 approval of the project bother to check:
  • if the arena financing plan was legitimate or a took advantage of a "loophole"?
  • if there would be enough affordable housing financing to get the project done anywhere close to the “anticipated” ten-year timetable?
  • if that ten-year timetable would be enforced in future ESDC contracts or whether the agency would give the developer 12+ years to build Phase 1 and no deadline for Phase 2?
These are all questions that might be pursued if the Assembly Committee on Corporations, Authorities, and Commissions, chaired by Brodsky, turns its direct attention to Atlantic Yards.

What a fiduciary duty means

The bill would amend the Public Authorities Law to “establish a statutory fiduciary duty on the part of authority board members to perform their functions in good faith and with the degree of independence, diligence, care and skill which ordinarily prudent persons would exercise under similar circumstances, and in all ways consistent with their fiduciary duties of loyalty and due care to the organization and obedience to the authority's corporate purposes

Corporate governance expert Ira Millstein, who chaired Pataki’s Commission on Public Authority Reform, testified before a joint Assembly/Senate hearing 3/7/07. “You need to have directors of these authorities which understand that they have a job to do,” Millstein said, according to a transcript of the hearing. “[W]e've talked to a lot of these directors in the past, and most of them did not, and still don't understand that they have a job. “

“This is a real job," he continued. "Now how do you tell people that they have a real job? Well, you tell them that they have a fiduciary duty. This is a common, well-known expression which everybody in the world understands. You have a fiduciary duty to do the job that you've been appointed to do. And that means you have the duty of loyalty, you have the duty of care, you have a duty to carry out the mission, and it's a duty. It's not something that you have because you think it's a good thing to do. There is a requirement that you do that.”

He noted that corporate directors have fiduciary duties enforced by stockholder derivative suits, while public authorities have gotten into trouble only when “something blatantly went wrong” and the issue was covered by the press.

The penalty is shame

Brooklyn Assemblyman Hakeem Jeffries, a member of the committee, asked what kind of penalties authority board members might face, given that authorities are not corporations. Millstein suggested that civil penalties were not necessary, given that the monetary penalties corporate directors might pay are nearly always covered insurance and thus not a deterrent.

The real deterrent, he suggested, was shame: “Nobody likes to read about themselves in the newspapers of having been on a board that went to sleep. “

And that’s why the press should have paid more attention to the ESDC’s approval of Atlantic Yards.

Implications for AY eminent domain case?

Regarding the ESDC’s performance, the plaintiffs in the Atlantic Yards eminent domain case have argued, in appeal papers before the U.S. Supreme Court,
that the case differs from one in Washington, DC, involving the City Council, a legislative body:
As the court observed, legislators enjoy both statutory and common lawprivileges and immunities from disclosing their subjective motives and intentions in considering and/or acting on legislation.
Here there is no such privilege or immunity and thus no reason for hesitancy. Ratner’s and Pataki’s decision to condemn respondents’ properties was rubber-stamped by the ESDC, an unelected, quasi-governmental corporation. Indeed, the ESDC is so removed from state government that the Eleventh Amendment does not protect it from suit.


That may not be the same as lacking a fiduciary duty, but strikes me as a parallel issue. The suit argues that the ESDC has not been very accountable. So does the pending reform legislation.

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