Endowment Conflicts of Interest
Posted on January 9th, 2013 in Uncategorized |
The Times had a good piece a couple days ago about how college and university endowments are often opportunities for members of governing bodies to support their private investments—by getting the universities to invest in things they’ve invested in. What happens is that universities put these financiers on their boards because of their perceived investment expertise and their ability to help the university gain access to hard-to-access investments. (I am skeptical that any investment is hard to access these days, but never mind.) Then the board members turn around and recommend the university make investments from which they, the board members, might profit.
Trustees’ connections can prove profitable for the universities, offering access to top-performing hedge funds and private equity firms that may not be open to other investors. But they can also create the appearance that the colleges may have nonfinancial motives for picking investments. And if the investments do not perform well, it can be stickier to fire the money manager.
The Times hangs this piece on Dartmouth, which seems to have a number of potential conflicts. Elsewhere around the Ivy League:
…Brown and Cornell have disclosed five trustee-related investments. Princeton, Yale, Columbia and Pennsylvania have reported just one. Harvard has not reported any trustee investments, but its reports do not include investments managed by firms of board members of Harvard Management, which runs the university’s endowment.
My guess is that this practice is rampant, especially since hedge fund returns have been so miserable the past few years. (Hey, they need new investors from somewhere.) I’ll be curious to see what comes of this.
10 Responses
1/9/2013 5:09 pm
The Bloomberg story has more detail.
1/9/2013 5:26 pm
From the Boston Globe, May 1, 2012: On Harvard, the report questions why the school’s IRS forms - some of which were filed under the auspices of the Harvard Management Company, which oversees the school’s investments - do not mention Greylock Partners, a venture capital firm that counts HMC chairman William Helman among its partners. The Globe, among others, has reported that Harvard has invested in Greylock. Harvard declined to answer the question specifically, but released a statement noting that it has a conflict-of-interest policy and saying that “all tax filings and disclosure forms are completed in full accordance with all IRS and state requirements.’’
1/9/2013 6:09 pm
Unless I’m missing something (and it wouldn’t be the first time), when you see something like this in the report, you really have to wonder how accurate it is:
From The Boston Globe: “On Harvard, the report questions why the school’s IRS forms - some of which were filed under the auspices of the Harvard Management Company, which oversees the school’s investments - do not mention Greylock Partners, a venture capital firm that counts HMC chairman William Helman among its partners. The Globe, among others, has reported that Harvard has invested in Greylock.
1/9/2013 6:58 pm
Sam, whether or not the reporter got this particular situation right, I am curious about the general questions: (a) whether there is anything wrong with the practice of institutions investing in funds that have board members as partners, and (b) specifically whether Harvard/HMC policy would permit it. I can’t quickly find any statement of a Harvard policy on that. (The faculty is heavily regulated now on potential self-dealing, though maybe not yet heavily enough, and those policies are on the Harvard web site.)
1/9/2013 10:07 pm
What I find surprising is the absence of any mention of Middlebury’s relationship with Dick Fuld; its my impression that the crash of Lehman hit Middlebury especially hard.
1/10/2013 9:11 am
Harry,
In my mind, there is a conflict in having an institution investing in funds that have board members as partners. Some people believe there is no conflict. I’m of the school which says that if one even has to ask about a conflict, you’re too close to the line and if you’re too close to the line, just call it out.
It would be bad enough if the conflict involved an investment that an endowment could get out of easily. It is much more of a problem when the investment has a long lockup frame and/or a potential future call on more money. Boards can speak all they want about people recusing themselves, but in fact, as I’ve seen, recusal doesn’t solve the potential problem.
It seems to me a no brainer. If you want to sit on the board, and if the board wants you to be there, the board should find investment opportunities elsewhere. No one investment is crucial; only one conflict of interest situation is a real problem.
1/10/2013 9:18 am
@ marcel
Why is it your impression (i.e. what makes you think that it is so) that the Lehman crash hit Middlebury especially hard?
1/10/2013 9:18 am
@ marcel
Why is it your impression (i.e. what makes you think that it is so) that the Lehman crash hit Middlebury especially hard?
1/10/2013 10:49 am
Thanks, Sam. That makes sense to me. I wonder if it reflects Harvard policy. Is Harvard invested in new Fellow Paul Finnegan’s private equity fund, for example?
I think probably this is an area where the norms are changing.
Here is the preamble to Harvard’s policy as it affects faculty. The terms by no means line up perfectly with the situation of trustees, for whom “primary” and “secondary” interests are, perhaps, reversed. But the prose about the importance of public perception is just right.
The concept of a conflict of interest can be understood by reference to primary and secondary interests. The Institute of Medicine of the National Academies of Sciences states:
A conflict of interest is a set of circumstances that creates a risk that professional judgments or actions regarding a primary interest will be unduly influenced by a secondary interest.
Every faculty member shares with the University a primary interest in preserving and furthering the University’s core missions and values. Paramount among these missions and values for the purposes of this policy are assurance of personal and institutional integrity in the conduct of all academic duties; pursuit and communication of truth; independent, objective, and ethical scholarship and research; accountability for actions and conduct; and preservation of the University’s standing as an institution worthy of public confidence and trust.
In the course of academic life, as is true in all professions, a faculty member inevitably holds secondary interests as well. Such secondary interests are many and ubiquitous. For the most part, they are legitimate and, indeed, are inherent in the professions, well recognized, and managed by sundry professional standards and behavioral norms. The prospect of personal financial gain is one such secondary interest, but there are many others of a nonfinancial nature, including, for example, securing career advancement, advancing the interests of friends and relatives, or winning accolades from peers or highly competitive prizes. Some secondary interests, such as obtaining and renewing sponsored research funding or being the first to publish research findings, may even be argued as necessary for faculty members to support the core missions of the University. Notwithstanding, such interests remain secondary because they may on occasion misalign or conflict with a faculty member’s and the University’s shared primary interests.
This policy confines its focus to financial conflicts of interest. In part, this is because financial conflicts of interest are discernible, measurable, volitional, manageable, and well understood by the public. In addition, they often generate deep public concerns, especially when recognized in organizations or individuals perceived to hold fiduciary positions or relationships of public trust. However, in focusing on financial conflicts of interest, this policy does not intend to minimize the importance of nonfinancial conflicts, which can and do influence professionals’ judgments, choices, and decisions.
We define an individual financial conflict of interest as follows:
An individual financial conflict of interest is a set of circumstances that reasonable observers would believe creates an undue risk that an individual’s judgment or actions regarding a primary interest of the University will be inappropriately influenced by a secondary financial interest.
A financial conflict of interest is a matter of objective circumstance, and, therefore, a distinction between “apparent” and “actual” conflicts of interest is not useful. A conflict of interest does not depend on the character or actions of the individual. It exists (or does not exist) regardless of whether it is operative, that is, whether it is in fact influencing an individual’s judgment or actions. To recognize the existence of a financial conflict of interest is not to pass judgment on the character or actions of an individual and does not per se imply wrongdoing.
1/10/2013 7:54 pm
I had friends on the faculty there, and I recall their talking (c. 2009) about cuts that seemed more dramatic than I was hearing about elsewhere, as well as large cancelled fundraising pledges. My impression at the time was that Middlebury’s endowment was quite entangled/dependent on Fuld/Lehmann. I apologize for my vagueness, but it wasn’t important enough to me at the time to take careful notes.