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A Crisis of Stewardship: Conflicts of Interest on the Boards of Higher Education

A new report highlights the need for greater transparency about potential conflicts of interest on boards of trustees of private colleges.

Submitted by: Francesca Rheannon

Posted: May 09, 2012 – 09:00 AM EST

Tags: higher education, governance, leadership, csr, conflict of interest

 
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By Francesca Rheannon

When the financial system melted late in 2008, the endowments of private colleges took a big hit. In December 2008, Harvard University estimated its losses at 22 percent in the first four months of FY2009, totaling $8 billion.

The financial pain spiraled out to swamp many others, including students, faculty and staff members, alumni, and the local economy. The fallout included “layoffs, slashed benefits, hiring freezes, reduced student services, construction delays, stalled economic development, and forgone tax revenue,” according to one report.

Trustees Affiliated with Wall Street Economy

But was Harvard University itself partly to blame? That’s what a 2010 report by the Tellus Institute found, when it uncovered a strategy of risky investments by the University. And that strategy may well have been influenced by trustees who had ties to financial companies that were a part of the university’s portfolio of investments.

Harvard UniversityHarvard is far from alone in having trustees on its board who have business relationships with the college they are supposed to be impartially serving. Nationwide, 25 percent of private colleges had financial ties with trustee-affiliated companies, according to research from The Chronicle of Higher Education. That figure raises serious questions about conflicts of interest. As the Chronicle report stated:

Trustees are a university's ultimate decision makers. Whether approving a building project or directing endowment money, they profoundly affect everyone on the campus. In making those choices, trustees are supposed to be concerned only with what is best for the institution. But what happens when a trustee also has a business relationship with the university?

Massachusetts -- the “Education State” – is a poster child for the problem. Errors of Omission, a new report out from the Tellus Institute, looked at twenty of the wealthiest private colleges in Massachusetts (and Dartmouth in New Hampshire). It found:

  • 70 percent "had at least one trustee affiliated with a firm doing business with the school,"
  • 86 percent of those provided “disclosures of business transactions with related parties that appear to be erroneous, problematic or substantially incomplete,” (including to the IRS and the state department of revenue), and
  • "The greatest number of trustees reported as ‘interested persons’ or ‘related parties’ work in financial services."

Worst Offenders: Boston, Harvard, Tufts and Williams College

The four academic institutions with the worst record on transparency in business relationships with trustees were Boston University, Harvard University, Tufts University, and Williams College.

For example, Harvard’s affiliated investment management company, Harvard Management Company (HMC), failed:

“To disclose the potential conflict of interest resulting from the university’s widely reported investments with Greylock Partners, where HMC director William W. Helman serves as a partner. Harvard has reportedly been invested in Greylock venture capital funds since the 1970s, and Helman is a long-standing member of HMC’s board.

Helman is no stranger to these sorts of conflicts; he is also among the numerous trustees of Dartmouth College affiliated with firms managing multi-million-dollar sums for that college’s endowment.”

Errors of Omission notes that nonprofit colleges are granted “the generous benefits of tax exemption because the institutions must serve public purposes.”  It argues that the public, “which grants those benefits of tax exemption and ultimately bears its costs,” has a right to know when trustees “benefit privately…from their nonprofit board service.”

Corporate Influence On Higher Education

Is the failure to hold these institutions to account on revealing potential conflicts of interests on trustee boards part of a larger trend of the influence of corporations on institutions of higher learning?

I sat down with the Tellus Institute report’s lead author Joshua Humphreys to find out more about the “crisis of stewardship.” Although the focus of Errors of Omission is the lack of transparency about the personal interests of college trustees (and the implications for decision-making at the institutions on whose boards they serve), I started out by addressing a more fundamental issue:

Francesca Rheannon: The main thrust of your report is the need for greater transparency. But before even talking about that, is it ethical for trustees to be involved with companies that are doing business with the college, even if disclosed?

Joshua Humphreys: Experts who work on nonprofit governance say the best practice is to draw a bright line between board service and providing service to the colleges on whose board one sits, so in that sense whether that's a matter of ethics or just good stewardship is really a fair one that we hope to encourage with this report.

Why is transparency on this issue so important?

We engaged in this project on the tail of research we did back in 2010 looking at the role of college endowments during the financial crisis. We found [for example] that more than half of Dartmouth College’s trustees worked at financial firms, private equity firms and hedge funds that were managing Dartmouth College's multi-million dollar endowment. And this had not been disclosed in any specific way in the school's IRS tax filings.

Our real concern is that the transparency system clearly is not adequately effective as it currently stands, given the kinds of errors of omission and inaccuracies that plague so many of the filings and disclosures that are made in a more opaque manner. So we thought it was important to highlight the state of the current system of transparency related to these trustees.

Financial Crisis And Stewardship Crisis Are Linked

financial crisisLiterally, a majority of the members of boards of trustees at many of the colleges that we've looked at are drawn from business and finance. When you have people who come from the world of the “shadow” banking system, where opacity and lack of transparency are, in fact, sources of competitive advantage, inevitably they bring those kinds of biases to bear upon their stewardship of boards.

Why are the ties of trustees with financial companies and private equity firms especially troublesome?

For us, we've seen what we describe as a “crisis of stewardship” in higher education. And the financial crisis and the endowment declines that occurred because of the financial crisis really put that stewardship crisis in sharp relief.

If you have, as you do at a place like Boston College, half a dozen trustees affiliated with hedge funds and private equity firms that also have actual money that they're managing for the schools, how are those investment committees and boards going to function in an independent way?

Is this part of a larger trend of increasing meshing of business interests between institutions of higher learning and private companies? Universities and colleges are increasingly partnering with private companies on business ventures. Does your report fit into this larger context?

There's wide literature that has looked at the role of academic capitalism and this new knowledge economy where research is no longer done in a disinterested way at colleges and universities but rather is done with the hope that it can be commercialized. The research is often sponsored by profit companies and has become an extremely important source of revenue for colleges. So this is definitely part of a trend.

Others, such as Sheila Slaughter at the University of Georgia, who wrote the book Academic Capitalism And The New Economy with Gary Rhoades, has highlighted precisely these kinds of corporate ties. They see corporate trustees as networks of power behind the emergence of this much more market focused agenda for higher education. Our findings reinforce the sense that much of higher education today is being captured by corporate interests.

CSRwire received this updated information from the Union of Concerned Scientists today. We feel it is important and are sharing it with our readers:

I wanted to let you know that we’ve clarified one of the findings in our report, “A Climate of Corporate Control,” which you recently covered. This update does not affect our overall findings nor does it seem to directly affect your coverage based on my read. While your story discussed several aspects of GE’s giving, you did not write about their funding for think tanks. However, you did link to Ron Bailey’s critique, which does touch on this topic.

In any case, we always strive for accuracy, so I wanted to share this with you.

Originally, we counted funds General Electric gave to several non-profit groups through an employee matching gift program. These matching gift programs allow individual employees to choose where their money (and GE’s matching money) go. By contrast, funds from GE and its corporate foundation are directed by company executives. Our updated report removes the matching gifts, which affects our analysis of which climate-engaged groups GE ultimately gave to. We also reviewed the rest of the data related to non-profit group support and found no further need for clarification beyond GE.

We now conclude that GE has only funded non-profit groups that support climate science. Previously, we had concluded they were funding groups that misrepresent climate science, too. However, GE has still taken contradictory actions on climate change overall, including its support for Proposition 23 in California and its membership in various trade organizations that work against one another on climate change.

You can find a copy of the updated report here: http://www.ucsusa.org/scientific_integrity/abuses_of_science/a-climate-of-corporate-control.html

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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