- "If the individual himself or herself has substantial enough holdings or essentially, is wealthy enough, then even a large holding or stake in the company might not be material to that individual person's portfolio... That is contrary to our state ethics act," said board member Blannie Miller. "Even though we are not subject to that, that may be some guiding principle."
At a board meeting last week for NCInnovation, the private nonprofit given $500 million in taxpayers’ funds to help facilitate commercialization of public university research, directors discussed their work to determine if potential for conflicts of interest exists between members of the investment committee and the financial institutions bidding to manage the half-billion-dollar endowment.
While some members apparently have substantial stock holdings in the very companies that have made the committee’s shortlist to manage the investments, NCI’s executive committee determined those members were simply too wealthy already for such facts to represent a “material conflict.”
Endowment
NCI’s model is predicated on leveraging investment returns from an endowment to fund grants awarded to public university researchers with the goal of catalyzing commercialization and, therefore, economic development. That’s where the state taxpayer comes in. Following the 2023 biennial state budget negotiations windfall, NCI received its public funding in two $250 million tranches. The money has mostly been held in money market accounts while the organization selects an investment manager to manage the endowment.
The investment committee, working with a financial matchmaker of sorts named Clearview Advisors, started with 17 investment firms. Leveraging a blind-selection process, the committee members winnowed that list down to 11 firms.
“Eleven firms were sent a supplemental or revised update to the original RFP sent in December 2023,” stated NCI director and chair of the investments committee Stan Kelly in presenting his report to the full board last week. “Of the 11 firms, only eight chose to respond based on the supplemental RFI. Clearview then set up these eight final firms in their portal for each committee member to review and score based on final selection criteria.”
Kelly, previously president of Wachovia Wealth Management and Wells Fargo Carolina’s community banking, reported that the list was culled to three by the committee in a late September meeting, at which point a different committee member suggested a careful look at potential conflicts of interest.
“As a result, the 9-26-24 committee meeting was held in closed session,” reported Kelly at the November board meeting. “The outcome of the closed session resulted in a recommendation that the conflict of interest matter be brought to the executive committee, and the investment committee would pause the investment banking selection pending outcome on what they (the executive committee) do.”
non-material
The executive committee determined possible conflicts of interest with the three finalists to be “non-material.”
“Based on the report provided earlier today by Chair King and action taken by the executive committee, the investment committee can now resume its work,” Kelly continued. “Staff will be scheduling a meeting, giving prior notice. The remaining process under Clearview’s guidance is estimated to take up to 45 days. And, possibly, we may ask for a special called board meeting to ratify the final recommendation.”
Despite the recommendation to clear members of potential conflicts of interest, one director voiced concerns over the reasoning used to arrive at the conclusion.
“I was the executive committee member that was the sole vote against saying that there, after a review of the facts and law, there were no conflicts at the investment committee meeting — but I did just want to explain that vote,” stated director Blannie Miller, appointed to the board by NC House Speaker Tim Moore. “I am not questioning the integrity of any of the investment committee members and do not have direct concerns there. My concern is, the facts from some of the board members and the legal analysis provided by counsel verbally at the (closed) meeting, in terms of what type of indirect financial interest is not considered material by the IRS. I did not hear any legal precedence for safe harbor, which would allow those board members with indirect financial interest to be determined that their interests were immaterial.”
Miller, an attorney, implored directors to carefully consider the potential for indirect conflicts of interest among directors voting on the final investment manager selection. The board includes a bevy of wealthy individuals, some of whose fortunes maybe intertwined with the financial institutions currently under consideration to manage the NCI endowment.
Curiously, the verbal advice of counsel offered in closed session, which Miller referred to in her comments to the board, may have suggested the individual members in question were simply too wealthy for their holdings in those financial institutions to be considered material.
“I know that I am not the attorney for the organization, or for any of you, but I have real concerns about the fact that there is no legal safe harbor,” continued Miller. “Basically, the the idea was that, if a director has an indirect financial interest, such as certain stock in one of the companies responding to the RFP; if the individual himself or herself has substantial enough holdings or essentially, is wealthy enough, then even a large holding or stake in the company might not be material to that individual person’s portfolio. We didn’t hear any legal precedence for that being a safe harbor in the IRS analysis, and, in fact, that is contrary to our state ethics act, even though we are not subject to that, that may be some guiding principle.”
Appearance of conflict of interest
Chairman of the NCI board of directors, Kelly King, former CEO of regional banking powerhouse BB&T (now Truist) and one of the original progenitors of the NCI vision, reiterated Miller’s call for members to closely consider potential conflicts in every instance.
King described his 50-year career in banking, even though he is retired, as providing enough appearance of conflicts to warrant caution and recusal on some board votes. He encouraged all members to consider such appearances on conflict of interest, even if indirect, on each and every item the boards and committees vote on.
NCI has faced scrutiny from government watchdogs and taxpayer advocates since it first appeared in draft legislation at the NC General Assembly. Critics keyed in on original draft language that seemed to offer avenues for NCI to make equity investments that could open the door for corruption. That language, and the structure of NCI’s funding and statutory allowances, changed markedly throughout the drafting process, alleviating some of the most pressing concerns.
As currently structured the organization is only approved to make grants to researchers funded by the endowment returns. Though the relevant statutes allow for drawdowns on the taxpayers’ $500 million, executives have voted on and documented policies to protect the investment corpus fully, while using positive investment returns to finance the grants.
Who is generating those investment returns with taxpayer money, however, could represent its own appearance of conflict.
“So, if I were the attorney for the company or current individual, I would probably say that the risks outweigh the benefits,” Miller concluded at the Nov. 12 board meeting.