Investors should probably be a little bit worried about Eliot Spitzer's eagerness to become the next comptroller of New York.
The comptroller's job isn't considered terribly exciting. Officially, the comptroller's primary role is to "ensure the financial health of New York City by advising the Mayor, the City Council, and the public of the City's financial condition." Many who have landed in the office have used it as a place to serve time while they wait to run for mayor (usually unsuccessfully).
But Spitzer describes it as a "dream job." This isn't because the former governor dreams at night about the financial health of the city. It's because he plans on running the office in an entirely new way—as an activist investor.
And activist investors aren't always—or even usually—good news for most shareholders.
The comptroller manages the assets of the five New York City pension funds, which hold a total of about $140 billion in assets. Spitzer intends to use the office to influence the way companies are governed—although he denies that he would attempt to engage in "political activism."
"This isn't about political activism, let me just take that off the board," Spitzer told CNBC. "This is about the appropriate role shareholders as owners of entities should play. Ownership trumps regulation. ... Neither regulation nor prosecution can generate good judgment within organizations. Only ownership can generate that."
But it's very hard to draw a line between political activism and shareholder activism when it comes to pension funds. Just last December, Spitzer was using his column in Slate to advocate leveraging the power of pension funds and university endowments to pressure the private-equity firm Cerberus about its ownership of gunmakers.
"It is time to determine pension fund by pension fund who has invested in Cerberus and bring pressure on those investors either to get out of Cerberus or have Cerberus change the way it runs the gun industry," Spitzer wrote.
(Read More: Spitzer's Encore as Scourge of Wall Street)
Although we often associate shareholder activism with hedge fund managers like Bill Ackman and Dan Loeb, the principal activist investors in the United States are actually union, and state and local pension funds. One reason pension funds are more likely than other types of institutional investors to assume activist roles is that they can exploit their market power for private benefits.
For most institutional investors, activism just doesn't pay off. A multibillion-dollar diversified fund would have to deploy vast resources just to determine which of its investments might be underperforming because of issues that can be addressed through activism. It then must attempt to corral other shareholders into supporting the campaign. And proxy contests cost millions.
What's more, the rewards for public shareholder activism are likely to be meager. Turning around a company is difficult. And there's not much evidence that pressure from outside shareholders is very effective at that, outside the takeover context.
Another deterrent is that the gains of activism must be shared, despite the costs being born only by the activist. UCLA law professor Stephen Bainbridge explained this in a recent paper on shareholder activism:
Suppose that the troubled company has 110 outstanding shares, currently trading at $10 per share, of which the potential activist institution owns ten. The institution correctly believes that the firm's shares would rise in value to $20 if the firm's problems were solved. If the institution is able to effect a change in corporate policy, its ten shares will produce a $100 paper gain when the stock price rises to reflect the company's new value. All the other shareholders, however, will also automatically receive a pro rata share of the gains. As a result, the activist institution confers a gratuitous $1,000 benefit on the other shareholders.
In a market where most institutional shareholders attempt to grow their assets under management based on their performance relative to fund managers, conferring a gratuitous benefit on other shareholders is no way to get ahead.
But union pension funds are different. For one thing, they aren't in competition for funds like other managers. For another, they can benefit their constituents through activism not aimed at raising the price of shares.
"Examples of potential benefits which would be disproportionately of interest to proposal sponsors are progress on labor rights desired by union fund managers and enhanced political reputations for public pension fund managers, as well as advancements in personal employment," the legal scholar Roberta Romano wrote in a 2001 paper that looked at pension fund activism.
Some of this kind of activism might actually hurt other investors. Corporate management may accede to uneconomic demands of activist investors because the costs are actually borne by the larger body of shareholders.
This means that the activist path Spitzer plans to take if he wins the office of comptroller is likely only to lead to better performance of New York City's pension funds at a cost to other investors.
Of course, Spitzer may have something entirely different in mind. Perhaps he'll be an activist investor who pursues pure public good, reshaping how we think of activist investors altogether. His job, after all, involves the financial health of the city, not just managing its pension funds. The need to answer to a broader constituency could influence his activism to be more public-minded.
—By CNBC's John Carney. Follow me on Twitter @Carney