Friday, July 16, 2010

What's violating fiduciary duty for a public authority? "I don't care what the facts are; I'm going to do what the governor or mayor told me do"

The road to reforming public authorities is a long one, but, with the expansion of the Authorities Budget Office (ABO) and the release of a report July 1, New York is moving down that road, right?

Yes, and no.

It's not merely that the ABO is understaffed, with a cohort so small it "borders on insanity," according to corporate governance expert Ira Millstein.

(Working pro bono, noted attorney Millstein with colleagues shaped the contours of the 2009 Public Authorities Reform Act, leading New York to what Assemblyman Richard Brodsky, the legislative sponsor, calls "a grand experiment" in reforming government.)

It's that even an expert like Millstein assumes that "you'll never have on the board everybody thinking uniformly." And, for some authorities--I'll point to the Empire State Development Corporation (ESDC) and its quasi-spawn, the Brooklyn Arena Local Development Corporation (BALDC)--that hasn't been true.

There's been little discussion and no dissent when it comes to Atlantic Yards; the board members ask the barest of questions, are glaringly uninformed, and uniformly vote as predicted.

At the symposium

It all sounded so civilized.

On 4/27/10, the Government Law Center at Albany Law School hosted a symposium (webcast) on the new law, the reforms that expanded powers and duties of the ABO and, perhaps most importantly, requires authority board members to adhere to a fiduciary duty and not simply follow a political patron.

A strict reading of the act would suggest that, had it been in place, the Metropolitan Transportation Authority would not have been able to revise the Vanderbilt Yard deal as it did in June 2009--Brodsky said as such.

Fiduciary duty

The only time fiduciary duty really kicks in, Millstein said, is when board members don't do their homework.

The ESDC certainly might qualify; remember how board member Charles Dorkey, voting in December 2006 on Atlantic Yards, couldn't even identify Pacific Street.

But even Millstein allows for good faith incompetence. As he clarified, the failure to do homework must be flagrant, with the board member saying I don't care what the facts are, I'm going to do what the governor or mayor told me what to do.

Only true cross-examination of board members, I'd suggest, could drill down and establish that.

Fiduciary duty is only part of the new era of board accountability; some authorities have not complied with the new law, notably the shadowy, unstaffed Job Development Authority (parent of the BALDC), which has not filed an annual report, budget information, or a mission statement.

The lineup

Along with Millstein, the panelists at the event were David Kidera, Director of the ABO, and Luke Bierman, Counsel to the State Comptroller.

The event was hosted by Scott Fein, Director of the Public Authorities Project of the Government Law Center. More than 120 representatives of public authorities were in attendance, which qualified board members for participation in required board member training.

Brodsky's remarks

"Let me now tell you what really happened," declared the bumptious Brodsky (screenshot at right), his mode on this day more lecturer than prosecutor. "These bodies were created for two reasons. To issue debt, revenue debt, because the state can't do it. And to protect people like me from politically difficult decisions, like raising tolls. If I had my druthers, they'd be abolished, we'd give the state revenue debt power, but that's not a fight worth fighting, because a lot of good things happen when authorities get involved."

"We started a process of investigation...the Erie Canal deal, the MTA stuff, and we created a climate in which the public became aware, not only because of the 2005 Act, but because attention was paid to this issue," he said.

(For details on such investigations, see Tom Robbins' column in this week's Village Voice, State Assembly Lion Richard Brodsky Sharpens His Claws, which canonizes Brodsky for his worthy work, but leaves out his role in killing congestion pricing and the commuter tax, as well as his curious agnosticism toward Atlantic Yards.)

"Soviet-style bureaucracies"

"And I coined a phrase--which, turns out, worked--and that was 'Soviet-style bureaucracies,'" Brodsky continued. "It's not really true, but it caught the public imagination." (He's still using it.)

"People didn't like [authorities]," Brodsky said. "The net result was, we then pushed Governor [George] Pataki into a discussion that led to the creation of the first task force which led to the creation of an intellectually sound model... among those were the existence of a fiduciary duty, a cop called an ABO, transparency."

"We put it into law and we got half of it out of George. We then went back to beat the hell out of whoever needed the hell beaten out of them," he said. "The public interest in this maintained. And the Assembly passed it, given the political climate, the need for reform of Albany institutions, and change in leadership at the Senate. In June of last year, the bill passed, Senator [Bill] Perkins shepherded it through quite swiftly, the governor decided he was going to veto it. We went back to the pounding model. We worked out a bunch of changes, most of which I agree with..."

"The net result is we got a bill signed, and we have an office, and we have people serving on authorities with this fascinating new concept: a fiduciary duty within the public sector," Brodsky declared.

Real estate deals

"You need to understand that, at the heart of the mission, it is notion that the boards control the authorities with a legal requirement that they focus on the mission of the board, they're no longer going to be vehicles for big real estate deals in the city, and a bunch of stuff that didn't work," he said, in what might be seen as a dig at Atlantic Yards.

"And in the end, we're recreating government. This is a grand experiment," he said. "No one in the world has tried this. If this works, you're going to see this model working in Dubai... Those kind of questions all are implicit in the success of this enterprise."

Reporting requirements

Kidera (below) has the job of implementing it all, and it's not easy.

At about 75:30, he stated, "Where I have some concerns is the relationship between the Board of Directors and the management of the authority... If I could sum up Ira's [Millstein] comments in one sentence, it would be that New York State is finally getting serious about this... I think there's [been] very little pressure on public authorities to actually report to anybody with on-time and accurate information."

"A whole host of state entities were supposedly getting information prior to 2005 and 2006," he said. "I think for the most part either that information had not been provided on time, was not accurate. We didn't have the tools to enforce it. It would take many years for the Comptroller to track down information from some of the authorities that were reporting to them. Certainly my experience in the Budget Division for many years was that we didn't do anything with this information and we didn't get much information at all."

"So I think we're moving now towards recognizing how important it is to understand what it is going on in public authorities, and to understand that the public has a right to that information, and you as public entities have an obligation to share that information not only with us, but also with your stakeholders and with the public at large," Kidera said.

While the initial reform act focused on reporting, "now we're moving much more towards accountability," he said.

“And I think it’s no longer acceptable to submit to us information that is incomplete, that is inaccurate, that your board has not seriously reviewed and understand," he said. "Compliance for the sake of compliance and meeting a deadline is no longer really what we want... and even broader than that, that you understand that, as board members and as management, what your responsibilities are... not just to us, but to the public at large.”

As noted, not every authority has complied.

Independent board members?

Millstein (right) described a scenario in which public authorities try to balance a myriad of interests, "and there will be a bunch of people on your board who don't agree."

Then, at about 133 minutes in, Fein asked a question that is hardly a hypothetical and actually a rather generous description, given the highly political performance of the MTA and ESDC boards.

"Procedurally, how does it work?" Fein asked. "Let's assume it's a seven-person board, and it's so clear that the sixth person... is carrying the governor's water, or he carries spears for labor. He comes, and he's got a constituency somewhat narrower than the people of the state of New York. What are the rest of the board members supposed to do, call him on his act?

"Yes," responded Millstein, spry and sharp at 83, with a nimbus of white hair, a sharp yellow tie, and a bit of a twinkle in his eye. "It seems to me that you'll never have on the board everybody thinking uniformly. I don't know of any board which comes to a difficult decision with everybody having decided uniformly what to do."

Fiduciary duty

"These are tough questions; that's what boards are there for. I can't make the job easier," Millstein said. "I think there will be people who begin to think about their fiduciary responsibilities who will say, 'I've had enough of this, I'd rather not serve on this board.'"

"Let me give you one other piece of advice," he added. "Don't serve on a board unless you really like the work of the authority. Don't.... It's tough duty. And you'll get bored, or you won't do your job... If you're asked to serve on a board, really think about whether or not you give a damn about what the authority is doing. If you don't, don't go on the board. You only want to go on boards when you care, and where you care enough to do your homework, sweat out the kind of questions that you're raising, try to convince the other members of the board of your point of view, carry on with the work and try to reach a consensus, even though it may not be exactly what you want. But don't go unless you really like the job that you're going to have to do, especially when you don't get compensated... And every year, for public board members, it gets harder... the job gets tougher... there are more rules."

No need to be right

At about 158:40, Millstein amplified the issue, tamping down some of his warnings.

"I didn't want to leave you all with the impression that a fiduciary duty requires that you be right," he said. "The business judgment rule applies to most directors, and that means: you don't have to be right. You can make a mistake. And you can even make a decision where... the ABO says, We didn't think that was a good idea or You shouldn't have done that. That's not going to get you into trouble. What's going to get you into trouble is when you didn't pay attention, you didn't have a process, you didn't think about it, and you didn't make up your mind independently about what to do. You do all of those things--you're not going to go to jail, and nobody's going to be terribly critical."

While it may be hard to prove that there was no process, or board members didn't make up their minds independently, the record of the ESDC--even compared to the mildly contentious MTA--is not exactly reassuring.

"You may not make everybody happy," Millstein allowed. "[A court or ABO] may say: We didn't think that was a very good idea. We think they should've raised tolls. So what. If you thought about... that's fine. There's nothing in the law that says a board has to be correct at all times. You're not second-guessed as to correctness. The only place where the fiduciary duty really bites is if you didn't do your homework, you didn't think about it, you didn't have the information. Let me give you an example... If you go to a board meeting and fall asleep, nobody's going to sue you... But if you go to the board meeting and say, I'm going to go the board meeting and fall asleep, that's in bad faith. And that you can get in trouble for."

"Let me reduce it to your situation," he said, offering an example. "You go to a board meeting, and you say, I don't care what the facts are; I'm going to do what the governor or mayor told me to do, that could be a problem. But if you go to a board meeting and you say, I heard what you say, and I understood it... and this is the reason I made up my mind, that's exercising your fiduciary responsibility. I hope I'm making it clear. You don't have to be right. You have to be in integrity and thinking about it... and do what's in your best judgment is the right thing to do. And if you're wrong, too bad. You don't have to be right... It's not that horrible a job exercising your fiduciary duty, if you do your homework.

Best practices and funding

The law is still being worked out.

Near the end of the session (at about 184 minutes), in the Q&A, Millstein observed, "I think it would be good for every board to sit down and draw up its own guidelines, as to how it's going to operate... those will be provided to David [Kidera] and the ABO, and out of them will become best practices."

And, in closing (at about 197 minutes), Millstein noted, "I think seven people at the ABO to do all the things that have to be done, borders on absurdity... Seven people can't do what's required here. Think about that, and talk to the people you know in politics" to get them to beef it up.

That won't be easy, so, for now, the law on paper may be stronger than the law in practice.

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