Conflicted CIOs

Abstract

Public pension plan Chief Investment Officers (CIOs) allocate capital and pay fees to external vendors, potentially creating conflicts of interest when CIOs seek employment with those vendors. Plans managed by conflicted CIOs underperform by 47–101 bps annually. The underperformance is driven by CIOs with stronger labor market incentives and fewer pathways to private sector employment. The underperformance declines when CIOs’ perceived risk of prosecution rises due to an exogenous shock. Conflicted CIOs increase vendor expenses by 3–9 bps annually; vendors hiring them gain three new plan clients. The estimated aggregate loss from these conflicts is $5.2 billion annually.

Keywords: Public Pension Funds, Chief Investment Officers, Conflicts of Interest, Career Concerns, Governance, Investment Performance

JEL Classification: G23, G38, J33, J44, G34