In Focus: Why NU fails to make the grade on endowment transparency

Sarah Freishtat

In 1990 a group of Northwestern students banded together to investigate the details of the University’s investment in apartheid South Africa. In the age before widespread Internet use, they pored over dense documents, eventually concluding NU had lied to them about how many companies it supported that did business in South Africa.

While NU denied the student allegations, NU’s limited endowment disclosure makes it impossible to know which side was right.

It is widely known that NU has one of the largest university endowments in the country. What is less widely known is what NU does with that $6.8 billion. Students do not know what companies NU supports, or if those holdings conflict with school values.

While concerns about South Africa have faded from campus consciousness, NU has not adjusted its disclosure policies. Students have occasionally voiced concerns about transparency, but there has been no campus-wide movement to increase it.

Top-tier school, second-tier transparency?

The University’s endowment, a mutual fund, comprises donations from alumni and other supporters. Its largest shareholders are the Treasury Pool, Feinberg School of Medicine and the Central Administration.

NU’s Investment Office releases information about the endowment’s growth, holders and asset allocations on its website. It does not list specific companies in which the endowment is invested because managers of those companies often ask the school to keep the information private, said Chief Investment Officer William McLean.

The Investment Committee of the Board of Trustees works with the NU Investment Office and a hired firm to determine how to invest the endowment money. The University typically spends about 4 percent of the endowment each year and reinvests the remainder, according to the Investment Office.

The NU Investment Office releases information about the endowment holders, asset allocations and its performance. However, it does not provide information about specific companies in which the endowment is invested. Outsiders, including faculty, alumni and students, have no role in what NU does with its money.

Many of NU’s fellow private institutions welcome more community involvement. Top-tier schools such as Columbia University, Yale University and Williams College ­­- NU President Morton Schapiro’s previous home ­­­­- have advisory committees, which allow students and faculty to make recommendations on how the university should invest its endowment.

The Responsible Endowments Coalition, a national organization that works to increase responsible investing by universities, implements advisory committees on socially responsible investing at schools across the country.

“Northwestern is consistently ranked as one of the top institutions in the country that does not have an ACSRI,” said Martin Bourqui, national organizer for the REC..

The ACSRI are groups of faculty, administrators, students and alumni that examine a university’s endowment in detail and make recommendations about how the university should invest its endowment to help solve environmental, community or social issues.

“We must consider, ‘how does what we invest in affect corporate abuses of the environments of workers,'” Bourqui said.

ACSRI are important because they help bring the school’s investment policies in line with the values of the school, he added. “I haven’t seen too much at the University to indicate that the administration is interested in doing that,” he said.

“We’ll invest with you because you will make money.”

While some schools require that their endowments not be invested in certain industries, such as alcohol or firearms, NU has no such policies, McLean said.

“We don’t come out and say, ‘We’ll invest with you because you’re sustainable,'” McLean said. “We say, ‘We’ll invest with you because you will make money.'”

By some national standards NU is especially secretive. The University received a D in endowment transparency from the College Sustainability Report Card, which rates transparency based on accessibility of investment holding information and proxy voting records.

Proxy voting allows shareholders to send a representative to shareholder meetings to vote on corporate issues. NU uses a consulting firm to do proxy voting, since school officials often cannot attend those meetings in person.

Professor Robert Blumenthal, math department chair at Georgia College and State University, feels so strongly that schools should be transparent that he wrote about it in a 2009 letter to the editor for the Chronicle of Higher Education. He told The Daily transparency is especially important for private universities that, like NU, are non-profits. As a private institution, the University is not required by law to share as much financial information as a public university. However, it is tax-exempt and receives federal money in the form of grants and financial aid. Blumenthal said NU should be required to share the same information that any publicly traded company on Wall Street does, as taxpayers have a right to know how the University is spending its money. This information is also useful to the university community, he said.

“It’s important that prospective students and parents have some meaningful information about the fiscal health of the college or university before making a commitment to attend,” Blumenthal said.

McLean said few schools are able to disclose a specific list of companies in which they invest because the managers of those companies do not like to disclose who their investors are. He dismissed the Report Card as inaccurate.

“This is probably the most bogus (survey) we run across,” McLean said.

He cited spotty communication with NU and broad categories as shortcomings of the survey. Few schools, most of them public, can report all the information the Report Card asks for, he said. Due to these issues, NU does not fill out questionnaires sent by the organization.

Truth and consequences

Some schools, however, have been required to disclose information about the companies in which they invested and faced consequences.

In late 2003 the University of California Oakland and the University of Michigan were asked to report information about internal rates of return from individual companies in their endowment. A California court ruled that, under the state’s Freedom of Information Act, the figures had to be made public. As a result, many companies refused to provide the managers of the endowment with information on their performance.

The University of Michigan did not get off as lightly. One company, Sequoia Capital, asked the university to leave the fund so sensitive information would not have to be released to the public.

While private universities are not required to release this information, some have opted to allow the community more input.

Several schools that scored Bs in the endowment transparency category, such as Columbia and Yale, have advisory committees. These help ensure the school’s investments are in line with the values of the university, which may be one reason the schools rank higher, Bourqui said.

At Brown University and the University of Pennsylvania, committees have worked with the administration to divest from the hotel chain HEI, Bourqui said. Students said the company had a bad labor rights record.

The number of schools with ACSRI is growing. REC recently instituted ACSRI at Middlebury College and Colorado College, bringing the number of schools in the country with these committees to 40.

Making change versus making money

One reason NU doesn’t have a committee is because no students have approached REC about forming one, Bourqui said.

“As with most forward-thinking changes at schools, the power to get the work done comes from stu
dents,” he said. “Administrators and money managers usually, in the past, have not taken that initiative.”

While neither McLean nor Bourqui was aware of student efforts to start such a committee, NU students have brought individual issues to the administration. Before students brought their concerns about South Africa to the administration, a Special Trustee Committee on South Africa established a policy in 1985 calling for a case-by-case review of investments related to South Africa. The committee concluded total divestment “would be inconsistent with the Trustees’ duty to invest University’s assets in a prudent manner,” according to Daily archives.

Administrators said investment in companies that did business in South Africa dropped, but students accused NU’s numbers of being flawed and said the University would not tell them how they reached the divestment figures.

More recently, McLean said a group of students approached him about divesting from Sudan in 2005. The University identified four companies in which it was invested that supported the government of Sudan and sold its shares.

The Living Wage Campaign has also advocated for more social responsibility by the University, which it says can be achieved through greater transparency. The Campaign could benefit from knowing the University’s financial records in formulating its strategy to get campus workers a living wage, Living Wage Campaign co-chair Adam Yalowitz said. The details of NU’s contract with Sodexo, NU’s food service provider, could shed light on how environmentally friendly and sustainable Sodexo is, he said. There have been protests across the country in response to Sodexo’s policies, which Yalowitz called an example of how student awareness can promote change.

“Are students getting the most from their money?” the Weinberg senior said. “Are community values being realized?”

Craig Johnson, executive director of the Feinberg School of Medicine, had a different perspective about endowment transparency.

As one of the largest schools at NU, Feinberg receives one of the greatest portions of the endowment. The school uses about $41 million annually, Johnson said. This helps cover the school’s operating cost of $500 million per year, not including the hospital. Most of the endowment funds the school receives come from donors who restrict that money’s usage to specific purposes.

Despite being a major stakeholder, Feinberg has no say in how the University invests the endowment other than to help McLean determine how much each holder receives annually. The school receives reports from the investment office detailing asset allocation, diversification and general financial statements. Johnson said Feinberg is better off leaving investment decisions up to the professionals.

“We don’t have the expertise to manage that,” he said.

Full Disclosure

Blumenthal said all non-profit organizations, including NU, should reform their methods of disclosure. As tax-exempt institutions, they’re required to fill out a Form 990 detailing their finances, but little else is required of them by law.

Form 990, or the Return of Organization Exempt From Income Tax, provides all financial governance information to the public and helps the government prevent tax-exempt organizations from abusing their status. The form is available online through the GuideStar Web site. However, the site is often “woefully” out of date and lacks a complete set of financial statements from each school, Blumenthal said. The complete set of financial statements the Department of Education receives each year should be available in a timely fashion, including a school’s income statement, balance sheet and an auditor’s notes, he added.

In addition to updating the Form 990, Bourqui said NU could benefit from increased student interest in an ACSRI.

McLean said he would be open to the existence of such a group if there were enough student interest.

“Using the power of the university as a major institutional investor to put pressure on the people managing money can reform the financial system,” Bourqui said.

[email protected]