Part of the answer lies in investments made by college and university trustees, which resulted in huge losses after the 2008 financial crisis, with average one-year losses totaling 20.5% among schools with endowments higher than $1 billion, according to InsideHigherEd.com.
What led trustees to make these investments?
Some stakeholders think part of the answer lies in self-dealing among trustees, who direct schools' investments into their own funds or those in which they have some other interest.
Conflicts of interest
Reuters reports that colleges and universities including Dartmouth, Brown, Northwestern, and Stanford, just to name a few, have disclosed investments in funds linked to their trustees.
And worries about self-dealing don't end with investments in trustees' firms. In a 2010 survey of tax returns filed by 618 private colleges, The Chronicle of Higher Education found that about 25% of the schools examined disclosed financial connections to real estate businesses, construction companies, and other service providers associated with their trustees.
We're not self-dealing... trust us!
To examine the effect that such conflicts of interest can have on a school's investments, InsideHigherEd.com's Kevin Kiley took a look at the relationship between Dartmouth's trustees and the school's investments in funds linked with those trustees:
|Trustee||Fund Association||Amount Invested 2008-2010|
|Stephen F. Mandel Jr.||Founder, Lone Pine Capital||$36,039,000|
|Leon D. Black||Founding Partner, Apollo Management||$18,850,926|
|R. Bradford Evans||Senior Advisor, Morgan Stanley||$15,733,092|
|Russell Lloyd Carson||General Partner, Welsh, Carson, Anderson & Stowe||$5,135,469|
|William W. Helman IV||Partner, Greylock Partners||$3,378,310|
Justin Anderson, Dartmouth's assistant vice president for media relations, offers two defenses for these investments.
First, he claims that these investments are in the best interest of the school, telling InsideHigherEd, "To forgo investments with a firm simply because a board member has some interest in the firm would be contrary to the best interest of the college."
Second, he claims that the trustees complied with federal and state (New Hampshire) restrictions meant to prevent conflicts of interest, as well as Dartmouth's own regulations. Among other things, notes Kiley, the New Hampshire regulations require that:
- Those with a financial interest in the transaction cannot be present during the vote.
- At least two-thirds of the voting board members must approve each investment.
- A notice of the investment must be published in a "newspaper of general circulation in the community in which the charitable trust's principal New Hampshire office is located."
Lack of transparency
InsideHigherEd notes that while Dartmouth is open about its investments in these firms, stakeholders are complaining that the board has stonewalled them in the face of questions about the fees associated with its investments. In addition, stakeholders say that the school fails to offer online archives of investment notices, and so it is difficult to get a full and accurate picture of the amounts invested in trustees' firms or of how well these investments have performed. This lack of disclosure does not help justify Dartmouth's claims that these investments are in the best interests of the school.
When trustees make irresponsible investments and purchasing decisions, students and their families are not the only ones who pay. The burden of these costs is also passed on to taxpayers who help finance the public schools and to donors who help finance the private ones.
And without increased disclosure requirements, these stakeholders are in a poor position to evaluate or challenge these decisions.
Motley Fool contributor M. Joy Hayes, Ph.D., is the Principal at ethics consulting firm Courageous Ethics. She doesn't own shares of any of the companies mentioned. Follow @JoyofEthics on Twitter.