Monday, July 27, 2009

Whatever happened to fiduciary responsibility?

Seems like every day there's another story about a college or university that is in some form of financial distress. If it's not Harvard University dropping 11 digits worth of endowment value (check out the Vanity Fair article for interesting coverage), then it's the University of California and California State University systems furloughing their employees.

But the smaller, less prestigious schools generally don't receive the same kind of media coverage that the big boys do. One interesting story, though, is about Greensboro College, a small liberal arts school in the city of the same name in North Carolina. Like many of its peers, it has run into financial problems over the last year. It has had to layoff employees and cut the pay of most of the remaining staff by 20 percent. In fact, Greensboro got itself into such trouble that it was forced to turn to Bank of America for a loan to meet payroll and continue operations. And to get that loan, it had to put up as collateral all of its real estate and its entire endowment. Greenboro's long-time (16 years) president, Craven Williams, stepped down abruptly earlier this month.

Williams had embarked on an ambitious building and acquisition plan, using borrowed funds to do so. This had evidently exacerbated Greensboro's problems, causing the extreme measures it was forced to take this spring. What is striking, though, are some comments made by former trustees in an article in the local Greensboro newspaper, the News and Record. Here's what a couple of them had to say:
“There wasn’t a whole lot up for discussion,” recalled former trustee Tom Wright. “There would be a plenary session, but anything presented, it was as if the financial committee had already reviewed it.”

Said another former trustee, Richard Levy: “If you’re told, 'Everything’s running OK,’ and you’re not told about problems, you don’t go looking for them. You’re there to help.”

If they were accurately quoted, these are stunning admissions by the former trustees. Either they were purposely misled by the university's administration, or they were asleep at the switch in not being aware of the financial situation in which the college found itself.

Trustees play an important role in overseeing the fiduciary health of the institution, particularly in private institutions for which there is little or no government oversight and control. To let an institution get into such financial straits - caused not just by external economic and financial circumstances, but also by active decisions made by the institution's leadership and board - without the board being aware is an admission that at least some trustees were not paying attention. While it is easy to sit back and not go looking for problems, trustees have to be more proactive about asking the difficult questions.

Not to single out Greensboro; probably some of the same issues can be raised about the Harvard Corporation. Much has been written that Harvard is now reaping the downside of the aggressive endowment investment strategies that it has pursued for many years now (and for which it has very generously compensated the staff of Harvard Management Company). But perhaps there will be some hard questions asked about whether the university and others like it were too aggressive in pursuing increases in endowment value.

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