June 24, 2001

Harvard's Hoard

By JOHANNA BERKMAN

ext Sunday, Lawrence Summers becomes the 27th president of Harvard. But the distance from the Treasury Department to this particular ivory tower is not as great as it once might have been. Summers will have less money to play with than he did in his last job, as treasury secretary, but the endowment of the institution he inherits has climbed in recent months to as much as $19 billion -- a sum greater than the physical assets of McDonald's, the G.D.P. of Ecuador, the net worth of all but 5 of the Forbes 400 or, according to The Boston Globe, the endowment of every nonprofit institution in the world after the Roman Catholic Church. As the head of Harvard, there will be no escaping the burdens of high finance.

Or low. Summers's appointment in April was barely a month old before Massachusetts Hall, which houses his new office, was taken over by dozens of students protesting Harvard's failure to provide a "living wage" of $10.25 to all its employees. Over the next 26 days, tents popped up in Harvard Yard, as students, professors and workers slept outside in sympathy. Robert Reich, the former labor secretary, dropped by to show support. Senator Edward Kennedy tried to enter the building to meet with the students, but the police wouldn't allow it. Newspapers across the country ran editorials taking Harvard to task for refusing to spend even the smallest fraction of its endowment to improve the lives of its workers. Drawings of Summers as Marie Antoinette began to go up around Harvard Yard.

If the issues of the protest are small for such a rich and enormous institution -- about 400 employees and several hundred contract workers are affected by the university's position, which it has pledged to reconsider -- they call attention to a growing chorus of critics who believe that Harvard is at least squandering an opportunity to rethink its culture, or even its mission, in light of that one stunning number: $19 billion. (The next largest endowment, Yale's, is $10 billion.)

"It's absurd," says Reich, who has taught at Harvard. "There's no reason to raise a giant endowment merely for the sake of having a giant endowment." Jeffrey Sachs, a Harvard economics professor, is a bit more philosophical: "We all have the sense that this is a remarkable amount of money. The question is, To what purpose will it be put?"

Harvard surely wouldn't lack for recommendations if it wanted them. Frank Newman, the director of the higher education policy program at the Pew Charitable Trusts and the former president of the University of Rhode Island, notes that universities receive favorable tax treatment because society expects them to be "above and beyond corporate citizenship, to take the steps that help make society better." He suggests that Harvard spend more money to mentor minority students or to study such national issues as the health-care system. Sachs says that Harvard should "increase the knowledge capacity" in the developing world; Reich talks about Harvard "replicating itself" both globally and nationally. Todd Plants, who graduated from the college two weeks ago and was the chairman of the Student Affairs Committee last year, argues for more financial aid. (And you can see his point: tuition, room and board for the last four years cost $126,486, which more than a third of this year's 1,602 graduates paid in full.)

But Harvard has been reluctant to think creatively about its increased wealth. Last fall, for example, at a meeting of the Harvard Management Company board, which oversees the investment of the university's endowment, one member posed an intriguing question: Do we want to be fully endowed? At the time, Harvard's endowment was paying out enough income to cover 27 percent of the university's $2 billion operating budget. Would it be worthwhile to try to cover the whole thing? To make the school free to all 18,000 students? To liberate its 2,000 professors from grant writing to concentrate on teaching and research? The question was a nonstarter, says Elizabeth Huidekoper, Harvard's vice president for finance. The conversation "didn't quite go that far."

In January, Princeton (endowment: $8.4 billion) promised to abolish student loans. In April, Cornell (endowment: $3.4 billion) said it would open a medical school campus in the tiny Persian Gulf nation of Qatar. But the three largest nonannual expenditures of the outgoing president Neil Rudenstine's tenure capture Harvard's conservative approach when it comes to innovative spending: the purchase of 29 developed acres up the Charles River in Watertown for $168 million; the purchase of 48 developed acres across the river in Allston for $150 million; and the costs of formally merging with nearby Radcliffe for another $150 million. Ask about satellite campuses or online education, and you'll hear that such steps are too expensive. Ask about covering students' tuition, and you'll learn that paying for your schooling is a virtue. ("There's something good about hunger," one dean says. "It is important for our students to be co-investors in their own education.") Ask whether the recent $120 million operating surplus is a sign that Harvard could think of some new ways to spend its money, and you'll be told that that amount, left over after subtracting operating expenses from the sum total of endowment payouts, tuition, research grants and other income, is not all that significant. ("It's in the noise," Rudenstine says.) Rudenstine dismisses calls for a change in Harvard's spending strategies as the usual campus grumbling or the agitation of uninformed outsiders.

t is true that the situation looks more complicated from the inside. Perhaps because its purpose is to preserve generational equity in perpetuity, the Harvard endowment is often talked about as if it were a single, monolithic entity. In fact, it comprises 9,600 funds donated over the last three centuries. (Harvard's buildings, which the university carries at a depreciated value of $1.7 billion on its balance sheet, as well as its vast art collections and landholdings, are not included.) At most universities, the president controls the endowment. At Harvard, the endowment funds belong to whichever of the 10 schools they were donated. The result, a system known internally as "Every tub on its own bottom," has produced wide disparities in wealth. The richest by far is the Faculty of Arts and Sciences, the university's undergraduate and graduate core; its endowment is $8 billion, greater than that of every other university but Yale, Texas, Stanford and Princeton. Next in size are Harvard's medical ($2.1 billion) and business ($1.3 billion) schools. Two of the poorest are education ($290 million) and design ($250 million).

Despite its decentralized budget pool, Harvard is an incredible fund-raising machine. When the university's governing body, the Harvard Corporation, hired Rudenstine in 1991, it wanted a conciliator who could bring together the independent deans to collaborate on the first university-wide campaign since the 1940's. An unexpected bonus, says Ronald Daniel, Harvard's treasurer, was that the quiet, self-effacing former Princeton provost became a magnet for big donors. Under Rudenstine's watch, Harvard conducted a six-year, $2.1 billion fund-raising campaign -- and exceeded its goal by $500 million. More than 68 percent of this $2.6 billion came from gifts of $1 million or more; there were 498 of these. And while only two gifts were $50 million or more, 90 donors gave gifts of $5 million or more. That Harvard is already so rich, and so much richer than every other school, seems only to enhance rather than to hinder its ability to attract large gifts. "I like to back a good organization," says Thomas H. Lee, the centimillionaire leveraged-buyout fund manager, explaining why he gave such a wealthy school $22 million. "Excellence is expensive."

Harvard cultivates this crowd through an invitation-only organization called the Committee on University Resources, which was founded at the end of the 1960's to encourage those who have been generous to Harvard to give even more. A few years ago, for example, a university official told a COUR member, Albert J. Weatherhead 3rd, the owner of Weatherhead Industries in Cleveland, "You're Harvard's third largest living donor, and you won't rest until you are No. 1." Weatherhead, who has given a total of nearly $50 million to the school, says, "I just love that quote." When Rudenstine took office, there were 200 COUR members; today there are 400.

Typically, COUR's annual spring gathering, which takes place over two days in Cambridge, has a theme. During the last campaign, these included globalization and ethics. This year's event, however, was "really unusual," says William Boardman, Harvard's associate vice president for capital giving. "We didn't have a lot of fund-raising to talk about." Rather than something academic, he chose a theme more central to the lives of committee members, and perhaps the school as well: wealth management.

rom his 16th-floor perch inside the Boston Federal Reserve office tower, Jack Meyer, Harvard Management Company's president and C.E.O., oversees a staff of 185 and the investment of the university's billions. Were it not for the sign on the door, you would have no idea that H.M.C. is a university-owned nonprofit rather than an independent, highly sophisticated money-management firm. There is the water view, the beautiful wood paneling and the very for-profit salaries. Last year, H.M.C.'s top five performing portfolio managers earned bonuses totaling more than $50 million. The single biggest payout went to the foreign-equity manager. He got $17 million, more than 48 times as much as Rudenstine's compensation of $352,650.

Once, these bonuses made Meyer, a friendly man who speaks with the fast clip common among those who wield power on Wall Street, a scourge in the Harvard community. "In the early 90's, I received a lot of correspondence that was somewhat less than friendly," he says. Today, after the long bull market, even Jeremy Knowles, the arts and sciences dean, has made peace with Harvard's rewarding those who produce wealth much more generously than those who produce knowledge: "I ask myself, How much would they have made at Goldman Sachs?" (Knowles's salary, like that of every dean but that of the medical school, is less than $300,000. The average salary of a full professor at Harvard is $135,200.)

Harvard began its metamorphosis into a hedge fund in the mid-70's, when, after a pair of Ford Foundation monographs encouraged universities to invest more aggressively, it set up its own shop. Since Meyer took over in 1990, H.M.C. has employed an aggressive but diversified arbitrage strategy to make a fortune for the university's endowment -- $4.3 billion last year alone, a sum roughly equal to Columbia University's entire endowment. H.M.C. has also spread its investment tentacles into 68 private equity and venture-capital firms and seeds new investment funds too. The first -- there are now four, all run by former employees -- was seeded in 1998, when H.M.C.'s top-performing hedge-fund manager, Jonathon Jacobson, quit to start his own firm shortly after receiving a $10 million bonus. The deal: Meyer gave Jacobson $500 million to manage in exchange for reduced fees. Another dividend: as a free agent at Highfields Capital Management, Jacobson can invest Harvard's money in controversial holdings -- he has invested in casino stocks, for example -- while reducing the risk of a major P.R. blow-up. (H.M.C.'s only in-house prohibition is tobacco investments.) Last year, according to the university's tax returns, H.M.C. paid Highfields $29 million for investment-management services.

Another factor helping the growth of the endowment has been Harvard's conservative payout policy. While the endowment's returns have surpassed the internal target of 6 to 6.5 percent above inflation for the last nine years, the corporation has paid out only 4.2 percent of its endowment on average to the deans for spending, less than the typical university target of 4.5 to 5 percent. The strategy has netted the university additional billions.

arvard's money became a puzzle to me," says the psychologist Carol Gilligan, who will resign from her post as a professor at the School of Education next spring and teach full time at New York University. "Where are the resources of the university going?" she asks. Over at the far wealthier law school (endowment: $930 million), Prof. Alan Dershowitz expresses a similar befuddlement over why he has had such a difficult time getting funds for the public-interest-law program. "Harvard's goal is to die with the most amount of money," he says. "It should not be the goal."

Rudenstine counters with a lament: "Everyone thinks of the $19.1 billion as one pot of money. It's thousands of pots of money that are restricted accounts."

In fact, 87 percent of the Harvard endowment is "restricted" to either a particular school or specific purposes at that school. Still, Harvard's claim that its hands are tied when it comes to spending remains open to question. First, Harvard, rather than wealthy donors, at times creates those restrictions. Take the Weatherhead Center for International Affairs. The Weatherheads had already given Harvard four professorships and wanted to have a global impact; they would have considered an unrestricted gift (so long as it was "mind engaging"). Second, there has been as much as $920 million sitting unrestricted in the university's $3 billion general operating account. Much of that sum was generated in an unusual fashion -- by taking funds the deans set aside for near-term use, investing that money into the endowment and paying the deans a money-market rate of return while keeping the difference for the central administration. "If you want to say it was risky, I can certainly agree with you," Rudenstine says, but "in the end, proof happens in the pudding."

But what is the point? Why run the machinery this way? Lani Guinier, a professor at Harvard Law, thinks she understands Harvard's values. "Money has become the exclusive denominator," she says. "It defines everything: prestige, excellence, competence, commitment to the public good." Leon Botstein, the president of Bard College, sets Harvard in a broader social context. "We've reduced our definition of worth into fame and wealth, and it carries over into the way institutions think about themselves," he says. "An overwhelmingly huge part of what Harvard is about is managing its money. The absurd theory is, Harvard is safe if there's an atomic bomb that destroys all of America -- Harvard will continue. Learning and studying are very simple things, and the values they require are the love of learning and intellectual curiosity. Are they fostered by wealth? I don't think so. Smugness is fostered by wealth."

Even those from institutions that have profited in the same ways Harvard has, if less spectacularly, question Harvard's choices. James Freedman, the president of the American Academy of Arts and Sciences, tells me that as a former president of Dartmouth College (endowment: $2.5 billion), he "can't throw stones at others." But within a matter of minutes, he is arguing for a radical revision of Harvard's endowment policies: "You really wonder why Harvard, out of its $19 billion, couldn't take $1 billion and say, 'This is the capital that will fund our scholarships."' John Hennessey, the president of Stanford University (endowment: $8.7 billion), which recently received the largest gift ever made to higher education -- a $400 million matching grant from the Hewlett Foundation -- says it's time for Harvard to re-examine its financial priorities. The issue of whether the endowment is big enough or if its size warrants fundamental changes to the school's mission is one that the next president of Harvard "will have to face," he says.

When I relay some of these comments and suggestions to Rudenstine, he characterizes his first three years at Harvard as a "nightmare" because of the early-90's recession and deficits at the school. "So my first question when anybody says something about what any university should be doing is, Tell me how much you know about running a university." When I reply that some of these critics do (or have) run colleges and universities, he asks: "But do they know anything about Harvard? Harvard is different."

arvard is indeed different. as Howard Gardner, a professor at the Graduate School of Education, notes: "Harvard is older than the United States, and I think there's a reason for that. It's been very well managed." That management denies Harvard's president the authority to spend the university's money as he sees fit. But Summers will have power all the same. There is, for starters, the unrestricted money in the general operating account; that $920 million alone is more than the entire endowment of Boston University ($913 million) or Georgetown ($745 million). As the fund-raiser in chief, too, Harvard's president can steer donors toward particular projects.

While there's no indication that Summers plans to shift Harvard's strategy, there are those who believe he has precisely the kind of credentials to effect change if he wants to. In terms of brilliance and force of personality, Summers -- who at 28 was the youngest professor to receive tenure at Harvard in its modern history -- is as well equipped as anyone. And it stands to reason that the Harvard officials who chose him had more in mind than hiring a financial campaign guru. "If you were focused on money and fund-raising, that was probably not where Larry's competitive advantage lay," says his mentor and predecessor at Treasury, Robert Rubin. "He's much more caught up in the question of Harvard's mission."

Not that it would be easy. Should Summers seek to generate greater societal and intellectual returns on his school's money, he would need to persuade the corporation, which sets the endowment payouts, to be more generous. He would probably run into resistance. A remark from Harvard's treasurer, Ronald Daniel, suggests why: "Harvard is still a long way from having 'more than what it needs,"' he says. Even where there is no doubt about the school's financial security, ingrained caution toward spending is a brake. (Harvard was, of course, founded by Puritans.) When faculty members think about the endowment, they tend to share Harvard's conservative spending values. "What the $19 billion ought to allow us to do is be very thoughtful about how we go about making decisions," Gardner says. But mostly it is not a concern. As Henry Louis Gates Jr., who runs Harvard's Afro-American studies department, describes the endowment: "It's like the air we breathe. We take it for granted. It's around you all the time, so you don't think about it."

And were Summers to act, he would first have to contend with the great intramural disparities. The deans of the rich schools are likely to favor the capitalist status quo -- Every tub on its own bottom does make a larger number of people both responsible and accountable," says Knowles, the arts and sciences dean -- while it's hard to imagine the poorer deans entirely ignoring the untapped coffers around them. At the School of Public Health, which lacks a core of wealthy alumni supporters, Barry Bloom, its dean, describes his tub's financial set-up as "a pretty hazardous situation," because 59 percent of his professors' salaries are paid for with grant-sponsored funds. He says it "would be reasonable" if Harvard paid at least half.

Many are skeptical that the money race is over. As Harvey Cox, a Harvard Divinity School professor who has been teaching there since 1965, says: "The idea that the big capital fund-raising drive came to an end when Neil Rudenstine announced whatever colossal amount of money it was, is simply not true. The next day, we were, of course, raising money again." Sachs, the economics professor, acknowledges feeling like a "relentless fund-raising machine," but he expects change soon: "Harvard now has the happy circumstance of being able to move in a new direction." Arthur Levine, the president of Teachers College at Columbia University, likens Summers to Charles Eliot, Harvard's president from 1869 to 1909, who transformed the school into a modern national institution: "The task before him is to take a Harvard that has been the leader in industrial America and make it into the foremost university in an information age, and he has the resources to do it."

So far, this generation's Eliot has spent much of his time on airplanes, traveling around to meet Harvard's biggest donors, which is, depending on how you look at it, either an inauspicious harbinger for his presidency or simply a matter of Realpolitik. Or maybe nobody's business but the school's and that of its citizens and donors. When we spoke this spring, Summers said it was "very premature to be making vision statements." Fair enough. Still, it's hard to lie low when you have $19 billion, especially when it derives in part from favorable tax policies. For now, at least, he describes fund-raising as just a means to an intellectual end. "If the time were ever to come when we were consuming large amounts of resources and not making a commensurate contribution to teaching and knowledge," he says, "that would be a very serious problem, indeed."

Johanna Berkman, a former Goldman Sachs analyst, has written for Lingua Franca, New York and Worth.

September 16, 2004

Markets Help Endowment Pass $22 Billion at Harvard

By KAREN W. ARENSON

Harvard's giant endowment, by far the largest of any university's, grew further in the last fiscal year, reaching $22.6 billion by June 30 with the help of a 21.1 percent return on its investments, the Harvard
Management Company says. In June 2003, by comparison, the endowment was at $19.3 billion. Although many universities have not reported their final investment returns for the fiscal year ended in June, Harvard's are expected to be among the highest.

In a letter Tuesday to the Harvard community, Jack R. Meyer, president and chief executive of the management company, which is wholly owned by the university and invests its assets, said preliminary numbers for the 25 universities with the largest endowments showed that half had earned returns of at least 17.1 percent in the latest year. These universities typically enjoy somewhat higher investment
returns than other colleges and universities.
It is too early to say whether the strong results at Harvard will quiet any of the criticism that it pays its money managers too much. Last year Harvard reported that two of them had earned about $35 million
each in the previous fiscal year and that Mr. Meyer had earned $6.9 million. Some Harvard alumni have said they will withhold contributions to the university if the compensation plan is not changed, and
Harvard officials have said they will study the issue.

At other top universities, money managers rarely earn as much as $1 million. But some of those money managers noted yesterday that Harvard was unusual in the extent to which it directly invests its own assets, rather than simply overseeing investment portfolios that it farms out to independent managers.

They said Harvard's high compensation reflected Wall Street patterns and the university's sophisticated money management. "I admit that it creates a good deal of tension for the university," Mr. Meyer said of the issue in a telephone interview last night. "But I'm confident that it is a good deal for Harvard.

"The problem could easily be solved by spinning out all of our internal fund managers. But if that happened, our fees would go up, our investment results would go down.''

He said that if the compensation that each similar university paid to all its outside managers was added up, it would make the payments to Harvard's managers "diminish to nothing" by comparison. Among universities that have released their preliminary investment performance for the 12 months ended in June, the University of Pennsylvania says that it earned 16.8 percent and that its endowment reached $4 billion. The Massachusetts Institute of Technology says it earned 18.1 percent, which helped push its endowment to $6 billion. Stanford earned 18 percent, and its endowment reached $10 billion.
Cornell's return was 16.1 percent, and its endowment grew to $3.8 billion.

At Williams, which has one of the largest endowments among liberal arts colleges, the return was 17.8 percent, and the endowment climbed to $1.3 billion. Swarthmore earned a return of 18.6 percent and saw its endowment grow to $1.1 billion.
"We had a very good year," said Suzanne P. Welsh, treasurer and vice president for finance at Swarthmore.

"But the past fiscal year,'' she said, "is really just making up for returns we hadn't been getting since 2000,'' when the financial markets peaked. Year-to-year endowment growth results from several factors: how much an institution spends from its
endowment (typically about 5 percent of the total), how much it receives in gifts to the endowment, and the investment return.
Ronald G. Ehrenberg, a Cornell economist who studies higher education, said that while he expected many colleges and universities to report strong investment gains because of the uptick in the markets
during the last year, "many institutions, including my own, still have not seen their endowments grow back to where they were at the peak of the market four years ago."
Dr. Ehrenberg said he expected the good investment returns at the universities with the largest endowments to widen further the gap between them and other institutions.
Mr. Meyer's letter to the Harvard community noted that the university's highest investment returns last year were in stocks: domestic equities (22.8 percent), as well as foreign equities and emerging markets (each more than 36 percent).
 

But, his letter warned, "the cloud in this silver lining is that we don't expect the good times to persist." "We do not want to cut short the celebration of fiscal 2004 results," he  added, "but we should not get accustomed to these outsized returns."

Copyright 2004 The New York Times Company

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