University Trustee Investment Conflicts: When the Stumps Start Showing

University boards are great for mutual back-scratching

Deep water hides all stumps, as the saying goes, and while the endowments of rich universities were piling up cash during the investment-friendly period before 2008, nobody questioned the universities’ choices of which companies and funds to invest in. Then came the meltdown, and endowments of over a billion dollars lost an average of 20% or more. That kind of hit has consequences, and among them were that a lot of programs got cut and a lot pf people lost their jobs.

That, in turn, provokes scrutiny: the deep water had receded, and the stumps were out to see in all their ugliness. As an article in Inside Higher Ed explains, among the stumps on display was the fact that many prominent universities invested their funds in places where their trustees had financial interests:

“In February, the New Hampshire Attorney General received a letter from a group called “The Friends of Eleazar Wheelock” (Dartmouth’s founder), that identified itself as “a group of former and current faculty, staff, and employees of Dartmouth College.” The group gave no other indication of its members’ identities or how many people it included. The letter alleges that members of the college’s board and investment committee have funneled the college’s endowment to hedge fund, private equity, and venture capital firms they manage. The letter alleges that board members have not been forthright about these investments and the fees paid to their firms. The letter provides a list of investments the college made and how these investments relate to trustees. It alleges that the trustees violated state law and calls for the trustees to step down.”

As the Inside Ed article makes clear, the question really isn’t whether this was going on: it was (and is), and not just at Dartmouth. Universities court board members with business backgrounds and who come from the investment industry. That makes sense: boards have to oversee how the endowment is managed. Still, this is a conflict of interest when the money in channelled into members’ own firms.  New Hampshire, like many other states, prohibits transactions between non-profit organizations and firms in which trustees, directors, or officers have financial interests,  unless that transaction “is in the best interest of the charitable trust.” In addition, there are other safeguards required, such as two-thirds approval by the “disinterested” board members, having  the interested parties absent during the vote, and publication of a notice of the transaction in a “newspaper of general circulation in the community in which the charitable trust’s principal New Hampshire office is located.”

You don’t have to be a cynic to see that these are no safeguards at all. Board members live by quid pro quo: mutual back-scratching by alliance is why they are on the boards in the first place. Translation: there are no truly “disinterested” members. The absence of the profiting board members from the actual vote means little, and the publication has little real effect. Who reads the disclosures? Indeed, who reads newspapers? Okay, the board is open and candid about self-dealing—it is still self-dealing. As for the conflicted investments “being in the best interests” of the university: who decides that? The conflicted, profiting board.  I am not reassured.

From the article:

“Dartmouth is open about the fact that it engaged in transactions with firms in which its board members had some interest. According to Internal Revenue Service forms, between July 1, 2008 and June 30, 2010, the two most recent years for which information is available, the college made $36 million in capital contributions to funds run by Lone Pine Capital LLC, a privately owned hedge fund sponsor founded by Stephen F. Mandel Jr., chairman of the Dartmouth board, and almost $19 million in capital contributions to funds run by Apollo Management L.P., a private equity group founded by then-trustee Leon D. Black. The college also conducted several other transactions with firms run by trustees.”

Dartmouth is far from alone in this, but that’s no defense, as we all know. Whether the schools make money out of the crony investments or not, the fact is that these are unacceptable conflicts. Professional investors and business executives are being given control of charitable funds and being allowed to invest them for their own profit as well as that of the university. That’s leaving an open door to corruption, and virtual theft. A conflicted board member is incapable of determining whether an investment with her firm or in her company is objectively in the best interests of an institution. The safeguards are inadequate and laughably so. They do nothing to eliminate the appearance of impropriety, even if no actual impropriety exists. experience tells us, however, that where there is the appearance, the reality will be along soon if it isn’t there already.

Inside Higher Ed notes that Prof. Richard P. Chait of Harvard University’s Graduate School of Education, an authority on  institutional governance, insists that the only way colleges and universities can  avoid allegations of corruption and mismanagement is to almost always avoid doing business with trustees’ companies.

I agree.


Source: Inside Higher Ed

Graphic: Amanda Krill

Ethics Alarms attempts to give proper attribution and credit to all sources of facts, analysis and other assistance that go into its blog posts. If you are aware of one I missed, or believe your own work was used in any way without proper attribution, please contact me, Jack Marshall, at


One thought on “University Trustee Investment Conflicts: When the Stumps Start Showing

  1. One big test of character comes when large sums of money are involved. What strikes me is that boards of regents- being little governments in many respects- don’t have the same restrictions on them in the aspect of self-interest that traditional politicians do. Of course, those latter manage to sidestep the rules as well. Where there’s a will, there’s a way.

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