TIAA-CREF's leaders made "substantial missteps" in managing conflict of interest charges involving the relationship between some of its trustees and its external auditor last year, but the company showed no bad faith and ultimately handled the situation correctly, a high-profile investigator hired by the company concluded Thursday.
In a report published on the pension giant's Web site, Nicholas deB. Katzenbach, former U.S. attorney general, also blamed the problems on the company's governance structure, which places a board of overseers over separate boards of directors for TIAA and CREF. The arrangement creates the "constant risk of potential and actual conflict," the report said.
The report also states clearly that the conflict controversy did not "touch on the quality of TIAA-CREF's management of investor funds, or the integrity of the financial statements it prepared."
Two trustees -- Stephen A. Ross of CREF and William H. Waltrip of TIAA -- resigned last November after revelations that they had had a joint venture with Ernst & Young, the company's auditor, a situation that violated the Securities and Exchange Commission's rules on independent auditors.
Katzenbach's 53-page report notes that TIAA-CREF officials, upon learning informally of the trustees' relationship with the auditor, underestimated the gravity of the problem and failed to investigate the matter sufficiently.
"In sum, TIAA-CREF did not appreciate the seriousness of the independence issue. While its personnel recognized that there was a theoretical possibility of drastic consequences, they saw it as a technical violation that would almost certainly be resolved promptly and without difficulty," Katzenbach wrote.
"Had TIAA-CREF handled the situation better, it would likely have yielded the same result. But it would have done so more quickly, with less resulting internal strife, and with little or no adverse publicity," the report added.
Katzenbach urges the company to consider scrapping its current governance structure, which he says "presents a problem of power sharing," by having several boards with overlapping corporate purposes.
TIAA-CREF also released statements from its chairman, Herb Allison, and president of the Board of Overseers, Stanley O. Ikenberry, in which they vow to take the report's conclusions seriously and to use them in guiding the company's future operations.